6.1 Economic Issues (Cambridge International IGCSE Business): Exam Questions

Define ‘business cycle’

Identify two government economic objectives.

Define ‘economic growth’

Outline two ways an increase in inflation might affect CTF.

[case-study] CTF is a public limited company. It manufactures beds using batch production. The Operations Director is using break-even analysis to calculate the margin of safety for children’s beds. An extract from CTF’s output data is shown in the below table. The Operations Director wants to know how an increase in inflation might affect CTF. She knows there are many environmental pressures that a manufacturing business could respond to.

Extract from CTF’s output data (children’s beds per month)
Break-even output	14 000
Current level of output	18 000
Maximum factory output	25 000

Outline two ways CPK might be affected by an increase in taxation.

[case-study] CPK operates 5 sports clubs. Each club offers a range of activities including gym and yoga classes. CPK uses job enrichment to keep its 60 employees well-motivated. Having the right marketing mix is important to CPK’s success. The Finance Director is analysing CPK’s financial statements. An extract is shown in Table 3.1. He wants to know how an increase in taxation might affect CPK’s business.

Extract from CPK’s financial statements
	2020	2021
Current ratio	1.6	1.3
Profit margin	12%	10%
Non-current assets	$2m	$2m

Define ‘recession’

State the four stages of the business cycle.

Outline two ways that the appreciation of country B’s exchange rate might affect UDig.

[case-study] UDig is a large mining company based in country B. UDig is in the private sector. It supplies businesses in country B with 30% of the coal they need and the rest is imported.

UDig now has eight mines but plans to close two of them. This will threaten 1800 employees with redundancy. The Managing Director said: ‘I blame the appreciation of country B’s exchange rate and new legal controls, including those to protect the environment. The Government should help private sector businesses.’

Outline two problems inflation might cause Gino’s business.

[case-study] Gino owns a fast-food restaurant selling fried chicken and potato fries. He employs 5 full-time chefs and 12 part-time workers to serve the food. Communication is important and Gino has regular meetings with his part-time employees to keep them informed about any changes in the menu. It took 3 years before Gino’s business was able to break-even. He aims to achieve a Return on Capital Employed (ROCE) of 10%. Gino is always looking for ways to increase the number of customers. Inflation may be a problem for Gino’s business.

Do you think businesses will be more affected by new legal controls to protect the environment than an increase in interest rates? Justify your answer.

Extract:

{align=center} Gemma’s Jewels (GJ)

Gemma set up GJ as a sole trader 5 years ago in country Z. She started by selling rings and bracelets from a rented shop. She used her own savings to start the business. The first year was successful. After this first year Gemma decided to expand by selling more expensive items of jewellery. Gemma thinks it is important to set clear business objectives. She wants her business to increase sales by 10% each year and to increase market share.

As the business grew Gemma needed more finance for a computer, inventory and working capital to avoid liquidity problems. She decided to convert the business to a private limited company and sell shares to members of her family. Gemma still owns more than 50% of the shares in GJ.

In 2019, Gemma purchased a franchise from Beautywise Jewellery. This means GJ is now only able to sell Beautywise products in its shop. GJ has to purchase all of its inventory from Beautywise and in addition pay 20% of gross profit to Beautywise. More details about the franchise are in the advertisement in Appendix 1.

Gemma has developed a website so customers can order online. Customers can also download a mobile (cell) phone app to view and order jewellery.

Gemma plans to open a second shop as a Beautywise franchise in a nearby town. She has to decide which method of sales promotion to use. GJ needs to recruit a manager for the new shop. The manager will be responsible for operating the shop and making most of the decisions about which items of inventory to buy. The manager will also need to ensure excellent customer service is provided and that the new employees are motivated and working efficiently.

{align=center} Appendix 1

{align=center} Advertisement for Beautywise Jewellery Franchise

Become a franchisee to sell Beautywise Jewellery and improve your chances of success!!

What we offer you:

• Be the only shop in your area that sells Beautywise jewellery
• Beautywise will advertise nationally on television and in newspapers
• Help and advice on decoration of the shop and training for employees and the franchisee
• Ethically sourced jewellery imported especially for Beautywise
• The franchise fee is just $50 000 per year!

{align=center} Appendix 2

{align=center} Newspaper article- Daily News

External factors affecting the jewellery market in country Z

The demand for jewellery in country Z is likely to be affected by some recent changes. Consumers are becoming more aware of the ethical issues involved in jewellery production in some countries. The exchange rate of the currency of country Z is likely to depreciate over the next 12 months. The Government is planning changes to tax rates which might reduce the effects of the current economic boom.

