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A LevelBusinessAQARevision Notes7. Analysing the Strategic Position of a Business (A Level)7.3 Changes in the External EnvironmentEconomic Changes: GDP and Taxation

Economic Changes: GDP and Taxation (AQA A Level Business): Revision Note

Exam code: 7132

Steve Vorster

Written by: Steve Vorster

Reviewed by: Lisa Eades

Updated on

The effects on businesses of changing economic variables

  • Economic influences can present significant opportunities and threats to business performance

  • Businesses must anticipate and respond to these changes to remain competitive and successful

Key economic variables include

  • GDP (Gross Domestic Product)

    • Measures the overall health of the economy

    • Economic growth supports higher demand, while a recession reduces consumer and business spending

  • Taxation

    • Higher taxes reduce disposable income and business profits

    • Lower taxes can stimulate spending and investment

  • Exchange rates

    • A weaker currency makes exports cheaper but raises import costs

    • A stronger currency has the opposite effect — imports become cheaper but exports less competitive

  • Inflation

    • Increases input costs and reduces consumer purchasing power

    • Businesses may need to raise prices or absorb higher costs to protect margins

  • Fiscal policy (government spending and taxation)

    • Expansionary policies (e.g. tax cuts, increased public spending) boost demand

    • Contractionary policies (e.g. tax rises, spending cuts) reduce it

  • Monetary policy (interest rates and money supply)

    • Lower interest rates reduce borrowing costs and encourage spending

    • Higher rates increase savings and slow down inflation

  • Trade environment: open trade vs protectionism

    • Open trade allows access to global markets, lower costs and more competition

    • Protectionism (e.g. tariffs, quotas) limits imports, may protect domestic jobs but can raise prices and limit innovation

GDP

  • Gross Domestic Product (GDP) is the total monetary value of all goods and services produced within a country over a specific period (usually a year or a quarter)

    • It is a key measure of a country’s economic performance and growth

    • A rising GDP usually indicates economic expansion, increased business activity, and consumer confidence

    • A falling GDP may signal a slowdown or recession, which can lead to reduced demand and business uncertainty

  • A continuous cycle of rising or falling GDP is captured in a model called the Business Cycle

    • Understanding the Business Cycle helps generate an understanding of the impact on businesses

The business cycle

  • The business cycle describes the upturns and downturns in the level of a country’s economic activity (Gross Domestic Product or GDP) over time

    • A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative economic growth

    • A boom is defined as a period of time where an economy experiences increasing/high rates of economic growth

The business cycle over time

Graph depicting economic cycle stages: expansion, boom, downturn, low growth, recession, slump, recovery. Axes are time and GDP percentage change.
The business cycle includes periods of expansion, boom, recession and recovery

Stage of the business cycle

Characteristics

Impact on businesses

Recession

  • Increasing/high unemployment

  • Low confidence for firms/households

  • Low inflation or deflation

  • Increase in government expenditure

  • Customers have less  disposable income  and are likely to reduce spending or postpone significant spending decisions, leading to lower revenue

  • Businesses may find it relatively easy to recruit workers from a larger pool of candidates

  • Businesses may delay spending decisions and focus on reducing risk and survival

  • Production levels are likely to be reduced 

  • Businesses often stockpile products

  • Increased spending on welfare benefits and spending on infrastructure projects to inject demand into the economy may benefit some businesses

Boom

  • Decreasing unemployment and increasing job vacancies

  • High confidence and more risky decisions taken

  • Increasing rate of inflation

  • An improvement in the government budget as tax revenues rise and government expenditure falls

  • Customers’ disposable income increases, leading to higher sales revenue

  • Recruitment and staff retention may become more challenging and businesses may need to pay higher wages

  • Businesses look to expand and maximise profit

  • Production levels are likely to increase 

  • Product or market development strategies are more likely

  • Interest rates are likely to rise and the higher cost of borrowing will increase the risk of capital investment

  • Lower government spending may impact on business growth plans

  • Public sector pay controls may cause Industrial unrest and affect business operations

Case Study

Interpreting UK GDP Trends and Business Impact (2023–2025)

Bar chart showing UK quarterly GDP growth from Q1 2023 to Q1 2025, with growth peaking at 0.9% in Q1 2024 and 0.7% in Q1 2025.
UK GDP growth since 2023 (Source: BBC News)

Background
The chart shows how the UK economy fluctuated between early 2023 and the first quarter of 2025. GDP growth was negative in late 2023, then rebounded sharply in early 2024, with sustained positive growth through Q1 2025

