OxfordAQA IGCSE Business: The economic climate on business and Globalisation (9225)

This guide follows the OxfordAQA International GCSE Business (9225) specification, version 3.1, for exams from May/June 2022 onwards. It covers section 3.2.3 (The economic climate on business) and section 3.2.4 (Globalisation) in full. For a broader tour of all six influences, read the Influences on business study guide first. When you are ready to test yourself, use the revision notes, the practice questions, the course hub, the printable checklist and the free diagnostics.

What the specification asks you to do

Section	Content	You must be able to
3.2.3	Interest rates	Show how changing interest rates affect businesses that rely on overdrafts and loans, including Sharia compliant alternatives; show how they affect consumer and business spending
3.2.3	Level of employment	Identify how and why businesses are affected by changes in employment
3.2.3	Consumer spending	Discuss how demand changes as incomes fluctuate
3.2.4	Forms of globalisation	Show knowledge of specialisation by country, relative cost advantage, movement of labour, larger markets and international competition
3.2.4	Benefits and drawbacks	Explain the benefits and drawbacks for businesses in developed and developing countries, and for those countries’ economies
3.2.4	Exchange rates	Explain the effect on profit and sales of businesses that import and/or export, and the effects of severe fluctuations

You will not be expected to know why interest rates change, and you will not be asked to calculate exchange rate conversions. The arithmetic below only shows the size of an effect.

3.2.3 Interest rates

The rate of interest is the price of borrowing money (and the reward for saving it). A change in the rate reaches a business in two ways. Name both in an exam answer.

Channel 1: the business’s own finance

Businesses often borrow through loans and overdrafts. If the rate is variable, a rise means higher repayments at once. Higher repayments are a cost, so profit falls unless the business raises prices or cuts other costs. A business with little debt feels this less than one with a large loan. A business with a fixed-rate loan feels nothing until the fixed period ends, so check whether the stem says the rate is variable.

Channel 2: spending by consumers and other businesses

A higher rate makes borrowing dearer for households too. Mortgage and credit payments rise, so there is less income left to spend on the business’s products. Saving also becomes more attractive, which can reduce spending further. Other businesses delay buying machinery or vehicles when borrowing costs more, which hurts a firm that sells to them.

A fall in the rate works in reverse: cheaper loans, more disposable income, more spending and more business investment. Lower rates also mean lower returns on savings.

Sharia compliant alternatives

The specification names only “Sharia compliant alternatives”. The three structures below are our own general description, not from the specification. Some owners and customers avoid interest on religious grounds, and Sharia compliant finance does not charge or pay interest. In general terms, the alternatives include:

• a financier buying an asset and leasing it to the business for an agreed payment
• a profit-sharing partnership, where the financier takes a share of the results instead of interest
• a financier buying goods and selling them to the business at an agreed price paid in instalments

Because the cost is agreed in advance or linked to the business’s results, a business using these routes may be less exposed to a change in the rate of interest. This is our own reasoning, not a statement from the specification. They are not free: payments can still be large, and a profit share gives up part of the earnings. Write “may be less exposed”, not “is unaffected”.

Worked example: Bellmoor Bakehouse

Bellmoor Bakehouse has a variable-rate loan of £120,000 and an average overdraft of £10,000. Its profit before interest is £30,000 a year. The rate on the loan rises from 6% to 8%, and the overdraft rate from 14% to 16%.

Loan interest before   = 120,000 x 6%  = 7,200
Loan interest after    = 120,000 x 8%  = 9,600   (up 2,400)
Overdraft before       = 10,000 x 14%  = 1,400
Overdraft after        = 10,000 x 16%  = 1,600   (up 200)
Extra interest         = 2,400 + 200   = 2,600 a year
Profit after interest  : 30,000 - 7,200 - 1,400 = 21,400
                         30,000 - 9,600 - 1,600 = 18,800
Fall in profit         = 2,600 / 21,400 = 12.15%

Profit after interest falls by 12.2% (1 d.p.). The bakery also sells to households with mortgages, so sales of celebration cakes may fall too. A good answer names both channels and says which is bigger. Here the loan effect is certain and the fall in sales only possible.

