CIE IGCSE Business Studies - Chapter 26: Government Economic Objectives and Policies
Terms in this set (38)
What FOUR economic objectives do most governments have?
Balance of payments between imports and exports
What is INFLATION?
Inflation is the INCREASE in the average PRICE level of goods and services over time
RAPID INFLATION : what problems does this cause for WORKERS?
workers wages will not buy as many goods as before
So people's REAL INCOMES fall
If a worker gets a 6% wage increase, but prices rise by 10% in the same year, his REAL INCOME has fallen by 4%
So workers may start demanding wage increases to keep up with inflation.
What problems does RAPID INFLATION cause for EXPORTS?
Prices of the goods produced in the country with inflation will be HIGHER than those in other countries.
People may buy foreign goods instead
Jobs may be lost
What problems will RAPID INFLATION cause for businesses at home?
Businesses will be unlikely to want to EXPAND and create more jobs in the near future.
People's living standards are likely to fall
What BENEFITS does LOW INFLATION bring?
Low inflation encourages businesses to EXPAND, and it makes it easier for a country to sell its goods and services ABROAD
What problems does UNEMPLOYMENT cause?
1) unemployed people don't PRODUCE any goods or services. So the country's level of OUTPUT is LOWER
2) the government pays UNEMPLOYMENT BENEFIT (dole) which is VERY costly. Opportunity cost = this money now cannot be spent on schools and hospitals, or paying for a suicidal split from the EU, or deals with the DUP.
What benefits will LOW UNEMPLOYMENT bring?
Low unemployment will help to increase the OUTPUT of a country and improve living standards
What is GROSS DOMESTIC PRODUCT?
Gross Domestic Product (GDP) is the total value of output of goods and services in a country in one year.
If this goes up, it's called GROWTH
What problems does a falling GDP cause?
1) falling GDP = falling output
So fewer workers needed = unemployment
2) people's standard of living will fall
3) business owners will not EXPAND because people will have less money to spend, so what's the point?
What will RISING GDP (growth) bring?
it makes a country RICHER and allows living standard to RISE
What are the FOUR stages of the BUSINESS CYCLE? (sometimes called TRADE CYCLE)
Growth - Boom - Recession - Slump
Tell me more about GROWTH:
Country enjoying higher living standards
Most business doing well
Tell me more about BOOM:
too much spending - more demand than supply, so...
Prices start to rise quickly (consumer goods AND raw materials)
Shortages of skilled workers, so they can ask for more money
Business costs rise
Firms begin to feel uncertain about future
Tell me more about RECESSION:
GDP starts to fall
Workers are laid off as output is falling
Workers have less money to spend
Business experience falling demand and profits
Tell me more about SLUMP:
A serious and long-drawn-out RECESSION (period of falling GDP)
Unemployment very high
Many business fail
What do governments try to achieve with the TRADE CYCLE?
Avoid SLUMPS, but also avoid BOOMS - even though they seem good and full of jam for tea at first, they can lead to high prices, higher business costs, and RECESSION 💀
What is the BALANCE of PAYMENTS?
When the money flowing IN from selling EXPORTS, matches the money flowing OUT from buying IMPORTS. See?
What problems can happen when we IMPORT more than we EXPORT?
1) the country could run out of foreign currencies - may have to borrow from abroad
2) the price of our currency against other currencies (the EXCHANGE RATE) could fall - so the £ now buys less abroad than it did before
What is the EXCHANGE RATE?
The price of one currency in terms of another
£1 = $1.50
How much ECONOMIC POWER do governments have?
Sometimes they have control over 50% of a country's GDP through the taxes they raise!
They use this power to try to achieve their ECONOMIC OBJECTIVES
Their decisions have a BIG effect on businesses
What are the THREE main ways governments can influence the ECONOMY?
1) fiscal policy (taxing and spending)
2) monetary policy (interest rates)
3) supply side policies (trying to make your industries more competitive than other countries)
What are DIRECT TAXES?
Taxes paid directly from INCOMES - so any money you make is taxed before you get to spend it.
Profits tax (corporation tax)
What are INDIRECT TAXES?
Taxes added to the PRICES of goods
You pay the tax AS YOU BUY the goods/services
Usually added to LUXURY ITEMS, not essentials.
What FOUR taxes do governments use to raise money to spend on infrastructure etc?
1) income tax
2) profits tax (corporation tax)
3) indirect tax ( eg VAT)
4) import tariffs
What might be the effects of a RISE in income tax?
People have less DISPOSABLE INCOME...
..Less money to spend and save ...