Late 2023: Recession warning

  • Q3 (–0.1%) and Q4 (–0.2%) of 2023 marked two consecutive quarters of negative growth — a recession

  • Impact on business

    • Falling consumer demand led to lower sales, especially in retail and leisure sectors

    • Firms likely delayed investment and hiring due to uncertainty

Early 2024: Rapid recovery

  • Q1 2024 (0.9%) and Q2 (0.5%) showed strong economic rebound

  • Impact on business

    • Growing consumer confidence boosted demand for non-essential goods and services

    • Businesses likely resumed expansion plans, restocked inventory, and restarted recruitment

Mid to late 2024: Slower growth

  • Q3 (0.0%) and Q4 (0.1%) signalled a plateau in growth.

  • Impact on business

    • Businesses may have focused on efficiency, cost control, and cautious optimism

    • Firms reliant on rapid growth (e.g. startups) might have scaled back expectations

Taxation

  • Governments impose direct and indirect taxes on businesses and households

    • Direct taxes are levied on income, e.g. Income tax and Corporation Tax

    • Indirect taxes are levied on spending, e.g. Value added tax (e.g. VAT)

The impact of an increase in taxation

Impact

Explanation

Revenue

  • Revenue may fall for many businesses

    • Increased income tax will reduce the  disposable income of customers and demand for products may fall

    • Increased VAT makes products more expensive and customers may switch to alternative products

Costs

  • Operating costs will rise as a result of increased taxes such as VAT and National Insurance contributions

    • Higher costs may be offset by charging higher prices

    • Higher prices may lead to lower sales and profit may fall

  • Import costs are increased when customs duties  are raised

Business decisions

  • Business spending and investment may be affected by increases in Corporation tax, as less profit will be retained to cover future expenses and make plans for business expansion

  • Operational decisions may be affected by increases in business rates and taxes related to employing workers

    • Businesses may choose to delay business improvement or relocation, or employ fewer workers as a result of increased costs

  • In some cases businesses may take steps to try to avoid paying specific taxes or pay lower rates of taxation

    • Move the business to a low-tax location

    • Change production methods to reduce the use of highly-taxed components

Case Study

Impact of Employer National Insurance Contribution Increase on UK Businesses

Background

In April 2025, the UK government implemented significant changes to employer National Insurance contributions (NICs) which are a direct tax

  • Rate Increase: The employer NIC rate rose from 13.8% to 15%

  • Threshold reduction: The earnings threshold at which employers start paying NICs decreased from £9,100 to £5,000 per year

These adjustments aimed to improve public finances but have raised concerns among businesses regarding increased operational costs

Bar chart showing annual NICs increase for earnings from £10,000 to £100,000. Increases range from £2 to £1,127, highlighted in dark blue.
Increase in NIC contributions (Source: Contractor Umbrella)

Impact on Businesses

1. Increased operational costs

  • Higher Payroll Expenses: Employers now pay more NICs per employee, increasing overall payroll costs.

    • For an employee earning £30,000 annually, the NIC payable by the employer increased by approximately £270 per year due to the rate hike

2. Pressure on employment decisions

  • Hiring Freezes: To manage rising costs, some businesses have paused recruitment

  • Job Reductions: Particularly in sectors like retail and hospitality, companies are considering reducing part-time roles to cut expenses

3. Investment and growth constraints

  • Delayed Expansion Plans: With tighter budgets, businesses may postpone investments in growth or infrastructure

  • Reduced Training Budgets: Companies might limit spending on employee development programs

4. Sector-specific challenges

  • Small and Medium Enterprises (SMEs): SMEs, with limited financial buffers, are disproportionately affected, potentially leading to closures or downsizing.

  • Labour-intensive Industries: Sectors relying heavily on human labour face steeper cost increases, impacting competitiveness.

Business Response Strategies

To mitigate the impact, businesses are exploring various strategies:

  • Salary Sacrifice Schemes: Encouraging employees to exchange part of their salary for non-cash benefits, reducing NIC liabilities.

  • Operational Efficiency: Streamlining processes to lower costs without reducing staff.

  • Price Adjustments: Passing some of the increased costs to consumers through price hikes, where market conditions allow.

Conclusion

The increase in employer NICs presents significant challenges for UK businesses, particularly SMEs and labour-intensive sectors. Companies must adapt through strategic financial planning and operational adjustments to navigate the heightened cost landscape

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    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Lisa Eades

    Reviewer: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.