3
Business and the Economy
Back in Business · Strand 1: Leading in Business
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3.1
Explain how economic indicators can impact on business development and growth
Explain
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EXPLAINGive a detailed account with reasons. For each indicator, name it, say what it means, and explain what happens to businesses when it is high and when it is low.
Select an indicator to see its impact on business growth
Inflation is a rise in the general level of prices in an economy over time. When prices go up, the same amount of money buys less than it did before.
How it is measured: In Ireland, inflation is measured using the Consumer Price Index (CPI), produced monthly by the CSO. The CSO tracks the prices of 612 everyday goods and services — things like food, rent, energy and clothing. These prices are compared to the same month the previous year, and each item is given a weighting based on how much of people's income is typically spent on it. A rising CPI means prices are going up. CPI does not stand for Cost of Production Index.
How it is measured: In Ireland, inflation is measured using the Consumer Price Index (CPI), produced monthly by the CSO. The CSO tracks the prices of 612 everyday goods and services — things like food, rent, energy and clothing. These prices are compared to the same month the previous year, and each item is given a weighting based on how much of people's income is typically spent on it. A rising CPI means prices are going up. CPI does not stand for Cost of Production Index.
🔴 HIGH Inflation — Bad for growth
Higher production costs. Raw materials, energy and rent all cost more, cutting into profit margins and making expansion harder to afford.
E.g. A café pays more for milk, coffee beans and electricity, leaving less to fund a second location.
Staff want higher wages. Employees ask for pay rises to keep up with rising prices, pushing business costs up further.
E.g. A bakery's staff seek a pay rise after their own grocery bills increase.
Consumers spend less. When prices rise, people have less to spend. Sales fall, making it harder to fund growth.
E.g. A restaurant sees fewer bookings as customers cut back on eating out.
🟢 LOW Inflation — Better for growth
Costs are stable and predictable. Businesses can plan and budget with confidence, making expansion more realistic.
E.g. A food producer can forecast ingredient costs and plan to open a second production site.
Consumers spend more. Stable prices keep purchasing power intact, so people are more willing to spend.
E.g. Consumers continue dining out and shopping when prices are not rising sharply.
Note on deflation (falling prices). This can also be a sign of weak demand and low confidence, which is bad for growth.
E.g. If prices are falling, consumers may hold off buying, waiting for them to drop further.
Employment rates measure the percentage of the working-age population (people aged 15–64) who are in paid work.
Three key terms to know:
• Employment rate — the percentage of people aged 15–64 in paid work.
• Unemployment rate — the percentage of people who are actively looking for a job but don't have one.
• Full employment — when unemployment is around 4%. This means the few people without jobs are mainly just between roles. Getting unemployment to 0% is not possible in a real economy.
In Q3 2024, around 2.79 million people were in paid work in Ireland.
Three key terms to know:
• Employment rate — the percentage of people aged 15–64 in paid work.
• Unemployment rate — the percentage of people who are actively looking for a job but don't have one.
• Full employment — when unemployment is around 4%. This means the few people without jobs are mainly just between roles. Getting unemployment to 0% is not possible in a real economy.
In Q3 2024, around 2.79 million people were in paid work in Ireland.
🔴 HIGH Employment — Mixed impact
More people spending. When employment is high, people have wages to spend. This drives demand and helps businesses grow.
E.g. A retailer sees more footfall and higher sales when most people in the area are working.
Harder to find workers. When most people are already employed, there are fewer available to hire. Businesses may struggle to staff an expansion.
E.g. A construction firm trying to expand finds it difficult to recruit tradespeople.
Wages are pushed up. With fewer workers available, employees can ask for higher pay. This raises costs for businesses.
E.g. A restaurant has to offer higher wages to attract staff, cutting into its profits.
🟢 LOW Employment — Bad for growth
People spend less. When unemployment rises, fewer people have wages coming in. Consumer spending falls and demand drops.
E.g. Retailers in areas with high unemployment see fewer customers and lower revenues.
Business growth slows. With lower demand, businesses cut back rather than expand. Investment falls and hiring stops.