....business sales fall...
...managers decrease production...
...workers lose jobs
Makers of luxury good hit hardest, makers of essential goods do better
Does it have to be this way? How about:
Taxes go up..
..Government has more money to spend on building infrastructure, employing nurses, teachers, bus drivers etc etc...
...Economy gets a boost from all this government spending ...
GDP goes up...
....People enjoy living in a country where things actually work and look nice, like in Denmark
...all sorts of jam for tea 😌
What might be the effect of a rise in PROFITS TAX (corporation tax)?
Businesses have lower profits after tax
Managers have less money to put back into business
Business finds it more difficult to expand
New projects cancelled
Less money to pay shareholders
Share prices fall
Starting up a business starts to look like a bad idea
Fewer entrepreneurs willing to take the risk
What might be the effects of a rise in VAT?
Goods in shops become more expensive...
Consumers start buying less...
Reduced demand for non-essential items...
Business reduce output...
Workers laid off...
Wages buy less in the shops...
Workers demand wage rise..
which pushes costs up further....
not much jam for tea.
What is an IMPORT TARIFF?
A tax put on IMPORTED PRODUCTS
How would business be affected if the government puts TARIFFS on IMPORTS into the country?
1) 😇firms which compete with imported goods will benefit, as imports are now more expensive, so people will buy home-produced goods
2) 👺 Businesses who import raw materials or components from abroad will have higher costs as they will now cost more
3) 👺 Other countries might take the same action - RETALIATION - so business trying to export their goods might find it more difficult
What are the FIVE likely effects of a RISE in interest rates?
1) firms with loans will have to pay more interest = reduced profits = less money for shareholders and less for expansion
2) managers thinking about borrowing money to expand the business may now think twice. Entrepreneurs might be put off getting a loan to start a business
3) people's mortgage payments on their houses will go up
4) consumers will be unwilling to borrow money to buy expensive luxury items like cars and massive yachts, so those businesses may suffer
5) foreign banks will want to deposit money in your banks to take advantage of your nice high interest rates and earn lots of money.
What happens if foreign banks start depositing money in your banks to take advantage of high interest rates?
When they put their money into YOUR country's banks, they change their currency for your currency.
They are effectively BUYING your currency.
So the DEMAND for your currency goes UP.
So your exchange rate will APPRECIATE - your currency will go UP in value because everyone wants to buy it.
This is called EXCHANGE RATE APPRECIATION
Does EXCHANGE RATE APPRECIATION have an effect on IMPORTS?
Oh yes indeedy.
OK, your currency is worth more now, right?
So instead of £1 = €1, let's say that now
£1 = €2 (!!)
So a €100 desk used to cost £100, yes?
Well now it costs just £50! See?
So IMPORTS have become CHEAPER!
So people at home will want to buy them.
So home businesses may suffer 😩
Does EXCHANGE RATE APPRECIATION have an effect on EXPORTS?
Oh yes indeedy!
So, your currency is worth more now because everyone wants a piece of your high interest rate action.
So, instead of £1 = €1,
£1 = €2
(for the sake of argument)
So a £100 vase made in the UK used to sell for €100 in Holland.
But now that same vase costs €200!!
So people in Europe won't want to buy our expensive stuff.
So home businesses suffer 😭
Can you name THREE SUPPLY-SIDE POLICIES?
Supply-side policies are used to make YOUR industries more competitive.
1) PRIVATISATION - aims to use the PROFIT MOTIVE to increase efficiency. Except it doesn't, does it, Carillion?
2) Improve TRAINING and EDUCATION.
This one I like. A better educated population and a skilled workforce. Interesting conversations on the bus. Lovely.
3) INCREASE COMPETITION in all industries by
a)reducing government controls and
b) taking action against monopolies.
You are a business owner. The government increases income tax. People have less money to spend. What do you do?
a) lower your prices to increase demand (but you'll make less profit)
b) produce cheaper goods (but your brand image might suffer)
You are a business owner. The government decides to increase tariffs on imports. What do you do?
a) focus more on selling to the DOMESTIC (home-country) market as your goods now seem cheaper to locals
b) switch from buying imported materials and switch to locally produced ones (but foreign materials and components might be of higher quality - your products might suffer)
You are a business owner. The government decides to increase interest rates. What do you do?
You might want to:
a) sell assets for cash to reduce your loans which are now costing more (but those assets might be needed for future expansion)
b) reduce investment ( but other companies might still grow, so you'll lose your edge)
c) develop cheaper products so consumers will afford to buy them (but might tarnish your brand?)
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