The Economy & Business (Edexcel GCSE Business)

• 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

• 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

• 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

• 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

• 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

• 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

• 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