{align=center} Appendix 3

{align=center} Information on three possible locations for the new shop

Note: Franchise fee is $50 000 per year and 20% of gross profit is paid to Beautywise.

Explain the effect of the following changes on GJ.

• Depreciation in the exchange rate of country Z
• Increase in income tax in country Z

Refer to the following insert when answering the question

Explain two ways in which an increase in economic growth might affect NSN’s decision to build a new factory in country Z.

[case-study] NSN is a multinational company. It makes cars. Over the years, technology has changed production methods. NSN uses just-in-time inventory control in all its factories. NSN plans to open a new factory in country Z creating 7,000 jobs. Country Z’s Government has offered an $80m grant to NSN. A spokesperson for NSN said: ‘Governments should support business activity. There were also other factors that influenced our decision to build the new factory there including the possible effects of economic growth.’

Explain two ways that the introduction of a new tourist tax might affect Aurelie’s business.

[case-study] Aurelie is a sole trader. She started her small hotel a year ago using government support.

Aurelie knew it would be important to build good customer relationships. Aurelie wants to analyse her financial statements using ratio analysis. An extract is shown in the below table.

She is worried about how the Government’s plan to introduce a new tourist tax of $1 per tourist per night might affect her business.

Extract of Aurelie’s Income statement for 2020 ($)
Revenue	5 600
Cost of sales	1 800
Gross profit	X
Expenses	2 400
Profit	Y

Do you think a reduction in the level of unemployment always benefits businesses? Justify your answer.

Do you think all businesses benefit from an increase in government spending? Justify your answer.

Extract:

Safari Adventures (SA)

Tokumbo is a sole trader. He started SA 2 years ago in country X. Tokumbo had previously worked for a company selling holidays. SA organises safari tours which take tourists to view wild animals on a game reserve. Most of SA’s customers are tourists from other countries. Tokumbo did not have any objectives when he started SA but knows they are important for his business.

SA uses its own vehicles for the 7 day safari tours and provides accommodation in small local hotels. Tokumbo employs 4 safari guides, 1 for each of the 4 vehicles. The safari guides drive the tourists around the game reserve. There is 1 additional employee who helps Tokumbo in the office with administration. Tokumbo thinks SA needs a website so tourists can book directly with them rather than booking through holiday companies that charge SA a fee.

Tokumbo is considering the following three options for the future growth of SA safari tours:

• Option 1 - increasing the number of safari guides and vehicles to increase the number of customers from the existing target market
• Option 2 – targeting young people who want to camp and sleep in a tent on their safari
• Option 3 - targeting high-income tourists who prefer to stay in luxury hotels

Information about these three options is outlined in Appendix 3.

Tokumbo plans to provide more training for his employees whichever option he chooses. He wants his existing employees to have a wider knowledge of the wild animals on the game reserve and to be able to provide high-quality customer service. Tokumbo has to decide which method of training to use.

{align=center} Appendix 1

{align=center} Newspaper article in Main News, September 2022

{align=center} Tourism takes off

Country X is becoming a popular holiday destination for tourists from other countries.

There is an increased demand from high-income tourists who want to stay in luxury hotels whilst on safari tours. These tourists are willing to pay high prices. There is also a new trend for younger people who want cheaper holidays. They prefer to camp and sleep in tents on game reserves rather than stay in hotels.

Are the many safari businesses in country X ready to target these new markets?

The use of e-commerce to find and book safari tours by tourists from other countries is offering both opportunities and threats to businesses in country X.

The inflation rate in country X has increased to 4% which may affect some of our local safari businesses.

{align=center} Appendix 2

{align=center} Email from Tokumbo’s accountant

To: Tokumbo

From: Accountant

Subject: Source of finance for the new vehicles

New vehicles will be needed whichever option you choose for the future growth of your business.

I have considered several sources of finance you could use for the new vehicles. Interest rates on bank loans have fallen to 2% whilst interest rates on savings are 3%. I think you should choose from one of the following sources:

• Leasing
• Bank loan
• Retained profit

We can meet to discuss these sources if that would help you to decide.

{align=center} Appendix 3

{align=center} SA’s three options for a 7 day safari tour

Explain two possible effects on SA of the increase in the rate of inflation in country X.

Refer to the following insert when answering the question

Extract:

Gemma’s Jewels (GJ)

Gemma set up GJ as a sole trader 5 years ago in country Z. She started by selling rings and bracelets from a rented shop. She used her own savings to start the business. The first year was successful. After this first year Gemma decided to expand by selling more expensive items of jewellery. Gemma thinks it is important to set clear business objectives. She wants her business to increase sales by 10% each year and to increase market share.

