The document discusses how governments use economic policies to influence business decisions and achieve four main objectives: low inflation, high employment, economic growth, and a favorable balance of international trade. It explains each objective and why it is important for a strong economy and thriving businesses. Government tools like interest rates, taxes, and spending are policy instruments used to impact inflation, employment, growth, and trade balances.

1. The Changing Business
Environment
Government influence over decision making by using
economic policy measures

2. 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

3. Government Economic
Policies
 Most governments have four main objectives for their national
economies.
 Low and stable price inflation (a continuous rise in the average level of
prices in a national economy). If price inflation is high, people will not be
able to afford to pay for a lot of things, including basic necessities.
 High and stable employment. People have jobs.
 Economic growth in the national output and income. The country is
producing with people having jobs.
 A favorable balance of international trade and payments (hopefully one
country doesn’t owe the other country too much money in international
transactions. E.g. if a country is importing more than exporting, its trade
balance will be in deficit, that is, negative. This is not good for the country
as it is spending more money in another country. Hence, that country will
have to counterbalance this situation, e.g. encourage foreign companies to
invest in the country ).

4. 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, hence
businesses will be affected.

5. 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.

6. 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.

7. 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 as the country is producing lesser and people don’t
have jobs. Therefore, a country wants to have high and
stable employment.

8. 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 so they now have
lesser money to spend and this causes demand to fall.
Alternatively, the government may have to cut spending
on building roads, on education or supporting new
businesses.

9. 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.
Retraining will be necessary for them to return to the
workforce.

10. High and Stable Employment
 High levels of employment therefore help to increase
output, incomes, consumer demand and living
standards. When people have jobs, they have the
money to spend and the economy will remain strong.

11. 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. E.g. a country which creates $9 billion
in goods and services in 2010 and then creates $9.5
billion in 2011. Hence, there is economic growth in the
country.
 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.

12. 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. As a result, people will lose their
jobs.

13. A Favorable Balance of International
Trade and Payments
 No country is self-sufficient. They always need to
depend on others.
 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. Think of it this way: you
are spending more than you earn.

14. 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 as it now becomes more expensive to buy from
overseas.

15. 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.