Revise Economic issues for Cambridge 7115 (6.1)

The business cycle describes the fluctuations in economic activity that an economy experiences over time, typically moving through phases of boom, recession, slump, and recovery. A recession is formally defined as two consecutive quarters of negative GDP growth. For businesses, a recession signals a significant downturn in economic activity, leading to reduced consumer and business confidence. This translates into lower demand for most goods and services, particularly non-essentials and luxury items. Firms often respond by cutting back on production, freezing recruitment, making staff redundant, and postponing investment projects. Survival becomes the primary objective for many, with a focus on cost control and cash flow management. However, some businesses, like discount retailers, may see demand increase as consumers 'trade down'.

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power of currency is falling. It is commonly measured by the Consumer Prices Index (CPI). Cost-push inflation occurs when business costs (e.g., raw materials, wages, oil prices) rise, forcing firms to increase their prices to protect profit margins. Demand-pull inflation happens when aggregate demand exceeds aggregate supply, 'pulling' prices up. High inflation increases operational costs for businesses, can lead to demands for higher wages from employees, and creates uncertainty, making financial planning and investment decisions difficult. Businesses may have to absorb some cost increases, squeezing profits, or pass them on to consumers, risking a loss of competitiveness.

Interest rates are the cost of borrowing money or the reward for saving it, set by a country's central bank (e.g., the Bank of England). Changes in the base interest rate have a ripple effect on the entire economy. For businesses, higher interest rates increase the cost of servicing existing variable-rate loans and make new borrowing for investment more expensive. This can deter capital investment in new machinery or expansion projects. Furthermore, higher rates encourage consumer saving and increase mortgage payments, reducing disposable income and thus demand for many goods and services. Conversely, lower interest rates stimulate borrowing, investment, and consumer spending, but can risk fuelling inflation. Businesses must monitor interest rate forecasts to inform their financial and strategic planning.

An exchange rate is the price of one currency in terms of another. Fluctuations in exchange rates have a direct and significant impact on businesses engaged in international trade. An appreciation (strengthening) of a currency, like the Pound Sterling, makes exports more expensive for foreign buyers and imports cheaper for domestic consumers (SPICED: Strong Pound, Imports Cheaper, Exports Dearer). This can harm the competitiveness of exporting firms and domestic businesses facing import competition. Conversely, a depreciation (weakening) of the currency makes exports cheaper and imports more expensive (WIDEC: Weak Pound, Imports Dearer, Exports Cheaper). This can boost export sales but increases costs for firms that rely on imported raw materials or components.