Risk and Uncertainty

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Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

The difference between Risk and Uncertainty

Risk

These refer to the quantifiable probability of a damage or loss occurring.

Examples of Risks:

Banks when they lend capital to other firms and individuals
Risk of the return on an investment being lower than the expected return
General trade can influence interest rates and exchange rates, imposing a market risk

Uncertainty

This refers to a situation where the probability of each outcome happening is unknown

The impact of Shocks

These are the unforeseen changes which impact the economy and can be caused by humans or natural disasters

The Global Financial Crisis which happened in 2008 is an example of a shock as it impacted the economy for years after and was caused by the risks undertaken by banks

Exchange Rate risk and forward markets

The speculative attacks taken on currencies can affect the value of the exchange rate

Forward Markets – financial market which allows these contracts for future delivery to be made

The role of insurance for businesses

The aim of insurance is to reduce the risks that different decisions carry

The premium paid for taking out an insurance also refers to the price paid to cover a risk

Quick Fire Quiz – Knowledge Check

1. Distinguish between a ‘risk’ and an ‘uncertainty’ (4 marks)

2. Identify three examples of risks (3 marks)

3. By providing an example, explain the impact of shocks (4 marks)

4. Explain what is meant by an ‘Exchange Rate risk’ (2 marks)

5. Define ‘Forward Markets’ (2 marks)

6. Explain the role of insurance for businesses

Next Revision Topics

A Level Economics Past Papers

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