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The economy and business
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Businesses do not operate in a bubble. Changes in the economy affect their sales and costs.
Income and unemployment
Consumer income: when people earn more, they spend more, especially on luxuries. When incomes fall, sales of luxuries fall.
Unemployment: more people out of work means less spending. But businesses can find workers more easily and may pay less.
Unemployment: more people out of work means less spending. But businesses can find workers more easily and may pay less.
Inflation and interest rates
Inflation is a rise in the general level of prices. Costs rise, and customers may buy less if wages do not keep up.
Interest rates are the cost of borrowing and the reward for saving. Higher rates make loans and overdrafts cost more and reduce consumer spending (people save more and borrow less).
Interest rates are the cost of borrowing and the reward for saving. Higher rates make loans and overdrafts cost more and reduce consumer spending (people save more and borrow less).
Tax and exchange rates
Taxation: higher income tax leaves people less to spend; higher taxes on businesses reduce profit.
Exchange rates: the value of one currency in another.
A stronger pound makes UK exports dearer abroad and imports cheaper.
A weaker pound makes UK exports cheaper abroad and imports dearer.
Exchange rates: the value of one currency in another.
A stronger pound makes UK exports dearer abroad and imports cheaper.
A weaker pound makes UK exports cheaper abroad and imports dearer.
Interest rates rise from 3% to 5%. A business has a large overdraft. Explain one effect.
- The overdraft now costs more in interest.
- This raises costs and reduces profit.
Answer: Higher interest payments cut profit.
Higher incomes raise sales; unemployment cuts spending. Inflation raises costs and prices. Higher interest rates raise borrowing costs and cut spending. Higher taxes reduce spending and profit. A stronger pound makes exports dearer and imports cheaper.
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