E.g. A hospitality business reduces its hours and staff rather than opening a new venue.
More workers available to hire. A larger pool of job-seekers can make it easier to recruit if a business does decide to expand.
E.g. A growing business can fill vacancies quickly when many people are actively looking for work.
Interest rates are the cost of borrowing money, expressed as a percentage. If you borrow €10,000 at a 5% interest rate, you pay back €10,500 — the extra €500 is the cost of borrowing.
Interest rates affect both businesses (who borrow to invest and expand) and consumers (who borrow to buy homes, cars and other goods). The higher the rate, the more expensive it is to borrow — and the more expensive it becomes, the less people borrow and spend.
Who sets interest rates in Ireland? Interest rates are set by the European Central Bank (ECB), because Ireland is part of the eurozone. Ireland cannot set its own rates. The ECB targets inflation at or just below 2%. If inflation is too high, it raises rates to slow spending. In June 2024, the ECB cut its rate to 3.75% for the first time in almost five years.
Interest rates affect both businesses (who borrow to invest and expand) and consumers (who borrow to buy homes, cars and other goods). The higher the rate, the more expensive it is to borrow — and the more expensive it becomes, the less people borrow and spend.
Who sets interest rates in Ireland? Interest rates are set by the European Central Bank (ECB), because Ireland is part of the eurozone. Ireland cannot set its own rates. The ECB targets inflation at or just below 2%. If inflation is too high, it raises rates to slow spending. In June 2024, the ECB cut its rate to 3.75% for the first time in almost five years.
🔴 HIGH Interest Rates — Bad for growth
Borrowing costs more for businesses. Loan repayments go up, which reduces profits and makes expansion through borrowing less attractive.
E.g. A small business drops its plan to open a second outlet when it sees how high the loan repayments would be.
Consumers have less to spend. Higher mortgage and loan costs leave people with less money, so they cut back on spending.
E.g. After ECB rate rises, Irish mortgage holders spend less on eating out and non-essential purchases.
Businesses invest less. When borrowing is expensive, the return on investment needs to be much higher to justify it. Expansion plans get delayed.
E.g. A retailer delays a planned renovation when the cost of financing it rises sharply.
🟢 LOW Interest Rates — Good for growth
Cheaper to borrow for businesses. Lower repayments make it easier to take loans for new premises, equipment or staff.
E.g. An Irish food producer takes a low-cost business loan to fund a new production line.
Consumers spend more. Lower mortgage and loan costs mean people have more money, which boosts spending across the economy.
E.g. When rates fall, households spend more on home improvements and leisure, helping local businesses.
More businesses invest and grow. Cheaper borrowing encourages entrepreneurs and investors to take risks, and banks are more willing to lend.
E.g. A start-up gets funding more easily when rates are low, helping it grow faster.
There are two related but different terms here:
Economic growth is an increase in the total value of goods and services produced in a country from one period to the next. It is measured by GDP (Gross Domestic Product) or GNP (Gross National Product). A recession is defined as two consecutive quarters of negative economic growth — meaning the economy shrinks for six months in a row.
Economic development goes further — it means growth plus improvements in people's quality of life, such as access to education, healthcare and a decent standard of living. It is measured by the HDI (Human Development Index).
The key difference: you can have economic growth without development, if only a small wealthy group benefits from the increased output while most people's lives don't improve.
Economic growth is an increase in the total value of goods and services produced in a country from one period to the next. It is measured by GDP (Gross Domestic Product) or GNP (Gross National Product). A recession is defined as two consecutive quarters of negative economic growth — meaning the economy shrinks for six months in a row.
Economic development goes further — it means growth plus improvements in people's quality of life, such as access to education, healthcare and a decent standard of living. It is measured by the HDI (Human Development Index).
The key difference: you can have economic growth without development, if only a small wealthy group benefits from the increased output while most people's lives don't improve.
🔴 HIGH Growth — Good for business
People spend more. Growth leads to higher incomes and more confidence, driving up demand for goods and services.
E.g. During strong Irish growth, spending on housing, cars and leisure rises, helping many businesses expand.