As the business grew Gemma needed more finance for a computer, inventory and working capital to avoid liquidity problems. She decided to convert the business to a private limited company and sell shares to members of her family. Gemma still owns more than 50% of the shares in GJ.

In 2019, Gemma purchased a franchise from Beautywise Jewellery. This means GJ is now only able to sell Beautywise products in its shop. GJ has to purchase all of its inventory from Beautywise and in addition pay 20% of gross profit to Beautywise. More details about the franchise are in the advertisement in Appendix 1.

Gemma has developed a website so customers can order online. Customers can also download a mobile (cell) phone app to view and order jewellery.

Gemma plans to open a second shop as a Beautywise franchise in a nearby town. She has to decide which method of sales promotion to use. GJ needs to recruit a manager for the new shop. The manager will be responsible for operating the shop and making most of the decisions about which items of inventory to buy. The manager will also need to ensure excellent customer service is provided and that the new employees are motivated and working efficiently.

{align=center} Appendix 1

{align=center} Advertisement for Beautywise Jewellery Franchise

Become a franchisee to sell Beautywise Jewellery and improve your chances of success!!

What we offer you:

• Be the only shop in your area that sells Beautywise jewellery
• Beautywise will advertise nationally on television and in newspapers
• Help and advice on decoration of the shop and training for employees and the franchisee
• Ethically sourced jewellery imported especially for Beautywise
• The franchise fee is just $50 000 per year!

{align=center} Appendix 2

{align=center} Newspaper article- Daily News

External factors affecting the jewellery market in country Z

The demand for jewellery in country Z is likely to be affected by some recent changes. Consumers are becoming more aware of the ethical issues involved in jewellery production in some countries. The exchange rate of the currency of country Z is likely to depreciate over the next 12 months. The Government is planning changes to tax rates which might reduce the effects of the current economic boom.

{align=center} Appendix 3

{align=center} Information on three possible locations for the new shop

Note: Franchise fee is $50 000 per year and 20% of gross profit is paid to Beautywise.

Consider how the following three changes might affect GJ.

• All jewellery packaging must state in which country the product has been made
• Country Z has entered a boom phase of the business cycle
• A higher percentage of people in country Z use mobile (cell) phones

Which change is likely to have the most effect on GJ’s profit? Justify your answer.

Refer to the following insert when answering the question

Extract:

{align=center} Soapy Sudds Manufacturer (SSM)

SSM is a public limited company that was set up 25 years ago. SSM manufacture soap powder in country Y. The soap powder is used for washing clothes. SSM sells all its soap powder to large retailers in country Y. SSM’s sales have been increasing for many years in country Y but sales in the last year have remained the same. The directors of SSM are considering ways to increase sales.

SSM has a total of 100 employees with 60 in the Operations Department. It uses flow production in the factory and has 10 production lines with 5 workers and 1 supervisor for each line. The Operations Manager is aware that production workers are unhappy and often complain about their jobs being boring. These workers have always been paid by an hourly rate. The Human Resources Manager has recommended changes to ensure fewer workers leave each year to work for other businesses.

The directors of SSM have decided to expand the factory. They will need $15m to do this. The directors have also considered taking over a competitor. SSM is likely to benefit from economies of scale as it grows.

The Marketing Director thinks SSM should start selling soap powder in markets in other countries. SSM will need to carry out either primary market research or secondary market research to forecast the potential total sales in these new markets. There are many existing manufacturers in these countries. SSM need to consider the problems when entering new markets in other countries such as tariffs or quotas.

{align=center} Appendix 1

{align=center} Manufacturing process to make soap powder

All the different types of soap powder are manufactured on production lines using flow production. SSM makes use of specialisation.

Each production line has the following stages:

Each of these stages uses machinery controlled by a production worker.

{align=center} Appendix 2

{align=center} Email from the SSM Finance Director to the Managing Director

SSM has a cash-flow problem which may get worse. Please see charts below.

{align=center} Appendix 3

{align=center} Newspaper article from Main News 1 October 2021

Retailers have reported increased sales for most types of products such as sales of washing machines which have increased by 15%. Economic growth in country Y is predicted to increase.

Many businesses have been recruiting additional employees and there are now shortages of some skilled workers. The government in country Y has recorded an increase in inflation to 8% so far this year, which is a worry.

Consider the effects on SSM of the following changes in country Y:

• Increase in employment
• Increase in inflation

Which effect is likely to have the greatest impact on SSM’s profit? Justify your answer.

Refer to the following insert when answering the question

Extract:

{align=center} Vegetable Palace (VP)

VP was started 10 years ago in country Z. It is a public limited company. VP has a chain of 500 fast-food restaurants that operate across country Z. The VP brand is famous for its vegetarian food, this means none of its meals contain meat.

