Economic Factors (SQA National 5 Business Management): Revision Note

Business cycle

• The business cycle describes how the economy goes through periods of growth (boom) and decline (recession)

• Economies do not experience consistent levels of growth over time

The business cycle

• During the COVID-19 pandemic, many Scottish hospitality businesses experienced recession conditions - closures, low demand and job losses

• In contrast, as restrictions lifted, tourism hotspots like Edinburgh saw a boom in visitor numbers, boosting local shops and attractions

Characteristics of booms and recessions

Employment

• The level of employment in the economy affects both how much money people have to spend and how easily businesses can recruit staff

  • High employment

    • More people in work means higher disposable income, which boosts demand for goods and services

    • Businesses may expand to meet the extra demand

    • They may face skills shortages or rising wage costs

  • High unemployment

    • Leads to lower consumer spending, but businesses benefit from a larger pool of job applicants

    • There is less pressure to increase wages

• The unemployment rate in the UK has recently risen from 3.8% in 2023 to 4.3% in early 2024

Interest rates

• Interest rates are set by the Bank of England and influence the cost of borrowing and the reward for saving

  • Rising interest rates

    • Loans and mortgages become more expensive

    • Consumers may spend less, and businesses may delay expansion projects because borrowing is costly

    • E.g. When interest rates rose in 2023–24, many small Scottish businesses saw higher costs on bank loans (they had to repay more), making it harder to fund expansion

  • Falling interest rates

    • Cheaper borrowing encourages consumers to buy big-ticket items, such as cars or houses

    • It may be more attractive for businesses to invest in growth