THE ECONOMIC ENVIRONMENT

GROSS DOMESTIC PRODUCT (GDP) means the value of a country’s total output of goods and services over a period of time.

GDP GROWTH (also called ECONOMIC GROWTH) means the percentage increase in GDP, which is calculated quarterly (every three months).

RECESSION means two successive decreases in the quarterly GDP.

BUSINESS CYCLE means the regular changes in GDP that occur over time, as the economy moves between boom, recession, slump (or trough) and recovery (or growth).

INFLATION means the percentage increase in the general level of prices.

The main way of measuring inflation in the UK is the Consumer price Index (CPI).

DEFLATION means a percentage decrease in the general level of prices.

INTEREST means the cost of borrowing or the reward for saving.

INTEREST RATE means the amount of interest expressed as a percentage of the amount borrowed.

EXCHANGE RATE means the price of one currency expressed in terms of another.

We can use the acronym SPICED to remember the effects of a changing value of the pound:

Strong Pound, Imports Cheaper, Exports Dearer.

MONETARY POLICY means controlling the money supply in order to manage the economy.  The main method of monetary policy in the UK is the use of interest rates, which are determined by the ‘base rate’ that is set by the Bank of England each month.

In extreme circumstances, the Bank of England has also used QUANTITATIVE EASING, which means creating new money to stimulate GDP growth. 

 FISCAL POLICY means the use of taxation and Government spending (also called public spending) in order to manage the economy.

PROTECTIONISM means governments’ use of measures to restrict the level of imports.

Protectionist measures are called barriers to trade.   

Examples of protectionist measures include TARIFFS (taxes added to the price of imports) and QUOTAS (physical limits on the number of products that can be imported).

 OPEN TRADE / FREE TRADE is the opposite of protectionism.

It means that there are no barriers to trade between different countries

(e.g. within trading blocs such as the EU, NAFTA and ASEAN).

 GLOBALISATION means the increased integration and interdependence of national economies.  It affects where businesses sell their products and where they have them made.

 EMERGING ECONOMIES are countries where high levels of GDP growth are causing incomes per head to rise from what were very low levels until recently.

Most of these countries are in South East Asia, South America or Central America.

TAXATION means payments to national or local governments by people and organisations. 

 Direct taxes are based on income or profits (Corporation Tax, Income Tax and NI).

Indirect taxes are based on spending (VAT and Customs & Excise duties).

 Corporation Tax is paid by UK companies, based on their profits.

 Value Added Tax (VAT) is added to the selling price of most goods and services provided by all businesses whose revenue is above a certain amount.

 Income Tax is paid by sole traders and partnerships, based on their profits. 

It is also paid by employees, based on their salaries or wages.

 National Insurance is paid by employees, based on their salaries or wages.

It is also paid by businesses, based on the salaries and wages of their employees.

 Customs & Excise duties are added to the prices of goods such as tobacco, petrol and alcohol.