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UPDATED TO 2023-2025 SYLLABUS

CAIE IGCSE
BUSINESS STUDIES
SUMMARIZED NOTES ON THE THEORY SYLLABUS
Prepared for Mai for personal use only.
CAIE IGCSE BUSINESS STUDIES

Low inflation
1. External Influences on
Low Inflation: Low prices of goods & services so that
Business Activity people will buy more money in the economy.
Inflation: The increase in average prices of goods &
services.
1.1. Economic Issues Rapid inflation may lead to:
A fall in the value of money falls in real incomes.
Main Stages of the Business Cycle and Trade Wage price spiral.
Cycle Fall in international competitiveness as prices will be
high.
Gross Domestic Product (GDP): the total value of the Businesses may not want to expand and create jobs.
output of goods and services in a country in one year. Living standards will fall.
Low inflation rates will act as an incentive for firms to
produce and encourage them to expand.

Low Unemployment
Low Unemployment: A high % of people work so that
they don’t rely on government funds.
When people want to and have the ability to work but
can’t work, then they are said to be unemployed.
The country's output will be lower if unemployed
people don’t produce goods and services.
It involves an opportunity cost as the government has
to pay greater unemployment benefits, which could
Recession: too little spending, falling GDP, demand and be used to improve education and increase living
prices, workers lose jobs. standards.
Slump: long-drawn-out recession. Unemployment is
higher, and prices fall; many businesses fail to survive Economic Growth
this point.
Growth: GDP is rising, unemployment is falling, and Economic Growth: growth of a country's GDP (Gross
living standards are higher. (Firms are doing well at this Domestic Product) – more goods and services being
point). produced and sold.
Boom: too much spending, inflation, shortage of If an economy’s total output rises, it is said to be
workers, and businesses uncertain about the future. experiencing economic growth.
GDP is the total value of goods and services
Impact on Business from Changes in Economic produced in an economy.
Indicators Economic growth may cause employment to rise,
increasing living standards and reducing poverty.
Changes in employment levels will affect the ability of the A fall in GDP can lead to:
business to recruit new employees and also the income Unemployment
of customers. Fall in average living standards as poverty rises
Rising inflation may increase business costs, leading to Less investment
higher product prices. The effect of increasing inflation
depends on the type of product sold. Balance of Payment
An increase in GDP means the economy is growing.
Increase sales, higher income, but recruitment of
employees hard.

Government Economic Objectives

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Balance of Payment (of Imports & Exports): the Direct Tax

difference between a country's imports and exports Income tax reduces consumer disposable income.
balance out (BoP = Exports – Imports). Corporation tax on comparing profit.
Exports: Goods and services sold from one country Indirect Tax
to another. Expenditure taxes, e.g. VAT
Imports: Goods and services bought by one country Import tariffs/quotas to reduce imports from abroad.
from another. Import Tariffs: tax on imported goods.
Balance of payments is a record of one country’s Import Quota: a physical limit on the quantity of
financial transactions internationally. a product to be imported.
Governments will aim for an equal balance of payments: Governments and spending decisions include a tax
exports equal imports. measure according to the effect they want to achieve.
Higher imports than exports lead to a budget deficit. Governments will reduce spending and increase tax
Higher exports than imports lead to a budget surplus. rates to reduce inflation.
Problems of Budget Deficit: Governments will increase spending and decrease tax
The government can run out of foreign currency rates to stimulate economic growth.
reserves and will have to borrow.
The exchange rate depreciates – the price of our Monetary Policy
currency falls as compared to the other currency.
Exchange Rate: the price of a currency in terms
of another.

1.2. Government Economic Policies

Fiscal Policy
Fiscal Policy: any changes by the government in tax
rates or public sector spending.

Spending by the Government:

Government spending decisions can have a great impact

on certain business decisions.
If the government decides to increase its spending:
Increase subsidies and grants (to encourage
businesses to set up in high-unemployment areas).
Increase in welfare benefits, meaning consumers will
have a higher portion of income to spend.
Stimulation of economic growth.
If the government decides to decrease spending:
Increased competition (mainly if privation is used)
Disinflation (the reduction in the rate of inflation)

Tax

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Monetary Policy: change in interest rate by the Social Responsibility

