Government objectives Flashcards
Inflation
The price increase of goods and services over time
Unemployment
The percentage of the population that are capable of working but unable to find a job
GDP
The value of all the goods and services produced by a country in a year
Low inflation
When inflation is low, people enjoy better standards of living as they can afford to pay for goods and services.
It is easier for companies to set up new ventures and expand meaning all sectors of the economy benefit
Low unemployment
Improved economic growth
People have better standards of living
The government spends less money on benefits so they can use that money for other things (e.g infrastructure)
More tax income
Growth
- Positive outlook for new businesses
- Existing businesses grow and make profits
- Growth measured by a rise in GDP until it reaches max
- Falling unemployment as there are more jobs since businesses are doing well
- Raised standards of living as more people are employed
Boom
- 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 causes prices to rise (inflation)
- Lowest employment rates and increased wages
Recession
- Business confidence falls leading to less investment in new and existing businesses
- Decline in economic activity until it reaches a minimum
- Falling demand leads to falling profits
- Unemployment rises as businesses are not doing well and have to cut costs
Slump
- Very low business confidence with very little investment in new and existing businesses
- Low production of goods and services -businesses close down
- Low demand for goods and services
- high unemployment
- Inflation is at its lowest
Tax
A charge/fee paid to the gov. on income, goods and services
Direct tax
Income tax. Tax charged on personal income.
Tax on the profit made by a business.
Indirect tax
Tax charged on the price of goods and services. which is added to the price of goods and services before they are bought
VAT
Disposable income
The amount of income left for individuals after taxes have been paid
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 certain sectors in order to encourage growth.
Effects on increased income tax on consumers
A reduced disposable income means that consumers spend less money on goods and services.
Effects on increased income tax on businesses
- Less demand for goods and services. This leads to decreased sales for businesses
- Employees may not be as motivated to work as hard, affecting production
Businesses responses to increased tax rates
Businesses focus on cost reduction so that they can offer competitive pricing to attract customers
Firms reduce production levels
Businesses may decide to provide more fringe benefits to compensate and improve motivation
Corporation tax
The tax paid by businesses on the profits they make.
The higher the corporation tax, the smaller the profit after tax available to businesses.
If a country is in a recession and the governments objective is to encourage economic growth, it could lower the corporation tax rate.
Affects of increased corporation tax on shareholders
Shareholders will receive fewer dividends
Effects of increased corporation tax on businesses
A smaller profit after tax is available for businesses, so businesses cannot grow as much
Increased interest rates will discourage existing and new shareholders from investing in a business
Businesses response to increased corporation tax
Businesses may rethink their growth strategy. They may relocate their operations in a foreign country with a lower corporation tax rate
A smaller profit after tax may lead to corporations increasing prices to meet their costs
Businesses may have to look at other ways of obtaining funds
VAT
VAT is added to the prices of some goods and services we buy
makes those goods and services more expensive and harder to buy
the government does not put VAT on essential items.
Increased VAT effect on consumers
Goods and services become more expensive
Demand for goods and services fall
Increased VAT effect on businesses
Businesses make fewer sales
Businesses response to increased VAT
Less production due to less demand
Businesses will have to become more competitive in price
Import tariffs
Governments raise money by charging import tariffs or customs duty on goods that are imported from other countries.
This helps control the number of imports so that local businesses should do not incur loss of sales.
Import tariffs may increase the cots of local businesses that rely on imported raw materials for making their goods.
The duty is calculated as a percentage of the value of goods being imported.
Effect of increase tariffs on consumers
- Imported goods or goods using imported raw material become more expensive
Effect of increase tariffs on businesses
Lower sales for businesses selling imported goods
Increased cost of imported raw material may lead to higher cost of production
Local firms may benefit as demand for their product increases
Business response to increased tarrifs
Businesses mat decide to use local material which may be cheaper but quality may suffer as a result
Local firms may set up more branches and expand
Monetary policy
How a country’s government or central bank controls how much money there is in circulation. The government or central bank uses interest rates to maintain economic growth and keep inflation low.
Interest rates
The money that an individual or an organization can gain when they deposit money in a bank
The cost of borrowing money from a bank
Expressed as a percentage
Effect of increased interest rates on consumers
- Cost of borrowing increases so people borrow less
- More incentive to save so they will spend less
Effect of increased interest rates on businesses
Credit/cost of borrowing is more expensive
People spending less, so business sales drop
business response to increased interest rates
Firms may delay or conceal their plants to expand as the cost of borrowing money is high.
