1.12 Flashcards
Government objectives
International trade
● One of the roles of most governments is to provide a range of public
services.
● These might include health care, education, defence, care for elderly, child
protection policing, refuse collection, a judicial system and transport
networks.
● The amount of money spent by governments on these services will vary
enormously. Government spending levels will affect businesses.
Taxation
● The money raised from taxation is used by a government to help fund its
spending on public services.
● Businesses and individuals pay taxes.
● Some taxes are direct, which means they are charged on income.
Examples: Income tax, which is paid on personal income, and corporation tax, which is
paid on company profits.
● Some taxes are indirect, which means they are levied on spending.
Examples: Value added tax (VAT) which is paid when buying goods and services.
Taxation
● Governments many change levels of government spending and taxation
to influence the economy. This is called fiscal policy, and is likely to have
an impact on businesses.
Fiscal Policy - Examples
● If income tax is lowered, there is likely to be more spending in the
economy. Businesses may respond by increasing production and
expanding.
● In some countries, income tax rates may be cut to help the low paid.
● In recent years, a number of governments have cut corporation taxes.
Examples include Croatia, Denmark, Egypt, Estonia, Finland, Latvia,
Lesotho, New Zealand and Norway. One reason why governments are
cutting corporate tax is to attract foreign businesses to locate operations
in their countries - creating new jobs and improving living standards.
Constraints on public spending
● In recent years, some governments have tried to constrain levels of public
spending. The effects on businesses of such constraints can be severe.
● Public sector organisations that supply services directly may get their
funding cut, which may result in the need to lay off staff. This may result
in a fall of demand and businesses producing less.
● Private sector businesses that rely on public sector contracts for part or
all their business will be hit.
How can governments affect business activity?
Governments can change business activity in a number of ways. It can:
● Change the law
● Influence the rate of interest and exchange rates in the economy
● Change levels of government expenditure and taxation
● Introduce policies that have a direct impact on businesses
How can governments affect business activity?
Three specific approaches in which the government can affect business
activity are:
● Infrastructure provision
● Legislation
○ Consumer protection
○ Competition policy
○ Environmental legislation
● Trade policy
Infrastructure provision
● Developing and maintaining the nation’s key infrastructure.
○ This includes schools, hospital, roads, bridges, railway systems, etc.
Legislation
● Governments should provide a legal framework that ensures that the country,
its economy, its resources and its citizens are being protected.
● This should include, and is not limited to, the following:
○ Consumer protection
○ Competition policy
○ Environmental Legislation
Trade policy
● Some governments opt for protectionism, or restricting trade, with the
belief that its for the nation’s best interest.
● Protectionism might be used to:
○ Protect domestic jobs and domestic producers
○ Protect infant industries
○ Prevent dumping
Trade barriers
● Governments can use different trade barriers to restrict trade, such as:
○ Tariffs: Tax on imports, which makes them more expensive
○ Quota: Physical limit on an amount allowed into a country
○ Subsidy: Financial support to exporters or domestic producers
○ Administrative barriers: Strict health, safety and environmental regulations
to control importing processes
Trade barriers
● Governments can also influence businesses by forming trade blocs.
Effects of interest rates on businesses
Interest is the cost of borrowing money and the rewards to savers.
Effects of interest rate on businesses
● Interest rates are usually controlled by the authorities and can therefore
change.
● The use of interest rates to help control the economy is called monetary
policy.
Effects of interest rate on businesses
● With higher interest rates:
○ It is more expensive to borrow money
○ Demand in the economy is likely to fall
● With lower interest rates:
○ It is cheaper to borrow money
○ Demand in the economy is likely to rise