government and the central bank.
Governments will have a set of objectives they would like Social Responsibility: when a business decision benefits
to achieve and present them to the central bank, which stakeholders other than shareholders.
will set the interest rate based on these objectives. Examples of business activity impacting the
If these objectives seek to increase the overall demand environment:
in the economy, the central bank will lower interest Emission from transport vehicles.
rates, which will lead to - Pollution from factories.
More consumer spending than borrowing. Waste disposal
More risk of inflation (Decreases confidence Transportation of goods by ship or track burns fossil
consumers/Businesses have). fuels such as oil, creating carbon emissions, which
There is more incentive to expand because loans are link to global warming and climate change.
cheaper, so firms are more likely to take out a loan to
Arguments against being mindful of the Argument with being mindful of the
fund for expansion. environment: environment:
Depreciation of the exchange rate (Fall in value of the It can be expensive and reduce profit.
Pollution and global warming affect all, so
social responsibility helps reduce this
country’s currency) will make for costlier imports. problem.
Increase prices to pay for ‘environmentally Using non-renewable resources leaves less
If these objectives seek to decrease the overall friendly‘ policies. for the future and raises prices.
It can make firms unproductive, reduce salaries Scientists and environmentalists believe that
demand in the economy, the central bank will raise the and relocate to places without such policies. business activity can do permanent damage.
interest rate; this will lead to - Consumers buy less if the price is high.
Consumers are becoming more socially
aware, so environmentally friendly products
Less consumer spending than borrowing. have become a market advantage.
Pressure groups can take action to harm the
Less risk of inflation (Increases confidence The government should pay to clean it up. business's reputation and sales.
consumers/Businesses have). Owners can claim there isn’t proof that the
activity is causing damage.
The incentive to expand will decrease because taking
out a loan will be more expensive, so firms are likely Pressure Groups: people who want to change business
to delay any plans of expansion. (or government) decisions by taking actions, such as
Appreciation of the exchange rate (Rise in value of consumer boycotts.
the country’s currency) will make for cheaper
imports. The Concept of Externalities
Supply-Side Policies Private Costs: costs paid for by a business or the
consumer of a product.
Supply-Side Policies: try to increase the competitiveness Private Benefits: gains to a business or the consumer of
of industries in an economy against those from other a product.
countries. Make the economy more efficient and External Costs: costs paid for by the rest of society,
increase supply. other than the business.
These supply policies focus on more long-term External Benefits: gains to the rest of society, other
objectives, unlike fiscal/monetary, which are more short- than the business.
term and demand-focused. They have three main Social Costs = External costs + Private costs.
categories: Social Benefits = External benefits + Private benefits.
Encouraging Competition: through If the social benefit exceeds social costs, the scheme will
privatisation/deregulations. likely be accepted; the government/local community will
Labour Market Reforms: through trade unions, probably refuse permission.
minimum wage, and labour legislations.
Incentive-related Policies: through reduced tax Sustainable Development
rates and increased subsidies.

1.3. Environmental and Ethical Issues

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Sustainable Development: Development which does Offering or taking business from government officials or
not risk future generations' living standards. people working for other businesses.
Business can be sustainable by: Employ child labour, even if it is illegal in some countries.
Use of renewable energy Buy supplies that lead to damage to the environment.
Recycle waste Agree to ‘fix high prices‘ with competitors.
use fewer resources Pay high to the top of the hierarchy and poorly to the
Develop new ‘environmentally friendly‘ products and lower levels.
production methods.
Two main extreme views to the ethical standards:
Main Reasons Why Businesses Respond to If the law is not broken, businesses can do whatever to
Environmental Pressure gain profit.
Even if it is not illegal, therefore wrong even if it may
Consumers increase profit.
Bad publicity can cause them not to buy; if consumers Potential benefits of ethical decision Potential limitation of ethical decision
think the products harm the environment, they will stop Customers may be more inclined to buy
products not made by child labour.
Adults paid higher costs, especially if good
workers’ conditions were involved.
buying, resulting in the business changing the product or Good publicity about ethical decisions provides Prices may be set higher due to higher costs.
‘free promotion‘.
production method. If consumers are not interested in how it’s
Long-term profit increases made and care only for price - then profits fall.
Pressure groups Some workers and investors may want to link
an ‘Ethical business‘, making recruiting and Short-term profit may fall.
raising capital easier.
It could be argued that some countries employ
Can take actions towards businesses like consumer Less risk of legal actions being taken against children as they may be the only source of
the company. income for the family, and may cause them to
boycotts. fall to low levels.
The impact of the actions depends on:
Public support and media coverage.
Consumer boycotts result in a decrease in sales.
1.4. Business and the International
The group is well-financed and organised. Economy
Whether the action is unpopular but not illegal
Cost damage methods by the business. Globalisation: the world is becoming more
If a business sells to another business - public interconnected, leading to increasing worldwide trade &
pressure is less effective. people moving.
The reasons for globalisation include:
Government through legal contracts More Free-Trade Agreements and economic unions
between countries have replaced protection for
By making certain activities illegal: industries. Consumers can purchase with few or no
Locating in an environmentally sensitive area. import controls.
Producing non-recyclable products. Improved and cheaper travel links and
Dumping waste in nearby rivers/seas. communication between countries made it easier to
Pollution permits - licences that allow businesses to transport goods globally. Interest also allows easy
pollute to a certain level. If the business exceeds the price comparisons, and online/e-commerce allows
account, it must buy from a ‘cleaner‘ business or pay orders to be placed anywhere.
large fines. Many ‘Emerging market countries‘ are
Additional taxes on goods or factories resulting in industrialising very rapidly. They can sell globally at
pollution. cheaper prices because of the loss of growth of the
firms and industries.
Ethical Issues
The Opportunities and Threats of Globalisation to a
Ethical Decision: based on a moral code of conduct, Business include:
sometimes called ‘doing the right thing‘.