VP has a head office in Main City where all the directors and senior managers work. There are many barriers to communication. Each VP restaurant has a Manager, an Assistant Manager and 50 employees who cook and serve the meals. Restaurant Managers are often very busy and they are considering delegating some of their tasks to the Assistant Managers.

The ingredients for the restaurants are ordered in bulk by head office and then distributed from its warehouse to each of the restaurants. However, some senior managers think that Restaurant Managers should purchase their own ingredients from local suppliers. This would mean the ingredients would be fresher and would allow variations in the meals served.

VP wants to expand into another country. It will choose between the two countries shown in Appendix 2. VP will also need to decide how to enter a new market in another country. It has the option of forming a joint venture with another business or franchising the VP brand. The choice of finance will need to be considered for the expansion and the amount of finance will depend on the option chosen.

{align=center}

{align=center} Appendix 1

{align=center} Advertisement for VP's restaurants

{align=center} Choose VP for the finest vegetarian meals. Our service is the fastest possible!

{align=center} You will receive your meal in less than 5 minutes – guaranteed!

{align=center} Delicious and varied meals for even the biggest of appetites and all at competitive prices.

{align=center} New meals are being introduced all the time.

{align=center} There is a VP restaurant near you – we look forward to serving you soon.

{align=center}

{align=center} Appendix 2

{align=center} Summary of the two possible countries that VP could choose to locate its new restaurants.

{align=center} Appendix 3

{align=center} Email from VP’s Managing Director to VP’s Marketing Director

To: VP’s Marketing Director

From: VP’s Managing Director

Date: 31 March 2023

Re: Economic changes in country Z

Did you see the news this morning that interest rates will be raised from 3% to 5% later today? This will have several effects on our business in country Z.

The news also said that the exchange rate in country Z has depreciated. We will have to consider how this will affect our business, especially as we import 30% of our ingredients into country Z.

There are also new legal controls being introduced that mean we have to list all the ingredients used in each of our meals on the menu. We do reprint menus every time we change the meals, but it is something to consider.

Speak later today.

Using Appendix 3 and other information, consider how the following three changes in country Z may affect VP.

• Increase in interest rates.
• Depreciation of country Z’s exchange rate.
• New legal controls which require all restaurants to list the ingredients in their meals.

Which change is likely to have the greatest effect on VP's profits? Justify your answer.

Refer to the following insert when answering the question

Extract:

The BB Health Spa (BB)

Bethany owns The BB Health Spa in Main City in country X. Economic growth has been high for the last few years. The government of country X wants this growth to continue so it has reduced income tax. However, it is also worried about inflation becoming a problem so it has increased interest rates.

The BB Health Spa is very busy and Bethany is considering taking on a partner to help manage the business and give her more free time. However, she has been a sole trader for 10 years and wants the business to stay small.

The customers of The BB Health Spa are people of all ages who are interested in their health. Bethany employs two qualified workers to provide the treatments for customers. Bethany herself also provides customers with treatments. In addition, she does all the administration such as ordering inventory, accounts and paying invoices when the spa is closed.

The BB Health Spa still uses the original treatment equipment which was purchased when the business started. Some spas nearby have the latest equipment but these spas charge much higher prices than The BB Health Spa. Bethany records all the financial transactions by filling in accounts books by hand. This takes her a long time. Customers book appointments using the telephone and Bethany later telephones them to remind them when an appointment is due.

{align=center} Appendix 1

{align=center} Advert for treatments at The BB Health Spa

{align=center} Appendix 2

{align=center} Weekly forecasts for two possible additional services

{align=center} Appendix 3

Daily News September

{align=center} New equipment now available in many health spas to make skin look younger

There have been a number of changes in technology for health spas which allow the treatments to be much more effective in making skin look younger. Many people are keen to try these treatments using the latest equipment to get younger looking skin. This equipment is very expensive for health spas to buy or lease.

The news of these treatments has appeared on social media sites and on mobile phone Apps leading to higher demand. ‘Some customers will pay high prices for such treatments’, said a local health spa owner who is keen to promote his health spa as being one of the first to use the new equipment.

There have also been developments in software which make customer bookings and accounts much easier, quicker and with fewer mistakes. Automatic text (sms) messages are used to remind customers of their appointments – so no need to miss an appointment again.

Look out for these changes in health spas near you!

Explain how the following two changes are likely to affect The BB Health Spa:

• lower income tax in country X
• increase in interest rates in country X.

Which change is likely to have the most effect on profit? Justify your answer.

Refer to the following insert when answering the question