The Economy and Business
No business stands apart from the wider economy. See how unemployment, incomes, inflation, interest rates, taxes and the exchange rate change what a business can sell, spend and borrow.
Use it, the way the marks are given
Free interactive practice at using the material, which is what the marks are for.
Start revising freeWhat you'll cover
The economy shapes every business
No business stands on its own. The wider economy decides how much customers can spend, how much wages and materials cost, and how dear it is to borrow. This module works through the six economic factors: unemployment, consumer income, inflation, interest rates, taxation and the exchange rate.
The language of the economy
Four ideas run through this module:
Match each factor to its meaning
- Inflation
- Interest rate
- Exchange rate
- Unemployment
- The general rise in prices over time
- The cost of borrowing money
- How much one currency is worth in another
- The number of people without a job who want one
When interest rates change
The interest rate is the cost of borrowing. When rates rise, loans and mortgages cost more, so businesses invest less and customers spend less, while savers are rewarded. When rates fall, borrowing is cheaper, so investment and spending tend to rise.
Rates and investment
When interest rates rise, what tends to happen to business investment?
- It tends to fall, because borrowing costs more
- It rises, because borrowing is cheaper
- It never changes with interest rates
- It always falls to zero
A strong or a weak pound
The exchange rate changes who wins on trade.
What high inflation does
Select the TWO effects of high inflation on a business.
- The cost of materials and wages rises
- Customers can buy less with the same money
- Borrowing automatically becomes cheaper
- Exports automatically increase
Match each change to its effect
- Consumer incomes rise
- Taxes on income rise
- The pound gets weaker
- Unemployment rises
- Demand for goods tends to increase
- Consumers have less to spend
- Exporters tend to benefit
- It becomes easier to recruit workers
Follow the chain
Put the effects of a rise in interest rates into a sensible order.
- Interest rates rise
- Borrowing money becomes more expensive
- Businesses invest less and customers spend less
- Demand for goods and services falls
- Businesses may cut their costs or output
The economy in words
A general rise in the level of prices is called _____. The cost of borrowing money is the _____ rate. When the pound is weak, _____ become cheaper for foreign buyers. Higher _____ on income leave consumers with less to spend. High _____ means fewer people have money to spend.
Interest rates and the pound
Tap the TWO statements that are TRUE.
- Higher interest rates make borrowing more expensive for businesses.
- A weak pound tends to help businesses that export.
- Inflation means that prices are generally falling.
- A rise in income tax gives consumers more money to spend.
- High unemployment increases the money people have to spend.
A strong pound
When the pound is strong, what happens to the price of UK exports for foreign buyers?
- They become more expensive
- They become cheaper
- They become free
- The price never changes
Respond to the economy
A UK business faces a changing economy. Choose the most likely outcome each time.
- Interest rates have risen sharply, and the firm planned to borrow to build a new factory. What is likely?
- The pound has become much weaker, and the firm exports most of its goods. What is likely?
- A downturn has raised unemployment and cut incomes. How might demand for the luxury products it sells change?
Explain the economy
Explain how a change in interest rates and a change in the exchange rate can each affect a business.
- Explain what happens to borrowing when interest rates rise
- Explain how that affects business investment and demand
- Explain what a weak pound does to exports and imports
- Explain which kinds of business gain and which lose from a weak pound