External Economic Influences On Business Activity

Question 1

How government might intervene to help businesses and encourage enterprise

Answer 1

• Offering loan guarantee schemes – government-funded schemes that guarantee the repayment of a certain percentage of a bank loan should the new enterprise or small business fail.

• 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.

Question 2

Advantages of subsidies

Answer 2

• They avoid rising unemployment due to business failure.

• If a business fails, consumers may switch to buying imported products, making the balance of payments worse.

Question 3

Disadvantages of subsidies

Answer 3

• 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.

Question 4

How government might intervene to constrain business activity

Answer 4

• Government can impose fines on polluting businesses or impose strict limits on pollution levels.
• Government could pay for more training courses at colleges funded from general taxation.

Question 5

The macroeconomic objectives of governments

Answer 5

• 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 rate of unemployment of the workforce

• low price inflation – the rate at which consumer prices, on average, increase each year

Question 6

Economic growth affects businesses by :

Answer 6

• Slowing economic growth may lead to incomes for consumers and businesses increasing at a slower rate and this could slow the rate of increase in demand
• Businesses producing luxury high priced products experience reduced demand, creating spare capacity.

Question 7

The impact of low inflation on business decisions

Answer 7

• 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.

Question 8

Impact of high inflation on business decisions

Answer 8

• Rapid inflation will often lead to higher rates of interest. These higher rates could make it very difficult for highly indebted companies to find the cash to make interest payments.

• Employees will demand big wage increases to maintain the real value of their incomes.

• Consumers may become more price sensitive and look for bargains, rather than buying big brand names.

Question 9

The impact of high unemployment on businesses

Answer 9

• Unemployment reduces demand for goods and services by reducing the incomes of those looking for work.

• There will be reduced incomes and lower demand.

• The longer the period of unemployment, the more difficult it is to find work, as skills become increasingly out of date.

Question 10

Impact of high unemployment on business decisions

Answer 10

• It is easier to recruit new employees as more people apply for each vacancy.

• Workers may accept lower pay increases as they are afraid of losing their jobs.