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6.1 Government Economic Objectives + Policies (1. Government Control over…
6.1 Government Economic Objectives + Policies
1. Government Control over Economy affecting Businesses (Objectives)
Government's Economic Objectives
:red_cross:
Low Inflation
:red_cross:
Low Unemployment
:red_cross:
Economic Growth
To raise living standards
:red_cross:
Balance of Payments
(Between imports and exports)
Low Inflation
If there's Rapid Inflation,
:money_with_wings: Workers' wages will
not buy as many goods
as before. People's
real income falls
:money_with_wings:
Prices
of goods will be
higher
than other countries --> people may
buy foreign goods
--> Jobs in that country will be lost
:money_with_wings: Businesses may not want to
expand
and create
more jobs
. Living standards may fall.
:star: Low inflation can encourage businesses to
expand
and makes it easier for a country to
sell its goods + services
abroad.
Low Unemployment
If there's High Unemployment,
:money_with_wings: Unemployed people
don't produce any goods/services.
Total
level of output
of the country will be
lower.
:money_with_wings: Government will have to
pay more unemployment benefit
to those w/o a job (costs a lot). The money
can't
be used on schools, hospitals etc.
:star: Low unemployment will help to
increase the output
of a country and
improve workers' living standards
Economic Growth
If the GDP's falling,
:money_with_wings: As output is falling,
fewer workers
are needed and
unemployment will occur
:money_with_wings: Average
standard of living
will
decline.
(Most people will become poorer).
:money_with_wings: Businesses
less likely to expand
as people will have
less money to spend
on products they produce.
:star: Economic Growth makes the
country richer
and allows
living standards
to
rise
.
Balance of Payments
If value of imports is greater than value of exports,
:money_with_wings: The country could
'run out'
of foreign currencies and may have to
borrow
from abroad.
:money_with_wings:
Exchange rate
is likely to
fall
. (exchange rate depreciation). The country's currency will now buy
less abroad
than before the depreciation.
Inflation
:pencil2: The
increase
in the
average price
level of
goods and services
over time.
Unemployment
:pencil2: When people who are
willing
and able to work
cannot find a job
Economic Growth
:pencil2: When a country's
GDP increases
-
more goods + services
are produced than in the previous year
Balance of Payments
:pencil2: Records the
difference
between a country's
exports
and
imports
.
Real Income
:pencil2: The
value of income
(what can be bought of an income), it falls when prices rise faster than money income.
Gross Domestic Product (GDP)
:pencil2: The
total value
of
output
of goods+services a country in one year.
Imports
:pencil2:
Goods + Services bought in
by one country from
other countries
Exports
:pencil2:
Goods + Services sold
from a country to
other countries
Business Cycle
Main stages of the Business Cycle
:red_cross:
Growth
:money_with_wings:
GDP is rising
:money_with_wings:
Unemployment
is falling
:money_with_wings: The country has
higher living standards
.
Businesses do well.
:red_cross:
Boom
:money_with_wings: Caused by
too much spending
:money_with_wings:
Prices
start to
rise quickly
:money_with_wings: There will be
shortages of skilled workers
.
:money_with_wings: Business
costs will rise
The future of firms are uncertain.
Governments want to reduce the chances of this (as it will lead to recession)
:red_cross:
Recession
:money_with_wings: Caused by
too little spending
:money_with_wings:
GDP falls
:money_with_wings: Businesses experience
falling demand + profits
:money_with_wings: Workers may
lose their jobs
:red_cross:
Slump
:money_with_wings: A
serious
, long-drawn-out
recession
:money_with_wings: Very
high unemployment
levels
:money_with_wings:
Falling prices
Many businesses fail to survive this period.
2. Policies
Fiscal Policy
Important for...
:red_cross:
Construction firms
(building infrastructure)
:red_cross:
Defence industries
(recruiting army)
:red_cross:
Bus manufacturers
(expanding public transport).
Income Tax
:red_cross: Increase rate of tax
:arrow_heading_down: taxpayers have
less disposable income
:arrow_heading_down:
Less
money to
spend
:arrow_heading_down: Businesses see
falling sales
:arrow_heading_down: Businesses
produce fewer goods
:arrow_heading_down:
Unemployment rises
:star: Businesses producing
luxury goods
will be
most affected.
:star: Businesses producing
essential goods
will be
less affected
as consumers will still have to buy the products.
Profits Tax
Effects on Businesses if increased
:star:
Lower profits
for businesses after tax.
Less finance
to put into the business (
harder to expand
). Projects to expand may have to be cancelled.
:star: Less money to
pay back to owners
who invested into the business -->
Fewer people
will want to
start a business
:star: Companies'
share prices
could
fall
.
Indirect Taxes
Effects on Businesses if increased
:star:
Prices of goods would rise
--> consumers may
buy fewer
items -->
lower demand
. Mostly only affects luxury goods businesses.
:star: Workers'
real income declines
, businesses may be
pressured
to
raise wages
, forcing them to increase the
selling price
Import Tariffs
Effects on Businesses if increased
:star: Firms will
benefit
if they're
competing
w/ imported goods as
sales of home-produced goods may rise
.
:star:
Higher costs
if they use
imported materials
:star: Other countries may also
increase import tariffs
as retaliation. Exporting countries may sell
fewer goods
than before.
Import Quotas
Changes in Government Spending
:money_with_wings: If governments want to boost
economic growth
, they can
increase their spending
on education, health etc.
:money_with_wings: If governments want to
save money
(e.g. if they borrowed), they will often
cut the government spending.
Cuts on spending effects businesses which...
:red_cross: Produce equipment for schools, hospitals, defence equipments
:red_cross: Build roads, bridges, railways
Monetary Policy
Effects of Higher Interest Rates
:star:
Higher cost
of interest on loans
:star: Consumers'
incomes available
to spend
fall
:star: Could lead to
higher exchange rate
:star: Business may be
less willing
to
borrow
to pay for investment/expansion
:star: Less consumers borrowing to buy
expensive products
Supply Side Policies
:red_cross:
Privatisation
Aims to use the profit motive to
improve business efficiency
:red_cross:
Improve Training + Education
Particularly important to industries e.g. computer softwares, which are often very
short of skilled staff.
:red_cross:
Increase competition in all Industries
May be done by
reducing government controls
over industry or by acting
against monopolies
Exchange Rate
:pencil2: The
price of one currency
in terms of another. e.g. $1: 30B
Exchange Rate Depreciation
:pencil2: The
fall in value
of a currency compared to
other currencies.
Direct Taxes
:pencil2: Paid
directly from incomes
e.g. income tax, profits tax
Indirect Taxes
:pencil2: Taxes
added
to the prices of
goods
and taxpayers pay the tax as they purchase the goods.
e.g. VAT
Disposable Income
:pencil2: The
level of income
a taxpayer has
after paying income tax
Interest Rate
:pencil2: The
cost
of
borrowing money
:pencil2: Any change by the government in
tax rates
or public-sector
spending
.
:pencil2: Tax that is a percentage of the person's income
:pencil2: Aka. Corporation tax. The tax on the
profits
made by a
business
(usually companies).
:pencil2: Tax on an imported product.
:pencil2: A
physical limit
to the
quantity
of a product that can be
imported
:pencil2: A
change in interest rates
by the government or central bank.
:pencil2: Policy aimed to improve the efficient
supply of goods
and services.
