Government and economic influences on businessPage: 51

The impact of business activity on society

Advantages on society

• Production of useful goods and services which people wish to buy

• Creation of jobs and income. These increase workers’ living standards

• Introduction of new products and processes that widen product range and reduce costs of production

• Tax payments made by business to governments help to finance essential public services

• By producing goods for export, businesses earn foreign currency that the country can spend on imports

Disadvantage to society

• Profit motive of business can lead to decision to locate in cheap but attractive and unspoilt areas

• Managers aiming to lower costs might offer very low wages with poor and usage working conditions

• Some production methods lead to serious pollution problems• Certain goods made by industry are dangerous or can add to the

pollution problem• Profit motives can lead firms to merge and this can result in

monopoly control with less consumer choice• Advertising is very powerful and can be used to give a

misleading image or incorrect information to persuade consumers to buy

Government Economic Objectives

• Low Inflation• Low levels of Unemployment• Economic Growth • Balance of Payments (Equality between exports and imports)

Inflation is the increase in the average price level of goods and services over timeUnemployment exists when people who are willing and able to work cannot find a jobBalance of Payment records the difference between a country’s exports and imports

Low Inflation

Inflation occurs when prices rise. If there are rapid increase in inflation

1. Workers’ wages will not buy as many goods as before. This means that people’s Real Incomes will fall.

2. Prices of the goods produced will be higher than those in other countries.

3. Business will be unlikely to want to expand and create more jobs in the future.

Low level of unemployment

• Unemployed people do not produce any goods or services. The total level of output in the country will be lower than it could be in reality

• The government would pay unemployment benefits to those without jobs. A high level of unemployment will cost the government a great deal of money. This cannot be spent on other things such as schools and hospitals

There for having a low level of unemployment will help to increase the output of a country and improve the living standards

Economic Growth

GDP What is it?

Gross Domestic Product – is the total value of output of goods and services in a country in one year

• As the country’s output is falling, fewer workers are needed and unemployment will occur

• The average standard of living of people in the country - the number of goods and services they can afford to buy in one year – will decline

• Business owners will not expand their firms as people will have less money to spend on the products they make

GDP

Years

Growth

BoomRecession

Slump

Growth

Boom

Trade Cycle

• Growth – this is when GDP is rising, unemployment is generally falling and the country is enjoying higher living standards. Most businesses will do well at this time.

• Boom – This is caused by too much spending. Prices start to rise quickly and there will be shortages of skilled workers. Business costs will be rising and firms will become uncertain about the future.

• Recession – Often caused by too little spending. This is a period when GDP actually falls. Most businesses will experience falling demand and profits. Workers may lose their jobs.

• Slump – A serious and long – drawn – out recession. Unemployment will reach very high levels and prices may fall. Many businesses will fail to survive this period.

Governments will try to avoid the economy moving towards a recession or a slump, but will also want to reduce the chances of a boom. A boom will rapid inflation and higher business costs can often lead to the conditions that result in a recession.

• Exports: are goods and services sold from one country to another country

• Imports: are goods and services bought in by one country from another country

• The Exchange Rate: is the price of one currency in terms of another – example?

• Exchange Rate Depreciation: is the fall in the ‘value’ of a currency compared with other currencies. (chapter 25 )

Government Economic Policies

The main way the government influences the economy is by using – Economic Polices:

• Fiscal Policy – Taxes and government spending• Monetary policy and interest rates• Supply side policies

• Direct Taxes – are paid directly from incomes such as income tax or profit tax

• Indirect Taxes – are added to the prices of goods and taxpayers pay the tax as they purchase the goods - VAT

How do these taxes affect business activity? We will look at four of the common taxes and there effects

1. Income Tax2. Profit Tax or Corporation Tax3. Indirect Tax 4. Import duties and Tariffs

Income Tax

This is a tax used by most governments. It is a tax on people’s incomes. Usually, the higher a person’s income the greater will be the amount of tax they have to pay to the government.

Profits Tax or Corporation Tax

This is the tax on the profits made by businesses - usually companies

How will an increase in this Tax effect businesses?

• These business would have lower profits after Tax• Lower profits after tax is also bad news for the owners of the business

Indirect Taxes

Indirect taxes, such as Value Added Tax (VAT), are added to the prices of the products to buy.

• Prices of goods in the shops would rise. Consumers may buy fewer items as a result.

• As prices rise so the workers employed by a firm notice that their wages buy less in the shop. Their real incomes have declined.

