6.1 Government Economic Policies & Objectives Flashcards
Governments want 4 main economic objectives:
Low Inflation: Low prices of goods & services, so
people will buy more, more money in economy
Low Unemployment: High % of people working so
that they don’t rely on government funds
Economic Growth: growth of the GDP (Gross Domestic Product) of a country – more goods and services being produced and sold
Balance of payment (of Imports & Exports): the
difference between the imports and the exports of a
country balance out (BoP = Exports – Imports)
Balance of payment
the difference between the imports and the exports of a country balance out (BoP = Exports – Imports)
Inflation –
The increase of average prices of goods &
services
Rapid inflation may lead to:
A fall in value of money, fall in real incomes
Wage price spiral
Fall in international competitiveness as prices will be
high
Businesses may not want to expand and create jobs
Living standards will fall
Low inflation rates effect on firms
Low inflation rates will act as an incentive for firms to
produce and encourage them to expand
Low unemployment
When people want to and have the ability to work but
can’t work, then they are said to be unemployed
Unemployed people don’t produce goods and services, output of the country will be lower
It involves an opportunity cost as government has to pays greater unemployment benefits which could be used improve education and reduce living standards
Economic growth
If an economy’s total output rises, it is said to be
experiencing economic growth
GDP full form
GDP (Gross Domestic
Product)
GDP
GDP is the total value of goods and services produced in
an economy
GDP (Gross Domestic
Product)
Economic growth may cause
Economic growth may cause employment to rise,
increasing living standards and reducing poverty
A fall in GDP can lead to:
Unemployment
Fall in average living standards, as poverty rises
Less investment
Economies go through the ‘Business Cycle’:
Growth:
Boom:
Recession:
Slump
Business cycle
Growth: GDP is rising, unemployment falling,
businesses succeeding & higher living standards
Boom: Higher living standards so people start
spending more money, so prices increase – business
costs will also rise
Recession: people become uncertain about their jobs
so they don’t spend money. Many workers lose their
jobs because of lack of demand & profit in a business
Slump – A long-term, serious recession:
Unemployment will be very high, GDP has decreased
a lot and many businesses will not survive and go
bankrupt
Balance of Payments
Balance of payments is a record of one country’s financial transactions internationally
What do goverments want balance of payments to be
Governments will aim for equality in balance of payments that is exports equal imports
Higher imports than exports lead to budget deficit
Higher exports than imports lead to budget surplus
Problems of budget deficit: -
- Government can run out of foreign currency reserves and will have to borrow
- Exchange rate depreciates – the price of our currency falls as compared to the other currency
There are 3 main ways governments can influence the economy (AKA economic policies):
- Government expenditure
- Changing tax rates
- Interest Rates
Government Expenditure
Government Expenditure is how the government spends the money made from taxes. It is usually spent on education, defense, healthcare, public transport, etc.…
Government expenditure
Spending more on these markets will boost economy in a country (more jobs created, more demand)
Types of taxes
- Direct Taxes – taxes paid directly from incomes (of individuals as wages or as business as revenue)
- Indirect Taxes – VAT, taxes added to prices of goods
Income tax (direct
tax)
Tax on people’s incomes
You can either have a set tax (i.e. 20% of income)
or
Progressive income tax,
where richer people pay higher taxes.
Income/direct tax effect on business activity
People have less disposable income (money after
tax). They would have less money to spend on goods or services.
Businesses have less revenue.
Profits Tax (direct
tax)
Tax on profits made by businesses (a set percentage)
If tax rates increase:
Harder for a business to expand (less profit) less money to reinvest back into business, Fewer people will start their own business
Indirect Tax (VAT)
Tax added to prices of goods & services (varies within types of products)
Prices of goods will increase so less people
will buy them
Less demand for a business
Import Tariffs &
Quotas (indirect)
Tax on imported goods from other countries.
Import Quota is a physical limit to the
amount of products that can be imported.
Import Tariffs &
Quotas (indirect) effect on business activity
businesses will have more demand because there less imported goods, Importing raw materials from abroad will be much more expensive – products will
be more expensive – sell less
The interest rate
The interest rate is the amount charged for borrowing
money from a bank
In most countries, it is fixed by the goverment
monetary policy
the % of the interest rate is called the monetary policy
The effects to business activity due to having higher
interest rates include:
Less profit for companies that already took out a loan - less/slower expansion of a business.
Entrepreneurs thinking of starting business might not
be able to afford to take out a loan
If consumer loans (i.e. mortgages) increase, people
will have less disposable income – less demand for
goods
Higher exchange rates of currency
Businesses might respond to Higher income tax
Lowering production costs to
be able to sell goods for lower
prices
Businesses might respond to Higher tariffs (on imports)
Focusing on the domestic
market,
Buying materials from
local companies rather than
from companies abroad
Businesses might respond to Higher interest rates
Reduce investment for business
growth, Lower prices of goods
for consumers, Sell assets for
cash to reduce loans
Business activity can impact the environment in many different ways, including:
Air pollution made by factories & transportation
Water & land pollution from improper waste disposal
Increase carbon emissions – global warming
Most business decisions lead to benefits and costs. What types of benifits and costs are there
Private and external
Private costs & benefits =
Private costs & benefits are costs that a business pays for,
and the benefits the business gains
Sustainable development
Sustainable development – development that does not compromise the living standards of future generations
Businesses can contribute to sustainable development by
doing 4 main things:
- Using renewable energy (wind, solar)
- Recycling & reusing their waste
- Using less natural resources (lean production)
- Developing environmentally friendly products &
packaging (i.e. biodegradable packaging)
Pressure groups
Pressure groups - a group of people who want to change policies/decisions of businesses or the government.
