6.1 Government Economic Policies & Objectives

Question 1

Governments want 4 main economic objectives:

Answer 1

Low Inflation: Low prices of goods & services, so
people will buy more, more money in economy

Low Unemployment: High % of people working so
that they don’t rely on government funds

Economic Growth: growth of the GDP (Gross Domestic Product) of a country – more goods and services being produced and sold

Balance of payment (of Imports & Exports): the
difference between the imports and the exports of a
country balance out (BoP = Exports – Imports)

Question 2

Balance of payment

Answer 2

the difference between the imports and the exports of a country balance out (BoP = Exports – Imports)

Question 3

Inflation –

Answer 3

The increase of average prices of goods &
services

Question 4

Rapid inflation may lead to:

Answer 4

A fall in value of money, fall in real incomes

Wage price spiral

Fall in international competitiveness as prices will be
high

Businesses may not want to expand and create jobs

Living standards will fall

Question 5

Low inflation rates effect on firms

Answer 5

Low inflation rates will act as an incentive for firms to
produce and encourage them to expand

Question 6

Low unemployment

Answer 6

When people want to and have the ability to work but
can’t work, then they are said to be unemployed

Unemployed people don’t produce goods and services, output of the country will be lower

It involves an opportunity cost as government has to pays greater unemployment benefits which could be used improve education and reduce living standards

Question 7

Economic growth

Answer 7

If an economy’s total output rises, it is said to be
experiencing economic growth

Question 8

GDP full form

Answer 8

GDP (Gross Domestic
Product)

Question 9

GDP

Answer 9

GDP is the total value of goods and services produced in
an economy

GDP (Gross Domestic
Product)

Question 10

Economic growth may cause

Answer 10

Economic growth may cause employment to rise,
increasing living standards and reducing poverty

Question 11

A fall in GDP can lead to:

Answer 11

Unemployment

Fall in average living standards, as poverty rises

Less investment

Question 12

Economies go through the ‘Business Cycle’:

Answer 12

Growth:
Boom:
Recession:
Slump

Question 13

Business cycle

Answer 13

Growth: GDP is rising, unemployment falling,
businesses succeeding & higher living standards

Boom: Higher living standards so people start
spending more money, so prices increase – business
costs will also rise

Recession: people become uncertain about their jobs
so they don’t spend money. Many workers lose their
jobs because of lack of demand & profit in a business

Slump – A long-term, serious recession:
Unemployment will be very high, GDP has decreased
a lot and many businesses will not survive and go
bankrupt

Question 14

Balance of Payments

Answer 14

Balance of payments is a record of one country’s financial transactions internationally

Question 15

What do goverments want balance of payments to be

Answer 15

Governments will aim for equality in balance of payments that is exports equal imports

Higher imports than exports lead to budget deficit
Higher exports than imports lead to budget surplus

Question 16

Problems of budget deficit: -

Answer 16

• Government can run out of foreign currency reserves and will have to borrow
• Exchange rate depreciates – the price of our currency falls as compared to the other currency

Question 17

There are 3 main ways governments can influence the economy (AKA economic policies):

Answer 17

• Government expenditure
• Changing tax rates
• Interest Rates

Question 18

Government Expenditure

Answer 18

Government Expenditure is how the government spends the money made from taxes. It is usually spent on education, defense, healthcare, public transport, etc.…

Question 19

Government expenditure

Answer 19

Spending more on these markets will boost economy in a country (more jobs created, more demand)

Question 20

Types of taxes

Answer 20

• Direct Taxes – taxes paid directly from incomes (of individuals as wages or as business as revenue)
• Indirect Taxes – VAT, taxes added to prices of goods

Question 21

Income tax (direct
tax)

Answer 21

Tax on people’s incomes

You can either have a set tax (i.e. 20% of income)
or
Progressive income tax,
where richer people pay higher taxes.

Question 22

Income/direct tax effect on business activity

Answer 22

People have less disposable income (money after
tax). They would have less money to spend on goods or services.
Businesses have less revenue.

Question 23

Profits Tax (direct
tax)

Answer 23

Tax on profits made by businesses (a set percentage)

If tax rates increase:
Harder for a business to expand (less profit) less money to reinvest back into business, Fewer people will start their own business

Question 24

Indirect Tax (VAT)

Answer 24

Tax added to prices of goods & services (varies within types of products)

Prices of goods will increase so less people
will buy them
Less demand for a business

Question 25

Import Tariffs & Quotas (indirect)

Answer 25

Tax on imported goods from other countries. Import Quota is a physical limit to the amount of products that can be imported.

Question 26

Import Tariffs & Quotas (indirect) effect on business activity

Answer 26

businesses will have more demand because there less imported goods, Importing raw materials from abroad will be much more expensive – products will be more expensive – sell less

Question 27

The interest rate

Answer 27

The interest rate is the amount charged for borrowing money from a bank | In most countries, it is fixed by the goverment

Question 28

monetary policy

Answer 28

the % of the interest rate is called the monetary policy

Question 29

The effects to business activity due to having higher interest rates include:

Answer 29

Less profit for companies that already took out a loan - less/slower expansion of a business. Entrepreneurs thinking of starting business might not be able to afford to take out a loan If consumer loans (i.e. mortgages) increase, people will have less disposable income – less demand for goods Higher exchange rates of currency

