Chapter 24: Economic Issues Flashcards
What is the economy?
The state of a country or region in terms of the production and consumption of goods and services and the supply of money.
What are the 4 economic objectives of a government?
- Healthy balance of payments
- Low unemployment
- Low inflation
- Economic growth
What are imports?
The goods and services bought by a country from other countries. (Money flowing out)
What are exports?
The goods and services sold by one country to other countries in return for foreign currency. (Money flowing in)
Notes on a positive balance of payments (Card 1)
- The balance of payments of a country is positive when the value of exports is greater than the value of imports
- If there are more imports than exports, there is more foreign currency flowing out than coming into a country
- This is known as a balance of payments deficit, which can cause a shortage of foreign exchange
What is an exchange rate?
The value of one currency for the purpose of conversion to another.
Notes on a positive balance of payments (Card 2)
- This means that the government of the country may have to borrow foreign currency from other countries at expensive rates of interest
- This could also affect the exchange rate of the country
- To avoid expensive borrowing costs and varying foreign exchange rates, it’s better for a country to have a positive balance of payments
What are the benefits of low inflation?
- People enjoy a better standard of living
- They can afford to pay for goods and services
- They can afford to pay for non-essential (luxury) items
- Easier for companies to set up new ventures and expand – so the economy benefits in all sectors
What are some problems with inflation increasing?
- People may not be able to afford to buy local goods and instead may buy foreign goods (which may be cheaper)
- Can affect local businesses in the country as they receive fewer sales
Why do governments want people to have as many jobs as possible? (Economic objectives)
- People with jobs contribute to the total output of the country and improve economic growth (by increasing GDP)
- They can earn money and have a better standard of living
- Government doesn’t have to spend money on unemployment benefits so can spend that money on improving the country’s infrastructure
- The higher the employment level, the more income tax a government receives
What is infrastructure?
The basic physical and organisational structures and facilities (e.g. buildings, roads, power supplies) needed for the operation of a society or enterprise.
What does GDP show?
Whether a country’s economy is growing or not.
What does it mean if GDP increases?
- This is good for people as their standard of living should improve
- A growing economy should mean more business opportunities
What does it mean if GDP decreases?
- Bad for the economy and businesses and people in it
- Could lead to lower output so fewer employees are needed
- Generally people experience a lower standard of living as they can’t afford to buy as many goods and services
What are the 4 main stages of the business cycle?
- Growth
- Boom
- Recession
- Slump
What are key characteristics of the growth stage in the business cycle?
- A positive outlook for new businesses
- Existing businesses grow and make profits
- Growth in economic activity is measured by a rise in GDP until it reaches a maximum (boom)
- Falling unemployment as there are more jobs due to businesses doing well
- Raised standards of living as more people are employed
What are key characteristics of the boom stage in the business cycle? (Card 1)
- Business investments and profits are at their highest levels
- Most sectors of the economy are performing at their best
- High levels of demand for goods and services causing prices to rise (inflation)
- Very low unemployment rates
What are key characteristics of the boom stage in the business cycle? (Card 2)
- People have better jobs to choose from, leading to increased wage costs for businesses as well as a shortage of skilled people
- Too much spending and high borrowing costs during this stage may be risky for businesses
- If the economic outlook looks poor, the economy may go into a decline
What are key characteristics of the recession stage in the business cycle? (Card 1)
- Economy shrinks in size
- Business confidence falls leading to less investment in new and existing businesses
- Decline in economic activity until it reaches a minimum (slump)
What are key characteristics of the recession stage in the business cycle? (Card 2)
- Falling demand by consumers leads to falling profits
- Unemployment rises as businesses aren’t doing well and have to cut costs
- Employees are made redundant and businesses may close down
What are key characteristics of the slump stage in the business cycle? (Card 1)
- When the economy is at its worst
- Very low business confidence with very little investment in new and existing businesses
- Low production of goods and services
What are key characteristics of the slump stage in the business cycle? (Card 2)
- Many businesses close down
- Low demand for goods and services
- High unemployment due to low business activity
How do governments achieve these economic objectives?
By controlling:
- Interest rates (monetary policy)
- Tax rates (fiscal policies)
- Government spending (fiscal policies)
Where do governments mainly get their income from?