More investment. A growing economy makes investors more optimistic and willing to fund new projects and hire more staff.
E.g. Strong Irish economic performance attracts more multinational investment to the country.
Government has more money to support businesses. Higher growth means more tax collected, which can be used to fund grants, infrastructure and enterprise supports.
E.g. Strong tax revenues allow the government to increase funding for LEOs and Enterprise Ireland.
🟢 LOW or NEGATIVE Growth — Bad for business
People spend less. When growth falls, incomes and confidence drop. Consumers cut back, which reduces business sales.
E.g. During the 2008 Irish recession, consumer spending collapsed and many businesses closed.
Investment falls. A weak economic outlook puts investors and lenders off. Businesses freeze hiring and delay major spending.
E.g. During the recession, Irish businesses deferred expansion and focused on cutting costs.
Government has less money for supports. Lower tax revenues force cuts to spending, including grants and infrastructure that help businesses grow.
E.g. Austerity cuts during the recession reduced funding for enterprise supports across Ireland.
Exchange rates show the value of one currency compared to another. For example, if €1 = $1.10, it means one euro buys $1.10 US dollars. Ireland uses the euro (€).
Exchange rates matter for Irish business because:
• When Irish businesses export goods, buyers in other countries pay in their own currency — so the exchange rate affects how expensive Irish goods look to them.
• When Irish businesses import raw materials, the rate affects how much those imports cost in euro.
Ireland is a very open, export-heavy economy, so exchange rates have a big effect here. The rate between the euro and the US dollar ($) and UK pound (£) are the most relevant for Irish businesses.
Exchange rates matter for Irish business because:
• When Irish businesses export goods, buyers in other countries pay in their own currency — so the exchange rate affects how expensive Irish goods look to them.
• When Irish businesses import raw materials, the rate affects how much those imports cost in euro.
Ireland is a very open, export-heavy economy, so exchange rates have a big effect here. The rate between the euro and the US dollar ($) and UK pound (£) are the most relevant for Irish businesses.
🔴 STRONG Euro
Irish exports cost more abroad. A stronger euro means Irish goods are more expensive for buyers in other countries, which hurts exporters.
E.g. An Irish dairy exporter finds its products cost more for US buyers, so orders fall.
Importing raw materials is cheaper. A strong euro means imported inputs cost less in euro terms, which can help reduce production costs.
E.g. An Irish manufacturer importing machinery from the US benefits from a strong euro.
More competition from imports. Cheaper imports can make foreign goods more attractive to Irish consumers, putting pressure on Irish businesses.
E.g. A stronger euro makes UK goods cheaper in Ireland, increasing competition for Irish producers.
🟢 WEAK Euro
Irish exports are cheaper and more competitive. A weaker euro makes Irish goods less expensive for buyers abroad, boosting export demand.
E.g. A weaker euro makes Irish pharmaceutical products more price-competitive in the US.
Importing raw materials costs more. When the euro weakens, imported inputs become more expensive, squeezing profit margins.
E.g. An Irish food business importing cocoa or packaging faces higher costs when the euro weakens.
Uncertainty makes planning harder. Changing exchange rates make it difficult to set prices for export and budget accurately.
E.g. An Irish exporter quoting prices to US clients months ahead risks losing margin if the rate shifts.
Consumer confidence measures the degree of optimism — or pessimism — that consumers feel about the overall state of the economy and their own personal financial situation. It reflects how willing people are likely to be to spend money on goods and services.
In Ireland, consumer confidence is tracked through the Consumer Sentiment Index, calculated by the Irish League of Credit Unions in partnership with Core Research since October 2022. It gathers insights across four areas:
• Economic outlook — how optimistic people feel about Ireland's economy overall.
• Household finances — how worried people are about paying bills and running their home. High inflation tends to reduce this.
• Job security — how secure people feel in their job or about finding one. High employment tends to boost this.
• Spending intentions — how cautious people are about making big purchases like a car or holiday.
Consumer confidence can change quickly due to external factors like inflation, rising interest rates, or global economic events.