3.2.3 Level of employment

The level of employment is how many people who want work have jobs. It affects a business in three ways.

1. Demand. When more people are in work, more households have wages, so demand for many products rises. When employment falls, household incomes fall and demand weakens, especially for goods people can delay buying.
2. Recruitment. When employment is high, there are fewer unemployed workers, so a business may struggle to find staff and may need to offer better pay or training. When employment is low, recruitment is easier and pay pressure is weaker.
3. Costs. Higher pay to attract or keep staff raises labour costs. In a weak jobs market, fear of redundancy makes households cautious and they spend less.

The same change can help one business and hurt another. A restaurant gains from high employment because customers can afford to eat out, but it may find waiters harder to hire. Tie your answer to the type of business in the stem.

3.2.3 Consumer spending

Consumer spending changes when incomes change. The key idea is that demand for different products does not move by the same amount.

• Products people regard as luxuries, or can delay buying, tend to be cut first when incomes fall. They tend to rise most when incomes rise.
• Everyday necessities, such as basic food and school supplies, change little.
• Lower-priced alternatives may sell more when incomes fall, as buyers trade down.

A business with a mixed range is cushioned. A business with only one type of product is exposed. Rising incomes are an opportunity: a business may need extra stock and staff, and may be able to raise prices.

Worked example: Fordhaven Outfitters

Fordhaven Outfitters sells school shoes at £25 and designer trainers at £90. Monthly sales are 1,000 pairs of shoes and 400 pairs of trainers. Household incomes in the town fall. Shoe sales drop by 2% and trainer sales by 15%.

Revenue before:  1,000 x 25 = 25,000   and   400 x 90 = 36,000   total 61,000
Sales after:     980 shoes, 340 trainers
Revenue after:   980 x 25 = 24,500   and   340 x 90 = 30,600   total 55,100
Fall in revenue: 61,000 - 55,100 = 5,900, or 9.67% (9.7% to 1 d.p.)

Trainers lose 5,400 of the 5,900. A good answer names the trainers, explains that people can postpone buying them, and suggests a response such as promoting the shoes or holding less trainer stock.

3.2.4 Forms of globalisation

Globalisation is the growing links between countries, so that goods, services, money, people and ideas move more freely across borders. The specification names five features. Learn each as a short definition with a business consequence.

Feature	What it means	Business consequence
Specialisation by country	A country concentrates on what it produces best	Businesses in that country can sell large volumes at low cost; others must import what they do not make
Relative cost advantage	A country or firm can make a product at lower cost than others, for example through cheaper labour, skills or climate	Production may move to the lower-cost location
Movement of labour	Workers move to other countries to find jobs	Employers get a wider pool of skills; the home country may lose skilled workers
Larger markets	Barriers to trade fall, so a business can sell to customers worldwide, helped by online selling	More sales, and economies of scale
International competition	Overseas firms can sell in your home market	Pressure on prices, quality and survival

3.2.4 Benefits and drawbacks of globalisation

You are asked about businesses and about economies, in both developed and developing countries. Keep the four boxes apart.

	Benefits	Drawbacks
Businesses in developed countries	Larger markets; cheaper inputs and labour abroad; wider choice of suppliers	Face low-cost rivals; jobs may move abroad; local brands may lose share
Economies of developed countries	Cheaper goods for consumers; access to export markets	Loss of jobs in industries that cannot compete; reliance on foreign suppliers
Businesses in developing countries	Access to large export markets; foreign investment and skills; relative cost advantage can win orders	Competition from multinationals; dependence on a few buyers; pressure to cut costs and pay
Economies of developing countries	Jobs, tax receipts, new technology and skills	Profits may leave the country; local firms may close; workers may leave to find better pay

A strong answer picks one box and explains the chain. For example: a developing-country clothing maker has a relative cost advantage in labour, so overseas buyers place large orders, so it employs more people. That helps the business and, through jobs, the economy.

