Economic Factors (AQA GCSE Business)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
An Introduction to Economic Factors
A range of economic factors can present significant opportunities and threats to business activities
Businesses need to anticipate and respond to changing economic conditions in order to maximise their chance of success
Key economic factors include:
Interest rates
Employment levels
Customer spending
Interest Rates
The interest rate is a percentage reward for saving money and the percentage charged for borrowing money
Lenders commonly charge interest on borrowing at a higher rate than the rate offered to customers for savings and investments
Their rates are determined by the Base Rate, set by the Bank of England and reviewed monthly
Interest rates in the UK have risen since 2022, following several years at historically low levels
Diagram: UK Interest Rates (Bank of England Base Rate) 2015 to 2024
Interest rates in the UK rose sharply in 2022, following several years at very low levels (Source: Bank of England)
Impacts of Rising Interest Rates on Business
When interest rates rise, businesses pay more on new loan repayments, which increases their costs
Businesses may be less willing to make capital investments choosing instead to save their money, which may reduce their rate of growth
Customers are less likely to purchase goods on credit when interest rates are high, leading to a fall in sales
Level of Employment
The level of employment is a measure of the proportion of people aged 16 to 64 in employment
Labour costs are amongst the most significant for many businesses, so the employment rate can have a direct impact on the profitability of the business
Diagram: UK Employment Rate 2015 to 2023
Although impacted by the Covid-19 pandemic, employment rates have been rising in the UK since 2015 (Source: Office for National Statistics)
As the employment rate rises, businesses often have to pay more to secure enough workers
The lower the supply of workers, the higher the salaries or wages they will have to offer
Businesses may need to import labour from abroad
E.g. the National Health Service (NHS) is attempting to overcome staff shortages by recruiting doctors from countries including Egypt and India
They may need to invest in training to upskill existing workers, and take steps to retain more workers
E.g. financial incentives such as employee share schemes or long-service bonuses may encourage workers to remain employed in a business
Some businesses may also benefit from increased sales when employment rates are high
Increased demand, particularly for luxury goods, can be driven by high levels of employment as customers have disposable income to spend
Consumer Spending
Consumer spending refers to the total amount of money spent monthly on goods and services by individuals and households for personal use
Consumer spending is closely linked to income levels
In recent years, average UK incomes have been rising slowly, but have been affected by high levels of inflation
Higher-income UK households spend around four times more than low-income households and they have a greater ability to save
Low-income households spend a greater proportion of their income on necessities such as housing and groceries than higher-income households
Consumer spending plummeted during the recent Covid-19 pandemic, as a result of few physical outlets remaining open and job insecurity reducing consumer confidence
Diagram: UK Consumer Spending
UK consumer spending dipped during the Covid-19 pandemic, and has not yet returned to pre-2020 levels (Source: Statista)
Since the pandemic, consumer spending has remained below its 2019 level, impacting businesses in a range of ways
Businesses selling luxury and non-essential goods have experienced lower sales
UK retailers Joules, Ted Baker and The Body Shop have all recently been placed into administration as a result of falling revenue
Some UK businesses have introduced flexible payment options to encourage customers to increase spending, but pay in instalments
E.g. Luxury retailer Osprey offers the option to pay for goods through Klarna, a third-party short-term credit company
Price competition in the grocery market, in particular, has intensified
Budget supermarkets such as Aldi and Lidl have grown their combined market share to almost 20%
Examiner Tips and Tricks
In the exam, you could be asked to explain how an economic change could affect a business.
Two-mark explain questions require you to make a point and develop it, with a reason or impact.
Example
An economic change could be a rise in inflation [1] which could increase the cost of raw materials and components [1].
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