Taxes
Why do governments want a steady growth in the economic activity of a country, not extremely fast or too slow?
- If the growth is too fast, it may not be long-lasting as the infrastructure to support this growth may not exist
- A slow growth rate will increase unemployment levels as there will be fewer jobs
- In that situation, governments may change their economic (fiscal) policies to encourage growth
What are the fiscal polices in government income?
- Taxes
- Borrowing e.g. from financial institutions
What are the fiscal polices in government spending?
- Public services, e.g. schools and hospitals
- Subsidies on goods and services
- Welfare benefits
What is a subsidy?
A sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low.
What do governments spend taxes on?
- Pay for investments they make in public services
- E.g. education, health and transportation
KEY WORD: Direct tax
The tax charged on personal income or tax on the profit made by a business.
KEY WORD: Indirect tax
The tax charged on the price of goods and services, which is added to the price of goods and services before they are bought.
What are the two main types of direct tax that can be paid by an individual or a business?
- Income tax
- Corporation tax
What is income tax?
- The amount of income tax charged depends on the amount of income.
- The higher the income tax rate, the smaller the disposable income of individuals
- If the economy is in recession, the government may decide to invest in certWhaain sectors in order to encourage growth
- This investment may be partly funded by higher tax rates
What is the effect on an increase in income tax rates on consumers?
A reduced disposable income so consumers spend less on goods and services.
What is the effect on an increase in income tax rates on businesses?
- Less demand for goods and services leading to fewer sales for businesses
- Employees may not be motivated to work hard, affecting production
What are a business’s responses to an increase in income tax rates?
- Businesses focus on cost reduction so they can offer competitive pricing to attract customers
- Firms reduce production levels because of fewer sales
- Businesses may decide to provide more fringe benefits to compensate and improve motivation
What is corporation tax?
- Tax paid by businesses on the profits they make
- The higher the corporation tax rate, the smaller the profit after tax available to businesses!
- If a country’s in recession and the government’s objective is to encourage economic growth, it can lower the corporation tax rate
What effect does an increase in corporation tax rate have on shareholders?
Shareholders will receive fewer dividends!
What effect does an increase in corporation tax rate have on business?
- Smaller profit after tax for businesses
- A smaller amount to reinvest and grow
- New shareholders will be discouraged from investing
What are a business’s responses to an increase in income tax rates?
- Businesses may rethink their growth strategy
- May relocate their operations in a foreign country with a lower corporation tax rate
- Smaller profit may lead businesses to increase prices to meet costs
- They may have to look at other ways of obtaining funds
What are examples of indirect taxes?
- Value added tax (VAT)
- Import tariffs/customs duty
- Sales tax
- Excise duty
What is excise duty?
The tax paid by a manufacturer on the production of specific goods within the country.
What is VAT added to?
The price of some goods and services we buy.
Is VAT added to essential items?
No because VAT makes goods and services harder to buy.
What is the effect of VAT and an increase in sales tax on consumers?
- Goods and services become more expensive
- Demand for related goods and services falls
What is the effect of VAT and an increase in sales tax on businesses?
Businesses make fewer sales.
What is the business response to an increase in VAT/sales tax?
- Less production due to decreased demand
- Businesses will have to become more competitive in price
Notes on import tariffs/customs duty
- Governments can raise money by charging import tariffs/customs duty on goods that are imported from other countries
- Helps the government control the number of imports, so that local businesses don’t incur loss of sales (mmm)
- Helps domestic companies grow and to protect them from foreign competition
- Tax will discourage consumers from buying too many
- Import tariffs may increase the costs of locals businesses that rely on imported raw materials
How does an increase in import tariffs/customs duty affect consumers?
Imported goods or goods using imported raw materials become more expensive.
How does an increase in import tariffs/customs duty affect businesses?
- Lower sales for businesses selling imported goods
- Increased cost of imported raw material may lead to higher cost of production (think about the chain effects)
- Local firms may benefit as demand for their products will increase
What is cost of production?
Costs of production refer to all the expenses incurred in the process of creating and delivering a product or service. These expenses can include raw materials, labour, equipment, rent, and marketing costs. In simple terms, it is the sum of all expenses necessary to produce and sell a product or service.