In Ireland, consumer confidence is tracked through the Consumer Sentiment Index, calculated by the Irish League of Credit Unions in partnership with Core Research since October 2022. It gathers insights across four areas:
• Economic outlook — how optimistic people feel about Ireland's economy overall.
• Household finances — how worried people are about paying bills and running their home. High inflation tends to reduce this.
• Job security — how secure people feel in their job or about finding one. High employment tends to boost this.
• Spending intentions — how cautious people are about making big purchases like a car or holiday.
Consumer confidence can change quickly due to external factors like inflation, rising interest rates, or global economic events.
🔴 HIGH Confidence — Good for growth
People spend more. Confident consumers buy more goods and services, including non-essentials, which drives up business revenue.
E.g. When confidence is high, Irish consumers spend more on holidays, dining out and home improvements.
Businesses are willing to expand. When demand looks strong, businesses are more likely to invest in new premises, equipment or staff.
E.g. A restaurant group opens two new venues after seeing high bookings and positive spending trends.
Easier to get finance. Confident consumers mean confident investors and lenders too, making it easier to secure loans or investment for growth.
E.g. During periods of high confidence, banks are more willing to approve business loans.
🟢 LOW Confidence — Bad for growth
People spend less. When people feel uncertain, they save rather than spend. Business revenues fall.
E.g. After a sharp rise in mortgage rates, Irish consumers cut back on dining out and non-essential purchases.
Businesses hold back on investment. Uncertain demand makes expansion feel too risky. Hiring freezes and big spending decisions are postponed.
E.g. A retail chain delays opening new stores after consumer surveys show a drop in sentiment.
Harder to get finance. Cautious banks and investors tighten lending criteria and are less willing to back new projects.
E.g. A small Irish tech business finds it harder to secure investment when market sentiment is weak.
3.2
Outline the value of the business economy in Ireland
Outline
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OUTLINEGive the main points. Know the key Irish figures and what the data is used for.
Key Irish Figures
Gross Value Added (GVA): In 2023, the total value added from economic activity in Ireland was €484 billion.
Employment: In Q3 2024, around 2,794,800 people were in paid work in Ireland.
These figures make Ireland one of the highest GVA-per-person countries in the EU, largely due to the large number of multinational companies based here.
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Employment: In Q3 2024, around 2,794,800 people were in paid work in Ireland.
These figures make Ireland one of the highest GVA-per-person countries in the EU, largely due to the large number of multinational companies based here.
How This Data Is Used
Government uses it to:
1. Plan education and training so workers have the skills the economy needs.
2. Show investors that Ireland is a strong, stable place to do business, which helps attract FDI.
Businesses use it to:
1. Spot sectors that are growing and find new opportunities to expand into.
2. Compare their own performance against competitors and sector averages.
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1. Plan education and training so workers have the skills the economy needs.
2. Show investors that Ireland is a strong, stable place to do business, which helps attract FDI.
Businesses use it to:
1. Spot sectors that are growing and find new opportunities to expand into.
2. Compare their own performance against competitors and sector averages.
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Chapter 3 appeared in all four sample papers under LO 3.1. The questions below are taken directly from those papers. LO 3.2 had no dedicated sample paper question.
3.1Explain the impact of three economic indicators on business growthHL Paper 1 · Q2(d)▼
Question
The increasing rental costs have motivated Gráinne to build the new factory.
Explain the impact of three economic indicators on business growth.
Explain the impact of three economic indicators on business growth.
Suggested solution
Suggested answers based on the textbook. Offered as a study guide only.
Inflation: Inflation is a rise in the general level of prices over time. When inflation is high, costs for raw materials and wages go up, profits are squeezed and growth becomes harder. For Grá Chocolates, rising rental costs are a direct example of inflation affecting the business and pushing Gráinne to build rather than rent. When inflation is low, costs are more stable, consumers spend more freely and businesses have more scope to grow.
Interest rates: Interest rates are the cost of borrowing money, set by the ECB. When rates are high, loan repayments rise for both businesses and consumers. Profits fall, spending drops and expansion becomes less attractive. When rates are low, borrowing is cheaper, consumer spending rises and businesses are more likely to invest and grow.
