Ch 27 - economic issues (policies) Flashcards
3 policies that a govt uses to achieve economic objectivies
What does each deal with
» fiscal policy – taxes and government spending
» monetary policy – interest rates
» supply side policies.
Define fiscal policy
Fiscal policy is a government policy which adjusts government spending and taxation to influence the economy.
What are the 2 main types of taxes
define both
Direct taxes - paid directly from incomes
Indirect taxes - added to the prices of goods and taxpayers pay the tax as they purchase the goods
What is income tax
Tax on people’s income
Why does changing income tax affect spending
Influences disposable income
What is disposable income
level of income a taxpayer has after paying income tax.
Explain what happens if income tax is increased
what happens if taxes reduce
Less disposable income
Less money to spend
Less demand
Less sales for businesses
Businesses produce fewer goods
Unemployment
vice versa if taxes reduce
except after creating employment there could also be inflation since demand > supply.
Why are higher profit taxes bad for business
another name
Cooperation tax - Lower profits after tax. Profit is a interest free debt free source of finance. Less money to reinvest in the business. Business may find it harder to expand
Also bad for the owners since their reward is reducing. Reduces the motivation to start own business.
Negative impact of raising indirect taxes
make goods and services more expensive for consumers.
Since price is rising, consumers may buy fewer as a result. Reduces demand of product(s)
May lead to wage spiral since costs of goods and services are going up, real income is decreasing.
What is an import tarrif
what is an import quota
tax on an imported product
physical limit on the quantity of a product that can be imported.
Effects on businesses on increasing import tarrifs
» Businesses will benefit if they are competing with imported goods. These will now become more expensive, leading to an increase in sales of home-produced
goods.
» Businesses will have higher production costs if they have to import raw materials. These will now be more expensive.
» Retaliation from other countries
What is retaliation (import tarrifs)
How does it affect businesses
Countries may now take the same action and introduce import tariffs too.
A business trying to export to these countries will probably sell fewer goods than before since their goods are more expensive there.
When are quotas used
Quotas can be used selectively to protect certain industries from foreign competition that may be seen as unfair or damaging to jobs.
What is the definition of monetary policy
Decisions on the money supply, the rate of interest and the exchange rate taken to influence aggregate demand
What does ‘interest rate’ mean
The cost of borrowing money
What do higher interest rates do
More expensive to borrow money - businesses will have to delay taking loans for expansion. If they t take loans profit will reduce since they have to pay higher interest
More expensive to borrow for consumers - eg will not buy cars and homes and all.
Saving becomes more attractive (banks are giving more interest on savings) and consumer expenditure starts to fall.
Business have less demand
reduce output
Less sales and profits
Unemployment occurs
How does increasing interest rates affect exchange rate
Appreciates the exchange rate (more in deck for ch 29)
What are supply side policies
Policies aimed at increasing the productivity in the economy along with making its industries more competitive to other industries.
3 supply side policies
Privatisation
Improving training and education
Increasing competition in all industries
What is privatisation
Transfer of ownership of a firm from the public sector to the private sector
Why do governments use privatization?
The main object of private sector firms is profit, compared to the main objective of public sector firms which is social welfare
This leads to private sector firms being more efficient, delivering goods at a lower cost and better quality. This is better for society.
How do govts increase competition in industries
deregulation (removal of govt rules) + trade liberalisation (remove tarrifs and quoatas)
Why would govts want to increase comp in industries
Increase efficiency of businesses
Increase quality of products
Reduce prices of products
Why is spending on education and training a supply side policy
Increasing government spending on education & retraining raises the quality of the workforce.
this means that
People are more occupationally mobile - easier to get jobs. Reduces unemployment and increases productivity
If govts increase income tax
what is a possible business decision
what are the problems with this deicison
Decision:
Reduce prices of products to increase demand
problem:
reduced profit. Reduces GPM
decision:
Produce cheaper products to lower prices
problem:
Brand image may take a hit
If govts increase tariffs on imports
what is a possible business decision
what are the problems with this deicison
decision:
Shift focus on selling products more to the domestic market as locally produced goods now seem cheaper
problem:
Still might be profitable to export (opportunity cost)
decision:
Switch from buying imported materials and components to locally produced ones
problem:
Foreign parts may be of a higher quality compared to local.
If govts increase interest rates
what is a possible business decision
what are the problems with this deicison
decision:
reduce/delay investments. Growth reduces
problem:
Other companies may continue to grow so market share could reduce
decision:
Develop cheaper products that consumers will be better able to afford
problem:
customer may think that qual is bad. Neg impact on brand image
decision:
Sell existing assets for cash to reduce loans/pay higher interest rates
problem:
Assets may be imp for future expansion but they would have sold it
If govts increase spending
what is a possible business decision
what are the problems with this deicison
decision:
Switch marketing strategy to gain more public-sector contracts
problem:
May be great competition if other businesses take same action
