The political and legal environment

Government reaches a business through the law it makes and the policy it sets. Learn the four legal areas the specification names:

• Competition law — mergers and takeovers can be blocked by the Competition and Markets Authority (CMA); cartels, price-fixing and abuse of a dominant position are illegal. It protects consumers, and it caps how far a firm's growth strategy can go.
• Labour market law — the National Living Wage, working-time limits, holiday and parental rights, discrimination and equality law, redundancy rules. It raises costs and constrains how flexibly a firm can use its workforce — while also raising the incomes of the customers who buy from it.
• Environmental legislation — emissions limits, packaging and waste rules, extended producer responsibility, net-zero targets. It raises costs, forces investment, and creates opportunities for those who move first.
• Consumer protection — rights on faulty goods, refunds and misleading advertising.

Government policy also acts through enterprise support (grants, tax reliefs, R&D credits), the role of regulators (Ofgem, Ofcom, the FCA — who can cap prices and impose service standards), infrastructure investment, and international trade policy.

The examinable point: regulation is not simply a cost. It is also a barrier to entry that protects incumbents, and a source of advantage for the firm that complies early and cheaply while rivals scramble. Whether a new law helps or hurts a specific business depends on its cost base relative to its rivals'.

Competition law bites

The economic environment

AQA names six factors. Every one acts on a business through costs, demand, or both.

• GDP — the total value of output in an economy. Rising GDP (a boom) → rising incomes → rising demand, especially for income-elastic luxuries. Two consecutive quarters of falling GDP = a recession: demand falls, firms with high fixed costs and high gearing are exposed first, and inferior goods actually grow.
• Taxation — corporation tax cuts retained profit and the funds available for investment; income tax and VAT cut consumers' disposable income and so cut demand; National Insurance raises the cost of employing people.
• Exchange rates — see the next screen. This is the most examined and least understood.
• Inflation — a sustained rise in the general price level. It raises input costs and wage demands, distorts planning, and erodes the real value of cash — though it also erodes the real value of debt, which helps highly geared borrowers.
• Fiscal policy (government: taxation and spending) and monetary policy (the central bank: interest rates and the money supply).
• Open trade vs protectionism — tariffs, quotas and subsidies.

Match each economic term to its meaning

Tap an item on the left, then its partner on the right.

Exchange rates — learn SPICED

A strong (appreciating) pound means each £1 buys more foreign currency.

• Importers gain — foreign goods and components cost fewer pounds. Input costs fall, margins widen.
• Exporters lose — a UK product priced at £50 now costs foreign buyers more in their own currency, so demand falls. To hold their foreign price, the exporter must cut its sterling price and sacrifice margin.

A weak pound does exactly the reverse: exporters become more price-competitive abroad; importers face rising input costs (and, if they buy in dollars, imported inflation).

Your turn — the exporter's problem

What should the exporter do?

Your turn — the importer's side

Inflation, interest rates and real values

Inflation makes every headline growth figure a liar until you adjust it.

Consequences of inflation: input and wage costs rise · menu costs and planning difficulty · consumers may bring purchases forward (or, if incomes lag, cut back sharply) · exporters lose competitiveness if their inflation exceeds rivals' · the real value of debt falls, which quietly benefits highly geared borrowers · and the central bank will typically respond by raising interest rates.

Consequences of an interest-rate rise — trace both channels:

• Costs: the firm's own borrowing costs more; highly geared firms are hit hardest; new investment projects must clear a higher hurdle rate, so capital expenditure is deferred.
• Demand: consumers' mortgage payments rise, disposable income falls, and credit-financed purchases (cars, sofas, houses) collapse first. Saving becomes more attractive than spending.
• Exchange rate: higher UK rates attract foreign capital → the pound strengthens → exporters suffer, importers gain.

Your turn — real vs nominal growth

Your turn — the cost of a rate rise

Your turn — tax and the bottom line

Fiscal and monetary policy

• Fiscal policy is the government's tool: taxation and public spending. Expansionary fiscal policy (cut taxes, raise spending) boosts demand and can rescue a recession — but raises borrowing. Contractionary (raise taxes, cut spending) cools the economy and cuts demand for almost everyone.
• Monetary policy is the central bank's tool: the base interest rate and the money supply. It works chiefly through the cost of borrowing, and therefore through both business investment and consumer demand.

Watch the interaction — this is where good answers separate themselves. A rate rise designed to curb inflation simultaneously (i) raises the firm's interest bill, (ii) cuts consumer demand, and (iii) strengthens the pound, hurting exporters. Three separate hits from one policy change. A weak answer names one; a strong one traces all three and then says which matters most for this business — which depends on its gearing, its income elasticity and its export exposure.

Open trade, protectionism and globalisation

Protectionism means shielding domestic producers: tariffs (a tax on imports), quotas (a physical limit), subsidies to home firms, and non-tariff barriers (standards and red tape). It protects domestic jobs in the short run — and raises input costs for domestic firms who import, raises prices for consumers, invites retaliation against your own exporters, and shelters inefficiency.

Reasons for greater globalisation: falling trade barriers and trade agreements · dramatically cheaper transport and containerisation · the internet and instant, near-free communication · deregulation of capital markets · and the rise of the multinational.

Why it matters to a business: access to far larger markets · cheaper labour and materials through global sourcing · scale economies · but also far more intense competition at home from low-cost overseas entrants, exposure to exchange-rate movements, and long, fragile supply chains.

Emerging economies (India, Brazil, Vietnam, Nigeria and others) matter twice over: as rapidly growing markets with an expanding middle class, and as low-cost production locations — and increasingly as the home of formidable new competitors.

Political, economic, or trade-related?

Tap an external change, then tap the category it belongs to.

Who pays for a tariff?

Who is most exposed?

Thinking like an examiner

• Trace every external change through two channels — costs and demand — and then a third, the exchange rate, where relevant.
• The same change helps some firms and hurts others. A strong pound is a gift to an importer and a wound to an exporter. Always ask: what is this firm's exposure?
• Adjust for inflation before you praise a growth figure. 6% nominal growth in a 4% inflation year is 2% real.
• Rank the impact. A rate rise hits a highly geared luxury retailer far harder than a cash-rich discounter. The AO4 marks come from saying how much and why, not from listing effects.
• The external environment is uncertain, not just risky. That is why contingency planning (3.10.4) exists.

The big ideas to know

Press Finish to see your score.