Consumer confidence: Consumer confidence measures how optimistic people feel about the economy and their own finances. When confidence is high, people spend more, which drives demand and supports expansion. When it is low, people cut back on spending, revenues fall and businesses hold back from investing. As an artisan food business, Grá Chocolates relies on customers feeling financially secure enough to spend on premium products.
3.1Explain the economic indicator most relevant to the infographic (Inflation)HL Paper 2 · Q5(c)(i)▼
Question
Explain the economic indicator most relevant to the infographic above.
Context: the infographic showed rising consumer prices and CPI data for Ireland.
Context: the infographic showed rising consumer prices and CPI data for Ireland.
Suggested solution
Suggested answer based on the textbook. Offered as a study guide only.
Inflation is the economic indicator shown here. Inflation is a rise in the general level of prices over time. In Ireland it is measured using the Consumer Price Index (CPI), which the CSO produces each month by tracking the prices of 612 everyday goods and services. When inflation is high, businesses face rising costs for raw materials, energy and wages, which squeezes profit margins and makes growth harder. Consumers also have less purchasing power and spend less. When inflation is low and stable, costs are more predictable, consumers spend more and businesses are in a better position to invest and expand.
3.1Outline one impact inflation may have on Alice's businessOL Paper 1 · Q5(d)▼
Question
Outline one impact inflation may have on Alice's business.
Context: Alice runs a small mobile bakery business in Ireland.
Context: Alice runs a small mobile bakery business in Ireland.
Suggested solution
Suggested answer based on the textbook. Offered as a study guide only.
Higher production costs: Inflation causes prices for raw materials like flour, butter and eggs to rise. This increases Alice's cost per item, which squeezes her profit margin. She may have to raise her prices to stay profitable, which could reduce demand for her products and make it harder to grow the business.
3.1Choose one indicator and explain how it may impact business development and growthOL Paper 2 · Q2(c)▼
Question
Choose one of these and explain how it may impact on business development and growth in Ireland:
■ Inflation ■ Employment/Unemployment Rates ■ Interest Rates
■ Inflation ■ Employment/Unemployment Rates ■ Interest Rates
Suggested solutions — all three shown for practice
In the exam you choose one. All three are shown here so you can practise each one.
Inflation: When inflation is high, businesses face higher costs for raw materials and wages, which reduces profits and makes expansion harder. Higher prices also reduce what consumers can afford to buy, lowering revenues. When inflation is low, costs are more stable and consumers spend more, helping businesses to grow.
Employment/Unemployment Rates: When employment is high, more people have wages to spend, which drives up demand and helps businesses sell more. However, high employment can also lead to a shortage of workers and rising wage costs. When unemployment is high, consumer spending falls and businesses find it much harder to grow.
Interest Rates: When interest rates are high, businesses and consumers pay more to borrow. This reduces spending and investment, slowing growth. When rates are low, borrowing is cheaper, demand picks up and businesses are more likely to invest in expansion.
📌 For each indicator: define it, then cover what happens when it goes up and when it goes down
A complete answer covers three things: what the indicator is, what happens to businesses when it is high, and what happens when it is low. The sample papers show both directions being relevant — sometimes asking about one level, sometimes asking for a fuller explanation. Practise writing a definition and two impacts for every indicator so you can handle any variation of the question.
📌 Economic growth and economic development are not the same thing
Economic growth means the total value of what a country produces goes up — measured by GDP or GNP. Economic development means growth plus improvements in people's quality of life, such as access to education and healthcare — measured by the HDI. Be ready to explain both terms clearly and describe what each one measures.
📌 Exchange rates: the impact depends on whether the business exports or imports
A strong euro makes Irish exports more expensive for buyers abroad, which is bad for exporters. It also makes imports cheaper, which helps businesses that bring in raw materials from outside the eurozone. A weak euro does the opposite. When answering a question on exchange rates, think about whether the business in question is an exporter or an importer, as this changes the direction of the impact.
