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Chapter 4 government and economic influences on businesses Benefits to society of business activity: production of useful goods/services, creation of jobs/incomes

s which increase workers living standards, intro of new products and processes which widen product range and reduce costs, tax payments help fund essential services, businesses earn foreign currency as they export products which they can spend on imports Undesirable effects of business activity: profit motive of business can lead to them locating in cheap/attractive unspoilt areas, managers aiming to lower costs might offer low wages with poor/unsafe working conditions, pollution due to some production methods, dangerous goods made by industry, too many monopolies which reduce consumer choice, false ads Government economic objectives Low inflation Low unemployment High economic growth Balance of payments

Inflation: increase in the average price level of goods/services over time Unemployment: when people who are willing and able to work cannot find a job Economic growth: when a countrys gross domestic product increases (increase in the total value of goods/services produced in a year) Balance of payments: records the difference between a countrys imports/exports Real income: the value of income and falls when prices rise faster than money income (inflation rate) CONSEQUENCES IF EACH OF THESE ISNT MAINTAINED/ACHIEVED: Low inflation Real incomes will fall Prices of products in the country will rise, and jobs will be lost Business will be unlikely to want to expand, so living standards will fall there are less jobs Lower level of output Government loses money paying for more unemployment benefits Reduced standard of living as more people will be unemployed Higher unemployment Average standard of living will decline Less businesses expanding as customers have less money to spend on their products Trade cycle: o Growth: gdp increases, unemployment falls, higher living standards, successful businesses o Boom: too much spending, higher prices, shortage of skilled workers, business costs rising o Recession: too little spending, gdp falls, businesses experience falling demand/profit, unemployment o Slump: serious/long-drawn-out recession, high unemployment, prices fall, businesses fail Country may run out of foreign currencies and has to borrow from abroad Exchange rate (price of a currency in terms of another) depreciation (fall in the value of a currency compared with others)

Low levels of unemployment

Economic growth

Balance of payments

Direct taxes: paid directly from incomes Indirect taxes: added to the prices of goods and taxpayers pay the tax as they purchase the goods

Income tax Tax on peoples incomes If it increases: o Taxpayers would have lower disposable incomes o Business might see a fall in sales o Managers might decide to produce fewer goods o Unemployment o Businesses producing essential goods arent likely to be affected as consumers would still buy their products, as compared to luxury goods, which is the opposite. Tax on businesses profits Increase could cause: o Lower profits after tax is deducted o Harder to expand o New projects cancelled o Less money to pay the owners of the business Prices of goods may rise Consumers will buy less as a result Reduced demand Real incomes fall If they raise wages, they might have to force an increase in prices Imported goods become more expensive, so local internal businesses have less competition Businesses suffer higher costs if they have to import resources Other countries may do the same through retaliation, so exports will be less effective in that country as not much as before would be sold

Profits tax

Indirect taxes

Import tariffs and quotas

Government economic policies Fiscal policy: any change by the government in tax rates or public sector spending Construction firms will benefit from new road building scheme Defence firms will benefit if the government re-equips the army Bus manufacturers benefit from investments in public sector transport Monetary policy/interest rates Interest rate: cost of borrowing money It is the change in interest rates by the government or central bank Firms have to pay more interest to banks, which will reduce their profits/less expansion New investment in business activity will be reduced Reduced disposable incomes and demand for goods/services could fall if theyve taken out loans like mortgages Consumer demand will fall if theyre unwilling to borrow the money to buy Exchange rate appreciation: imports cheaper and exports more expensive Used by governments to improve efficient supply of goods/services in country Privatization: using profit motive to improve efficiency Improving training and education: more skilled staff Increase competition in all industries: reducing government controls over industries and preventing monopolies Businesses aim to make profit, and the profit motive may cause managers to make harmful decisions Businesses are prevented from building sites in beautifully natural areas

Supply side policies

Why is it desirable for government control over certain business activity?

They prevent the manufacture of dangerous products like explosives or drugs, which can cause death/injury Pollution problems (e.g. radioactive waste or river polluting) Businesses may exploit people if they are monopolizing the industry, and the government tries to stop this False advertisement

Consumer protection laws in the UK Weights and measures act (prevents the selling of underweight goods/innacurate measuring equipment) Trade descriptions act (prevents using misleading descriptions of a product) Consumer credit act (retailers have to give consumers a copy of the credit agreement) Sale of goods act (illegal to sell products with serious flaws, products which are not fit for the intended purpose, products which dont perform as described) Consumer protection act (sellers are liable for damage caused by their products, and prevents the use of false pricing claims)

Disadvantages of monopolies Can fix high prices for high profits as theyve no direct competitors Can prevent new firms from setting up and competing with them by charging low prices for a period of time, forcing firms out of business No competition = not encouraged to be efficient/introduce new products Unfair dismissal (based on age/race/religion/sex/disables, sex discrimination act makes it illegal to not hire people because of their sex or marital status, race relations act makes it illegal to only hire certain races, disability discrimination act makes sure employers make the working environment suitable for disabled people) Health and safety (protection from dangerous machinery, safety equipment and clothing, reasonable temperatures, hygienic conditions, not excessively long shifts) Unfair dismissal (for joining a trade union, being pregnant or when no warnings are issued, workers can take their case to an industrial tribunal where their complaints are considered of unfair dismissal/discrimination) Wage protection (contract of employment which lists the rights and responsibilities of workers, has to include nature of job, wage, hours of work, frequency of wage payment, deductions from wage) Prevents employers from exploiting desperate workers Higher wages encourages employers to train workers more Encourages more people to seek work Low-paid workers will have a higher standard of living Increases business costs = increases prices Unemployment may rise Workers may ask for higher wages to maintain the same difference between them and workers at minimum wage Planning controls (given by a government to allow a business to build a factory in a location) Development area (region of a country where the business will receive financial support to establish in undeveloped or areas of high unemployment) Business development in poorer areas Encouraging enterprise by assisting small firms

Employee protection

Advantages of legal minimum wage


Measures which influence business locations

Governments help businesses for

To encourage firms to export Jobs for many workers Many operate in rural areas where theres high unemployment Can grow into large important businesses Provide choice and variety for customers Managed in a flexible way (owner is in close contact with customers to quickly adapt goods/services to customers needs) Setting lower profits tax rates Subsidizing businesses Providing advice for small firms Provide college courses/training programmes for those interested in starting a business Earns a country foreign currency More employment More profits means government earns more from tax Governments encourage this by encouraging banks to lend exporters money at low interest rates, tax reductions, subsidies, stablising the exchange rate, offering credit facilities and encouraging international trade fairs to encourage international purchase of exports)

Advantages of small businesses for an economy

Governments help them by

Exporting of goods/services