Quick questions on Business and the economic environment explained: H2 Management of Business

Economies move through a business cycle: boom, slowdown, recession and recovery. In a boom, demand and confidence are high, so firms expand, recruit and invest; the risk is overheating and rising costs. In a recession, demand falls, so firms cut output, costs and sometimes jobs, and survival becomes the priority. Reading where the economy sits in the cycle helps a firm time investment and recruitment.

The interest rate is the price of borrowing. A rise in rates affects firms through two channels:

Inflation is a sustained rise in the general price level. Effects are mixed:

Unemployment affects firms through the labour market and demand. High unemployment means a larger pool of available labour (easier, cheaper recruitment) but weaker consumer demand because fewer people have incomes. Low unemployment tightens the labour market, raising wage costs and making skilled staff harder to find, while supporting consumer demand.

The exchange rate is the price of one currency in terms of another. It matters for any firm that exports, imports or competes with imports. A useful mnemonic is SPICED: Strong Pound (or home currency), Imports Cheaper, Exports Dearer. So a stronger home currency makes imported inputs cheaper but makes exports less competitive abroad; a weaker home currency does the reverse.

Explain how a cut in interest rates could benefit a car manufacturer. [4 marks]

A firm imports most of its components from abroad. Explain how a strengthening of its home currency would affect it. [3 marks]

Analyse why two firms in the same economy might be affected very differently by a recession. [6 marks]