Pressure groups acting on unethical decisions made by a business will lead to a consumer boycott - consumers not buying their products
Environmentally friendly businesses can use the fact that they are environmental as a marketing advantage
Pressure group
How and why it responds
Lots of public
support, Very bad
brand image &
reputation, Loss in
sales
Pressure by Laws passed by
Government
Government
making certain
activities illegal (i.e.
dumping waste)
It is more expensive
to manufacture
Pressure from fines
If a business
produces more
pollution than the
government allows,
they pay heavy
fines.
Costs of business
increase
Types of pressure on business
Pressure groups
Fines
Laws passed by gov
Gov permits
Governments sell ‘permits’ to companies that allow it to pollute the environment up to a certain level
Firms that pollute less than the government allows, can sell their permit to companies that pollute more
This motivates businesses to pollute less, to earn money
Ethics
Ethics – “doing the right thing” - the moral principles
Most businesses have to face many ethical decisions, they
have to decide whether to act ethically or have higher
profits
Eg of unethical decisions
Employing child workers, even though it might not be
illegal in some countries
Buying supplies that lead to damage of the
environment
Paying managers large bonuses while having their
workers in minimum wage & poor conditions
Offering bribes to people to gain information
Benifits of having an ethical code
Consumers appreciate the
efforts made by the company
and so they buy more from
them
Creates good publicity
Less risk of lawsuits
Easier to find workers
Disadvantages of having an ethical code
Higher costs of production
Higher prices – might lead to
less demand
In some places families
depend on their children to
earn money
Globalization
Globalization –the world becoming more interconnected
leading to increasing worldwide trade & people moving
The reasons for globalization include:
More Free-Trade Agreements – imports/exports between countries that pay no tariffs
Easier, cheaper and faster transportation between
countries
E-commerce allows products to be bought from all
over the world
Industrializing countries (i.e. India & China) can
produce products at very low prices
opportunities of globalization to a
business include:
Businesses can sell abroad,
increasing sales
Opening factories or offices
abroad – can be cheaper to
produce, but it is expensive
to set up
Importing materials from
abroad – can be cheaper but
transport costs can be too
high
Importing goods from abroad
and selling it in home country
threats of globalization to a
business include:
Increasing foreign
competitors importing their
products, leading to less sales
(& profit)
Workers in home country
might leave for higher wages
in other countries
More foreign companies set
up operations in the home
country of the business,
more competition
Protectionism
Sometimes governments introduce import tariffs and
quotas to protect local businesses – this is called
Protectionism
They believe that by reducing the number of foreign
competitors and goods (that would have much lower
prices), there will be less unemployment and higher
incomes
However, by doing this, it is harder for local businesses to import materials and export their goods abroad
Multinational Company
Multinational Company = Transnational Company
A multinational company is a company that has factories or service operations in more than one country
It is not just selling products abroad, it is having
operations abroad
Multinational Company is also called
Multinational Company = Transnational Company
The exchange rate of a currency is influenced by 2 things:
Demand for the currency: if many people want to buy
the currency the price will increase because there is a
‘limited’ number of currency (appreciate)
Supply of currency: if the central bank prints more
money, the supply increases but the demand is still
the same so the value is lower (depreciation)
If exchange rate Appreciates:
Import prices fall: since your
currency can buy more of the
other currency
Export prices rise: your
currency is worth more so it
is more expensive for other
currencies to buy it
If exchange rate Depreciates:
Import prices rise: your
currency is worth less so you
need more to buy other
currencies
Export prices fall: it is worth
less so other currencies can
buy your currency for les of
theirs
This means that if the currency Appreciates:
The product’s price in other countries will increase
Business will make more profit
Business can lower the price and still make the same
amount of money as before – it is more competitive
If the currency depreciates:
The products price in other countries will decrease
less profit will be made
Business needs to raise the price to make the same
amount of money as before – less competitive
Exchange Rate –
the price of one currency in terms of
another currency
However, there are potential drawbacks of multinational companies (MNC) to the country:
Less sales for local businesses, might go bankrupt
‘Repatriation of profits’ – profits are sent back to
home country and doesn’t benefit country located
Business has lots of influence on government – they
can threaten to leave the country
They can use up scarce resources in the country
Benefits of multnational companies to the business
Producing goods at lower
costs
Closer to resources (i.e. oil)
Closer to market
Avoid expensive taxes of
import of goods (i.e. Korean
cars (KIA) being produced in
EU to benefit from free trade)
Spread risks (if there are low
sales in one country and high
sales in another)
Benifits of multinational companies to the country
Jobs are created
Investments in development
of infrastructure in country
More exports
Tax – more money to
government
Increased product choice for
consumers
Two policies set by gov to influence businesses
Monetary
Through interest rates
Fiscal
Gov adjusts taxes and public spending to influence national economy
4 types of taxes in fiscal policy
Income
Profit
Indirect
Monetary policy
Gov have the power to change internet rates through central bank.
It affects the people who borrow or loan money from the bank
Effect of interest rates rising on business
Businesses who owe the bank will have to pay more interest leading to lower retained profit
People are more reluctant to start new businesses businesses expand existing businesses
Consumers who took loans will be left with less disposable income, limiting their spendings on other goods.
Demand will fall for businesses producing luxury or expensive goods such as cars as people are less willing to loan money from the bank (due to high interest interest rates)
GST
Goods and service tax
VAT
Value added tax
Diff VAT and GST
Same thing