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Potential Opportunities for Effect 1 Effect 2 Benefits to the business Benefits to the country
Business Producing goods at lower costs Jobs are created
They are expensive to sell Investments in the development of
Start selling exports to other abroad, and foreign Closer to resources (i.e. oil)
Increase potential sales, infrastructure in the country
countries -opening up foreign especially online sales. consumers buy the products
markets. even if they are popular at Closer to market More exports
‘home‘. Avoid expensive taxes on the import of goods
Quality good? Ethical issues? (i.e. Korean cars (KIA) being produced in the EU Tax – more money to the government
Open factories/operations in Cheaper to make goods Expensive or difficult to set to benefit from free trade)
other countries (become a outside than domestically. up operations in other
multinational) Spread risks (if there are low sales in one Increased product choice for consumers
countries? country and high sales in another)
Import products from other No trade restrictions, more Products need maintenance
and partly repairs. Will the
countries to sell to customers in profitable to buy, could sell needed parts be available Advantages to Host Country Disadvantages to Host Country
‘home‘ country. domestically. from the foreign producer?
New investment Influence the government and economy
Import materials and Cheaper purchases of (bringing outside influences and culture).
components from other supplies from other countries Are suppliers reliable? Does More export increases the international Due to MNCs ' expertise and activity, existing
countries. But still produce final will free trade and reduce greater distance add too competitiveness of the country firms will likely be pushed out of the market.
goods in the ‘home‘ country. costs. Materials can be much transport costs?
supplied ‘online‘. Fewer imports keep domestic businesses Depletion of scarce resources and
active and prevent the BoP deficit. endangerment of natural sites.
Jobs created reduced unemployment. Profits flow out of the country.
Potential Threats to Effect 1 Effect 2 Increase tax paid to the government. Often, unskilled work is created.
Businesses
More competition helps increase the
Increase imports into the If competitors offer cheaper Increased competition forces productivity and efficiency of domestic
home market from foreign products, domestic sales fall. local firms to be more efficient. businesses.
competitors.
Increase investment from Create further competition -
Multinationals that afford the Local firms become suppliers
1.6. Exchange Rates
multinationals to set up to multinationals, and their
operations in the home best employees may have sales could increase.
country. economies of scale.
Employees may leave In some professions, It might encourage local
businesses that cannot pay the employees have more choices
about where they work - businesses to use various Exchange Rate: the price of one currency in terms of
same or more than businesses will have to make motivational methods to keep
international competitors. more effort to retain them. their workers. another currency.
For example, 1 Euro is equivalent to 1.2 Dollars
Why Government Might Introduce Import Tariffs Currency Appreciation: when the value of a currency
and Import Quotas increases.
It can buy more of another currency
Import Tariffs: tax placed on imported goods in the 1 euro = 1.2 dollars, to 1 euro = 1.5 dollars.
country. Currency Depreciation: when the value of a currency
Import Quota: a restriction on the quantity of a product decreases.
that can be imported. It can buy less of another currency.
Protectionism: when a government protects domestic 1 euro = 1.2 dollars, to 1 euro = 1 dollar.
businesses from Foreign competition using tariffs and 2 things influence the exchange rate of a currency:
quotas. This reduces employment incomes. Demand for the Currency: if many people want to
Import tariffs increase the prices of imported goods, buy the currency, the price will increase because
making them less competitive than locally produced there is a ‘limited’ number of currencies (so it leads to
goods. appreciation).
Import quotas decrease the quantity of imported goods; Supply of Currency: if the central bank prints more
increasing the price means less availability, thus money, the supply increases, but the demand is still
increasing sales for domestic products. the same, so the value is lower (leading to
depreciation).
1.5. Multinational Companies (MNCs) Exchange Rates Can Affect Businesses By:
If it Appreciates If it Depreciates
Multinational (Transnational) Company: a company Import prices fall: since your currency can Import prices rise: your currency is worth
less, so you need more to buy other
buy more of the other currency.
that has factories or service operations in more than one currencies.
Export prices rise: your currency is worth Export prices fall: it is worth less, so other
country more, so it is more expensive for other currencies can buy your currency for less than
currencies to buy it. theirs.
It is not just selling products abroad; it is having
operations abroad
The benefits of a business and its impact on becoming
international:
Benefits to business Impact to stakeholders
New market Higher dividends
Easier to obtain raw materials as they can be
closer Opportunity to live and work abroad

Avoid trade barriers and import taxes Suppliers increase/decrease depending on the
location
Low Labour costs Government gains higher/lower taxes
Spread risk (if there are low sales in one
country and high sales in another)

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This means that if the currency appreciates:

The product’s price in other countries will increase
The business will make more profit
Businesses can lower the price and still make the
same amount of money as before – it is more
competitive.
If the currency depreciates:
The product’s price in other countries will decrease
less profit will be made
Businesses need to raise the price to make the same
amount of money as before – less competitive.

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CAIE IGCSE
Business Studies

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