The economy

• The economic climate has a big impact on businesses, affecting prices, investment decisions, and the number of workers employed
• Consumer spending influences businesses by affecting prices, investment decisions, and the number of workers employed
• The economic climate affects businesses in six main ways:

  • Unemployment
  • Changing levels of consumer income
  • Changes in interest rates
  • Inflation
  • Government taxation including national insurance contributions (NICs) and value added tax (VAT)
  • Changes in exchange rates
• Unemployment does not necessarily mean someone does not have a job; it refers to those actively seeking employment but unable to find work
• Reasons for unemployment include being made redundant, dismissed for misconduct, or being a school, college, or university leaver
• Unemployment impacts the economy by not utilizing available workers fully, leading to slower economic growth and potentially affecting businesses
• Higher unemployment results in lower household income, leading to reduced sales for many businesses as people spend less
• However, demand for some products and services may increase during high unemployment as consumers opt for cheaper alternatives, benefiting businesses providing these goods
• Interest rate represents the cost of borrowing money or the amount a saver receives in interest, usually stated as a percentage
• For example, an interest rate of 4% would require £4 to be paid for every £100 borrowed, or a saver would receive £4 for every £100 they invested
• Changes in interest rates affect both savers and borrowers:

  • Increase in interest rates:
  • Savers: receive more interest on their savings, encouraging them to spend less and save more
  • Borrowers: have to pay more back for money borrowed, discouraging borrowing
  • Decrease in interest rates:
  • Savers: receive less interest on their savings, discouraging saving and encouraging spending
  • Borrowers: have to pay less back for money borrowed, encouraging them to borrow more
• Businesses that sell expensive luxury goods, like new cars, are most likely to be affected by changes in interest rates as consumers may need to finance these purchases through borrowing
• Income is money received from work or investment, influencing how much someone spends
• Increases in consumer income lead to higher demand for goods and services, including luxury items, prompting businesses to produce more and potentially employ more staff
• Reductions in consumer income result in decreased spending, with people opting for cheaper alternatives and businesses planning to produce less, potentially leading to staff redundancies
• Not all businesses are affected the same way by changes in consumer income; the impact depends on the type of products a business sells
• Inflation refers to a general and sustained increase in prices over time, measured using an index like the Consumer Prices Index (CPI), which tracks how the price of a typical basket of items changes over time
• The rate of inflation is usually stated as a percentage; for example, an annual inflation rate of 2% means that a product priced at £1.00 last year will now be priced at £1.02
• Inflation reduces the purchasing power of money, leading to lower levels of consumer spending and a fall in sales for businesses if income does not increase at the same rate
• To compensate for inflation, staff may ask for pay rises above the rate of inflation, leading to higher costs for businesses and potentially further price increases, adding to inflation
• Inflation affects global businesses trading overseas; if inflation is higher in the UK than elsewhere, UK goods become comparatively more expensive, leading to a fall in demand for UK goods
• The economic climate has a big impact on businesses, affecting prices, investment decisions, and the number of workers employed
• Government taxation influences the economic climate, with taxes being a financial charge made by a government on individuals, consumers, and businesses
• Types of taxes in the UK include:

  • Income tax: charged on income such as wages
  • Corporation tax: a charge on a company’s profits
  • National Insurance contributions (NICs): cover healthcare, state pensions, and employment-related benefits
  • Value-added tax (VAT): a charge on sales of goods and services based on the value of the item sold
  • Council tax: a charge on property by local councils based on the property’s value and the number of people in a household
• The impact of taxation on businesses:

  • Taxes can be paid directly to the government or collected on behalf of the government by businesses
  • An increase in income tax means consumers have less money to spend, leading to reduced business investment
  • An increase in VAT results in consumers paying higher prices, reducing their purchasing power and potentially causing inflation
• The exchange rate is the price of one currency expressed in terms of another currency, determined by supply and demand
• Changes in exchange rates can affect the transportation and sale of goods or services imported into a country, as well as the price of goods exported abroad from the UK
• Increasing globalization and improved technology have increased the number of businesses that buy and sell overseas, all affected by changes in exchange rates
• Businesses need to consider exchange rates when agreeing prices, as large and unexpected changes can create uncertainty for businesses that trade overseas
• If the value of the pound increases, more foreign currency can be purchased for the same number of pounds, known as an appreciation in the value of the pound
• A depreciation in the value of the pound means that less foreign currency can be obtained for the same amount of domestic currency, making the pound weaker
• A UK business that exports products will benefit from a fall in the value of the pound, while UK firms that import raw materials will have to spend more pounds to obtain the same foreign currency
• The effect of a change in exchange rates can be remembered using the acronyms SPICED and WPIDEC:

  • SPICED: Strong Pound Imports Cheaper Exports Dearer
  • WPIDEC: Weak Pound Imports Dearer Exports Cheaper