3.2.4 Exchange rates and business

The exchange rate is the price of one currency in terms of another. You do not need to convert amounts. You need to know the direction of the effects and be able to explain them.

If the home currency	Exporters	Importers
Strengthens	Prices abroad become higher, so sales may fall	Imported inputs cost less in home currency, so costs and prices may fall
Weakens	Prices abroad become lower, so sales may rise	Imported inputs cost more in home currency, so costs rise and profit falls unless prices rise

Many businesses both import and export, so the two effects pull in opposite directions. Examine each.

Worked example: Pellanor Furniture

Pellanor Furniture imports hardwood and sells finished chairs in the home market and overseas. It makes 2,000 chairs a year at a home-currency price of £150. Imported wood costs £40 a chair and other costs are £70 a chair. Profit is £40 a chair, or £80,000. The home currency weakens. The imported wood now costs 10% more in home-currency terms, so £44 a chair.

Profit per chair after the rise = 150 - 44 - 70 = 36
Same 2,000 chairs               = 36 x 2,000   = 72,000 (down 8,000)
If overseas buyers find chairs cheaper and sales rise to 2,200:
                                = 36 x 2,200   = 79,200
If sales fall to 1,800 instead:
                                = 36 x 1,800   = 64,800

The weaker currency hurts on the cost side. Even a 10% rise in volume leaves profit slightly below the old £80,000. A good answer says so and notes that the firm could raise its price.

Severe fluctuations

A small, steady movement can be planned for. A sharp or unpredictable one cannot. The effects include:

• costs that change between ordering and paying, which can wipe out a planned margin
• difficulty setting prices and writing price lists or catalogues
• uncertainty about profit, which makes investment and borrowing harder to plan
• a sudden loss of export sales if the home currency jumps in value

Businesses respond by agreeing prices in advance, finding suppliers at home, or selling in several countries.

Common errors

• Writing “interest rates go up so the business is affected” without naming the channel (loan cost or customer spending).
• Saying a weak currency is “bad”. It helps exporters and hurts importers. Say whose view you take.
• Treating globalisation as only a benefit to rich countries or only a threat to poor ones. Both gain and lose.
• Writing about the country when the question asks about the business, or the reverse.

Frequently asked questions

How does a rise in interest rates affect a business? A rise in interest rates reaches a business in two ways: it increases repayments on variable-rate loans and overdrafts, which cuts profit, and it leaves households and other businesses with less to spend, so demand may fall. A strong answer names both channels and says which is bigger for the business in the question.

Do you need to calculate exchange rate conversions for OxfordAQA International GCSE Business 9225? No. This guide to the 9225 specification notes that you will not be asked to calculate exchange rate conversions, and you are not expected to explain why interest rates change. You need to know the direction of the effects on exporters and importers and explain them.

Is a weak currency good or bad for a business? It depends on whose view you take. A weaker home currency makes exports cheaper abroad, so sales may rise, but it makes imported inputs dearer, so costs rise. Many businesses both import and export, so you should examine both effects.

Why do sales of luxury products fall more than necessities when incomes fall? People can postpone buying luxuries such as designer trainers, so these are cut first when incomes fall, while everyday necessities change little. A business with a mixed range of products is cushioned; one selling only luxuries is more exposed.

What does globalisation mean in IGCSE Business? Globalisation is the growing links between countries, so that goods, services, money, people and ideas move more freely across borders. The specification names five features: specialisation by country, relative cost advantage, movement of labour, larger markets and international competition.

Official syllabus

OxfordAQA International GCSE Business (9225), specification version 3.1, for International GCSE exams from May/June 2022 onwards, published by OxfordAQA. This guide covers sections 3.2.3 and 3.2.4.