External economic influences Flashcards
Government assistance for entrepreneurs
- Offering loan guarantee schemes – government-funded schemes that guarantee the repayment of a certain percentage of a bank loan.
- Providing information, advice and training schemes for entrepreneurs
- Financing the building of small workshops, which are let to entrepreneurs and small businesses at low rents. Made in economically deprived areas, such as cities with high unemployment.
- Reducing the paperwork and legal formalities needed to set up a new business.
- Cutting the rate of profits tax (corporation tax) for new and small businesses. This allows them to retain more profits in the business for expansion
Government assistance for all businesses:
- subsidies to help keep prices down
- subsidies to stop a loss-making business failing and protect employment
- grants to relocate to particular areas with high unemployment
- financial support for consumers to buy products (houses) that will increase national output.
Advantages of subsides:
- They avoid rising unemployment due to business failure.
- Avoiding business failure also keeps suppliers in business.
- If a business fails, consumers may switch to buying imported products, making the balance of payments worse.
Disadvantages of subsides:
- Government has to raise taxes or cut other spending programmes in order to provide subsidies.
- Subsidies act as a disincentive to businesses to become more efficient.
- Consumers buy subsidised products at lower prices, so spend less on unsubsidised products, distorting the market.
How governments deal with market failure:
Correcting or controlling market failure:
Macroeconomic objectives of governments:
These macroeconomic (targets set for whole economy) objectives include:
- economic growth – the annual percentage increase in a country’s total level of output – known as gross domestic product (GDP) – usually measured by changes in real GDP
- low price inflation – the rate at which consumer prices, on average, increase each year
- low rate of unemployment of the workforce
- a long-term balance of payments between the value of imports and the value of exports
- exchange rate stability – to prevent uncontrolled swings in the external value of the currency.
How economic objectives and performance impact business activity
Economic growth in the economy occurs when the real level of GDP rises as a result of increases in the physical output of goods and services in an economy.
Benefits of economic growth:
- Real GDP growth raises average living standards if the population increases at a slower rate.
- Higher output levels usually result from increased employment, which increases consumer incomes and reduces the rate of unemployment.
- More resources can be devoted to desirable public-sector projects, such as health and education, without reducing resources in other sectors.
- Absolute poverty can be reduced, or even eliminated, if the benefits of growth spread to the whole population.
- Businesses should experience rising demand for their products, although this will depend on income elasticity of demand.
- Higher GDP makes more resources available for government through greater income from taxes and reduced spending on social benefits
Causes of economic growth:
- Technological changes and expansion of industrial capacity: Governments encouraging business investment and innovation in new industries and products.
- Increases in economic resources, such as a higher working population or discovery of new oil and gas reserves: Countries total output can increase when economic resources are available.
- Increases in productivity: Higher labour productivity can be achieved with a more highly skilled workforce and when workers accept and work with new technology.
The business cycle:
-Boom: Very rapid economic growth, with rising incomes and profits. Inflation increases due to high demand, making economy’s goods uncompetitive. Shortage of skilled workers lead to increase in wages. Interest rates are increased to reduce inflation.
-Downturn or recession: Decrease in demand and increase in interest rates, Real GDP slows and may fall (Recession). Incomes fall, profits are reduced.
-Slump: Very serious and prolonged recession, Real GDP falls, product and asset prices fall, likely to occur with government failing to take corrective economic action.
-Recovery and Growth: Downturns eventually lead to a recovery, when real GDP starts to increase, due to corrective government actions takes effect. Lower product prices increase competitiveness of a countries exports and demand for them starts to increase.
Threats of recession:
Unemployment rises, and income level falls. demand for products decline. Government tax revenue falls as less income tax and sales revenue tax is received.
Opportunities of recession:
- Capital assets, such as factories, may be relatively cheap and businesses could invest in expectation of an economic recovery.
- Demand for inferior goods (negative income elasticity of demand) could actually increase.
- The risk of retrenchment and job losses may encourage improved relations between employers and employees, leading to increased efficiency.
- Decisions to close factories and offices could reduce business costs significantly.
Inflation and its Causes
Inflation is When value of money falls
Causes are:
-Cost-push cause of inflation: When businesses face higher costs of production, through lower exchange rates, Higher wages, ets, they attempt to maintain profit margins, by increasing selling prices.
-Demand–pull causes of inflation: When consumer demand is high, during economic boom, increasing prices could earn lead to higher profit margins, and prevent supply shortages.
The impact of low inflation on business decisions:
- Cost increases can be passed on to consumers more easily if there is general price inflation.
- The real value of debts owed by companies will fall. Businesses that are heavily dependent on loan finance see a fall in the real value of their liabilities.
- The value of fixed assets owned by businesses, such as land and buildings, could rise. This increases the value of a business and makes it seem more financially secure.
- Since inventories are bought in advance and then sold later, there is an increased profit margin from the effect of inflation.
