The Changing Business Environment Government influence over decision making by using economic policy measures
Key Words Inflation Policy instrument Real income Public expenditure Unemployment Interest rate Economic growth Direct tax Imports Disposable income Exports Indirect tax Balance of payments
Government Economic Policies Most governments have four main objectives for their national economies. Low and stable price inflation High and stable employment Economic growth in the national output and income A favorable balance of international trade and payments
Low and Stable Price Inflation Inflation = a continuous rise in the average level of price. If prices rise too quickly it can be bad for business and an economy. Why? It reduces real incomes so incomes buy less and less over time. E.g. if a person’s income rises by 2% but prices rise by 5%, real income will have been cut by 3%. As real incomes fall consumer demand will fall.
Low and Stable Price Inflation Why? It causes hardship for people on low incomes. It increases business costs, especially if workers demand higher wages. Goods and services produced in the economy become more expensive to buy than those purchased from other countries with lower rates of inflation. People may buy more imports instead and hence businesses at home will suffer falling sales. Some may close and jobs will be lost.
Low and Stable Price Inflation Low and stable price inflation makes it easier for businesses to manage their costs, for exporters to sell their products abroad and for consumers, particularly those on low incomes to afford goods and services.
High and Stable Employment People who want to work but are unable to find a job will be unemployed. A rise in unemployment is bad for the economy. Why? The total national output and income of the economy will fall.
High and Stable Employment Why? The government has to spend more money on welfare to help the unemployed and their families. This money comes from businesses and working people through taxes. As businesses and working people pay more taxes, this will reduce their incomes and cause demand to fall. Alternatively, the government may have to cut spending on building roads, on education or supporting new businesses.
High and Stable Employment Why? If people remain unemployed for a long time, they may lose the skills they need to work in new business sectors.
High and Stable Employment High levels of employment therefore help to increase output, incomes, consumer demand and living standards.
Economic Growth in the National Output and Income Economic growth = if the total amount and value of goods and services produced in a national economy grows over time. Increased output helps increase incomes and living standards. If there is no economic growth, or if output falls over time, business and an economy will suffer.
Economic Growth in the National Output and Income Why? Employment, incomes and demand will fall. Government tax revenues will fall and government spending will have to be cut. Business revenues and profits will fall. Entrepreneurs will not invest in new businesses and may move production to other countries where economic conditions are better.
A Favorable Balance of International Trade and Payments No country is self-sufficient. Every country must import goods and services from other countries. Selling exports to other countries earn foreign currency. This can be used to buy imports. If a country pays more to overseas countries than it receives there will be a deficit on its balance of payments with other countries.
A Favorable Balance of International Trade and Payments Consequences It may run out of foreign currency to buy imports of parts and materials its firms need to produce their goods and services. The value of its currency may fall against other foreign currencies and make imports more expensive to buy. This can cause inflation. Firms that need to import materials and parts from overseas to produce their own products will face rising costs.
A Favorable Balance of International Trade and Payments A favorable balance of international trade and payments provide opportunities for businesses to export their goods and services overseas. It provides employment and incomes. It ensures an economy can afford to import a wide variety of goods and services to satisfy consumer needs and wants.