Import tariffs and quotas

Many governments try to reduce the import of products from other countries by putting special taxes on them. These are called duties or Import Tariffs and they raise money for the government.

Import Tariff: is a tax on imported productImport Quota: Is a physical limit to the quantity of a product that can be imported

How would businesses in a country be affected if the government put tariffs on imports into the country?

• Firms 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.

• Business will suffer higher costs if they to import raw materials or

components for their own factories. These will now be more expensive

• Other countries may now take some action and introduce import tariffs

too. This is called retaliation. A business trying to export to these

countries will probable sell fewer goods than before.

Monetary Policy: is a change in interest rates by the government or central bank

An interest rate is the cost of borrowing money. In most countries the level of interest is fixed by the government or the central bank via Monetary Policy

What impact would higher interest rates, imposed by the government have on businesses in that country?

• Firms with existing loans will have to pay more in interest to the banks.

This will reduce their profits

• Managers thinking about borrowing money to expand their business may

delay there decisions. New investment in business activity will be

reduced.

• If consumers have taken out loads such as mortgages to buy their

houses, then the higher interest payments will reduce their disposable

incomes.

• In addition to the point above, if the business makes expensive

consumer items like cars or if they build houses then they will notice

that consumer demand will fall for another reason. Consumers will be

unwilling to borrow money to buy these expensive items if interest rates

are higher.

Exchange Rate Appreciation is the rise in the value of a currency compared to other countries

How will a higher interest rates in one country encourage foreign banks and individuals?

What is exchange rate depreciation?

Effects on business of higher interest

rates

Higher costs of interest

on existing

loans

Business

Borrow less

Consumer borrow

less

Higher exchang

e rate

Disposable incomes

fall

Supply Side Polices

Are used by Governments to improve the efficient supply of goods and services in their country

• Government want businesses in their country to expand • To Produce more• To increase competitiveness

Government uses certain policies to achieve this:

1. Privatisation2. Improve Training and education3. Increase competition

Government Control over business activity

• Production Decisions – No AK-47’s or AK-42’s• Responsibilities to employees• Responsibilities to consumers• Responsibilities to the environment

Governments tend to put policies into place that regulate what is advertised by businesses. To ensure that the consumer is protected. False advertisement of a Good or Service can have heavy penalties on a business

Monopoly – What is it?

A monopoly is when one firm controls or dominates the market for a good or service.

Disadvantages of a Monopoly

• They can fix high prices to make high profits as they have no direct competitors.

• They can prevent new firms from setting up to compete with them. They might do this by charging very low prices for a short period, thus forcing the new firm out of business

• As there are no competitors, the monopoly is not encouraged to become more efficient or to introduce new products

Government’s Protecting Employees

• Against unfair discrimination at work and when applying for jobs• Health and safety at work• Against unfair dismissal• Wage protection

Unfair Discrimination – what factors falls under this?

• Are of a different race or colour• Belong to a different religion• Are of the opposite ‘gender’• Are considered too old/young for the job• Are disabled in some way

Health and Safety at Work

• Protect workers from dangerous machinery• Provide safety equipment and clothing• Maintain reasonable workplace temperatures• Provide hygienic conditions and washing facilities• Do not insist on excessively long shifts and provide breaks in the

work timetable

Industrial Tribunal

Is a legal meeting which considers workers’ complaints of unfair dismissal or discrimination at work

Protection against unfair dismissal

• For joining a trade union• For being pregnant (Doesn’t apply to some of you)• When no warnings are given before dismissal

Contract of employment

Is a legal agreement between employer and employee listing the rights and responsibilities of workers

Wage Protection

• The wage rate to be paid• How frequently wages will be paid• What deduction will be made from wages such as National

Insurance Tax

Advantages of a legal minimum wage

• It should prevent strong employers from exploiting unskilled workers who could not easily find other work.

• As many unskilled workers will be receiving higher wages, it might encourage employers to train them to make sure the they are more productive.

• It will encourage more people to seek work. There should be fewer shortage of workers

• Low-paid workers will earn more and will be able to afford to spend more.

Disadvantages of a legal minimum wage

• It increases business costs which will force them to increase princes.• Some employers will not be able to afford these wage rates. They may

make workers redundant instead. Unemployment may rise.• Other workers receiving just above the minimum level may ask for higher

wages to keep the same differential between themselves and lower paid workers. Business costs will again increase

Governments can help business as well! – How?!?

• To encourage business development in poorer areas of the country – called regional assistance

• To encourage enterprise by assisting small firms to set up and survive• To encourage firms to export

Well Done! Chapter finished!