The Economy & Business (Edexcel GCSE Business)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
The Impact of the Economic Climate on Businesses
The economic climate refers to the broad performance of the UK economy, as measured by changes to GDP growth
When GDP growth is increasing, incomes may increase, spending on goods/services increases, inflation may rise and unemployment may fall
When GDP growth is decreasing, incomes may fall, spending on goods/services falls, inflation may fall and unemployment may rise
A growing economy leads to more spending on business goods/services - and vice versa
Economic changes can present significant opportunities and threats to business activities
Businesses need to anticipate and respond to changing economic variables to maximise their chance of success
The following economic variables need to be considered
Changes to inflation, unemployment, exchange rates, household income, interest rates, and government taxation
The Business Impact of Changes in Consumer Income
When household income rises, the impact on businesses will depend on the nature of the goods/service that they sell
Firms which sell inferior goods will see a fall in demand and sales revenue will fall
Firms which sell normal goods and luxuries will see an increase in demand and sales revenue
When household income falls, the impact on businesses will depend on the nature of the goods/service that they sell
Firms which sell inferior goods will see an increase in demand and sales revenue will rise
Firms which sell normal goods and luxuries will see a decrease in demand and sales revenue
The Business Impact of Changes in Inflation
Inflation is the general rise in prices in an economy over time (measured using the consumer price index)
Rapid inflation is causing problems for businesses and households in the UK
After several decades of relatively low levels of inflation the UK has recently experienced rapidly increasing levels of inflation
This has caused large scale disruptions in the economy as many workers are striking to attempt to secure higher wages
Business Challenges Caused by Inflation
Increased business costs | Higher repayments on loans | Consumers change spending habits |
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The Business Impact of Changes in Exchange Rates
The exchange rate is the value of one currency expressed in terms of another
Exchange rates are an important economic influence for businesses that import raw materials and components and for businesses that export their products
The value of a currency can appreciate or depreciate over time
The Impact on Business of Currency Appreciation & Depreciation
Change to Currency Value | The Impact on Exporting Businesses | The Impact on Importing Businesses |
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An Increase in the Value of the £ Against Other Currencies (Appreciation) |
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A Decrease in the Value of the £ Against Other Currencies (Depreciation) |
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Examiner Tips and Tricks
Many businesses are affected as both importers of raw materials and components and also as exporters of goods and services overseas. It would be unusual for UK-based exporters to wholeheartedly celebrate a weak pound or be entirely dismayed at a strong pound as the global nature of business means that for many firms’ both costs and revenues are affected by exchange rate movement.
To help you remember the effects of an appreciating currency, remember the acronym SPICED - Strong Pound Imports Cheaper Exports Dearer
The Business Impact of Changes in Interest Rates
The interest rate is a percentage reward offered 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
If interest rates rise businesses will have to pay more on their loan repayments which will increase their costs
Businesses may be less willing to make capital investments choosing instead to save their money
Customers are less likely to purchase goods on credit when interest rates are high leading to a fall in sales
The Business Impact of Changes in Taxation
Governments impose direct and indirect taxes on businesses and households
Direct taxes are levied on income e.g. Income tax and Corporation Tax
Indirect taxes are levied on spending e.g Value added tax (e.g. VAT)
The Impact of an Increase in Taxation
Impact on: | Explanation |
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Revenue |
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Costs |
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Business Decisions |
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The Business Impact of Changes in Unemployment
The impact on business of changes in the unemployment rate will depend on the type of skill required by the business
As the unemployment rate falls, businesses have to pay more to secure skilled workers
The less the supply of skilled workers, the higher the salaries they will have to offer
As the unemployment rate falls, businesses may have to pay more to secure unskilled workers
The less the supply of unskilled workers, the higher the wages they will have to offer
The increase in wages for unskilled workers will depend entirely on how limited the supply of unskilled workers is
Generally, the higher the unemployment rate, the cheaper a business can secure labour - and vice versa
Labour costs are amongst the most significant for many businesses, so the unemployment rate can have a direct impact on the profitability of the business
Examiner Tips and Tricks
When discussing changes to the unemployment rate, consider where the overall rate has changed from and to. For example, if it has changed from 19% to 14%, there is still a lot of unused labour in the economy, so the business costs for labour are unlikely to change by much. However, the closer the unemployment rate gets to zero, the greater the impact on business costs.
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