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Government economic objectives
- Positive balance of payments: When the value of exports is greater than the value of
imports (balance of payments surplus) More exports means more money coming into
the country and less imports means less money flowing out of the country, which
means the country earns more money.
- Low unemployment: This ensures that
people contribute to the total output of the country to improve economic
growth, to provide a better standard of living, to decrease money being spent
on unemployment benefits and higher level of employment means more taxes are
received.
- Low inflation: People can enjoy a
better standard of living because they are able to afford goods and services,
it becomes easier for companies to set up new ventures and expand. If inflation
increases then people may not be able to afford local goods and they may buy
foreign goods which may be cheaper, and this affects local businesses in the
country as they have fewer sales
- Economic growth: GDP (gross domestic
product) shows whether a country's economy is growing. GDP increase means that
more goods and services have been produced than the year before which increases
the standard of living and increases business opportunities
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Main stages of the business cycle; growth, boom, recession,
slump
Growth: This is when the
economy recovers or grows
-
Positive outlook for businesses
-
Existing businesses grow and make profit
-
Increases GDP
-
Falling unemployment
-
Raises standard of living
Boom: This is the peak of
the business cycle
-
Business investments and profits are at their higher levels
-
Most sectors of the economy are performing at their best
-
High levels of demand for good and services which causes inflation
-
Very low unemployment rates
Recession: This is when the
economy shrinks in size
-
Business confidence falls leading less investment in new and existing
businesses
-
Decline in economic activity until it reaches a minimum (slump)
-
Falling demand by consumers lead to decrease in profits
-
Unemployment rises because businesses have to cut costs
Slump: This is when the
recession stage of the economy is at its worst
-
Very low business confidence with very little investment
-
Low production of goods and services
-
Low demand for goods and services
-
High unemployment
·
How changes in taxes and government can affect business activity
Direct
tax: The tax charged on personal income or tax on the profit made by a business
Indirect
tax: The tax charged on the price of goods and services, which is added to the
price of goods and services before being bought
Disposable
income: The amount of income left for individuals after taxes have been paid
Tax
rates are charged to achieve economic objectives, high tax rates means that
there is less disposable income for the business and this may affect the business
negatively, which may make them protest. They may also decrease shareholder's
dividends or decrease production because they don't have enough money. It may
also cause them to relocate their operations in a foreign country with a lower
tax rate.
·
How changes in interest rates can affect business activity
How businesses might respond to these changes
High
interest rates means that the cost of borrowing is more expensive and interest
costs are high, which may cause businesses to delay or cancel their plans to
expand as the cost of borrowing money is high