Question 30

Businesses might respond to Higher income tax

Answer 30

Lowering production costs to be able to sell goods for lower prices

Question 31

Businesses might respond to Higher tariffs (on imports)

Answer 31

Focusing on the domestic market, Buying materials from local companies rather than from companies abroad

Question 32

Businesses might respond to Higher interest rates

Answer 32

Reduce investment for business growth, Lower prices of goods for consumers, Sell assets for cash to reduce loans

Question 33

Business activity can impact the environment in many different ways, including:

Answer 33

Air pollution made by factories & transportation Water & land pollution from improper waste disposal Increase carbon emissions – global warming

Question 34

Most business decisions lead to benefits and costs. What types of benifits and costs are there

Answer 34

Private and external

Question 35

Private costs & benefits =

Answer 35

Private costs & benefits are costs that a business pays for, and the benefits the business gains

Question 36

Sustainable development

Answer 36

Sustainable development – development that does not compromise the living standards of future generations

Question 37

Businesses can contribute to sustainable development by doing 4 main things:

Answer 37

1. Using renewable energy (wind, solar) 2. Recycling & reusing their waste 3. Using less natural resources (lean production) 4. Developing environmentally friendly products & packaging (i.e. biodegradable packaging)

Question 38

Pressure groups

Answer 38

Pressure groups - a group of people who want to change policies/decisions of businesses or the government. Pressure groups acting on unethical decisions made by a business will lead to a consumer boycott - consumers not buying their products Environmentally friendly businesses can use the fact that they are environmental as a marketing advantage

Question 39

Pressure group | How and why it responds

Answer 39

Lots of public support, Very bad brand image & reputation, Loss in sales

Question 40

Pressure by Laws passed by Government

Answer 40

Government making certain activities illegal (i.e. dumping waste) It is more expensive to manufacture

Question 41

Pressure from fines

Answer 41

If a business produces more pollution than the government allows, they pay heavy fines. Costs of business increase

Question 42

Types of pressure on business

Answer 42

Pressure groups Fines Laws passed by gov

Question 43

Gov permits

Answer 43

Governments sell ‘permits’ to companies that allow it to pollute the environment up to a certain level Firms that pollute less than the government allows, can sell their permit to companies that pollute more This motivates businesses to pollute less, to earn money

Question 44

Ethics

Answer 44

Ethics – “doing the right thing” - the moral principles Most businesses have to face many ethical decisions, they have to decide whether to act ethically or have higher profits

Question 45

Eg of unethical decisions

Answer 45

Employing child workers, even though it might not be illegal in some countries Buying supplies that lead to damage of the environment Paying managers large bonuses while having their workers in minimum wage & poor conditions Offering bribes to people to gain information

Question 46

Benifits of having an ethical code

Answer 46

Consumers appreciate the efforts made by the company and so they buy more from them Creates good publicity Less risk of lawsuits Easier to find workers

Question 47

Disadvantages of having an ethical code

Answer 47

Higher costs of production Higher prices – might lead to less demand In some places families depend on their children to earn money

Question 48

Globalization

Answer 48

Globalization –the world becoming more interconnected leading to increasing worldwide trade & people moving

Question 49

The reasons for globalization include:

Answer 49

More Free-Trade Agreements – imports/exports between countries that pay no tariffs Easier, cheaper and faster transportation between countries E-commerce allows products to be bought from all over the world Industrializing countries (i.e. India & China) can produce products at very low prices

Question 50

opportunities of globalization to a business include:

Answer 50

Businesses can sell abroad, increasing sales Opening factories or offices abroad – can be cheaper to produce, but it is expensive to set up Importing materials from abroad – can be cheaper but transport costs can be too high Importing goods from abroad and selling it in home country

Question 51

threats of globalization to a business include:

Answer 51

Increasing foreign competitors importing their products, leading to less sales (& profit) Workers in home country might leave for higher wages in other countries More foreign companies set up operations in the home country of the business, more competition

Question 52

Protectionism

Answer 52

Sometimes governments introduce import tariffs and quotas to protect local businesses – this is called Protectionism They believe that by reducing the number of foreign competitors and goods (that would have much lower prices), there will be less unemployment and higher incomes However, by doing this, it is harder for local businesses to import materials and export their goods abroad

Question 53

Multinational Company

Answer 53

Multinational Company = Transnational Company A multinational company is a company that has factories or service operations in more than one country It is not just selling products abroad, it is having operations abroad

Question 54

Multinational Company is also called

Answer 54

Multinational Company = Transnational Company

Question 55

The exchange rate of a currency is influenced by 2 things:

Answer 55

Demand for the currency: if many people want to buy the currency the price will increase because there is a ‘limited’ number of currency (appreciate) Supply of currency: if the central bank prints more money, the supply increases but the demand is still the same so the value is lower (depreciation)

Question 56

If exchange rate Appreciates:

Answer 56

Import prices fall: since your currency can buy more of the other currency Export prices rise: your currency is worth more so it is more expensive for other currencies to buy it

Question 57

If exchange rate Depreciates:

Answer 57

Import prices rise: your currency is worth less so you need more to buy other currencies Export prices fall: it is worth less so other currencies can buy your currency for les of theirs

Question 58

This means that if the currency Appreciates:

Answer 58

The product’s price in other countries will increase Business will make more profit Business can lower the price and still make the same amount of money as before – it is more competitive

Question 59

If the currency depreciates:

Answer 59

The products price in other countries will decrease less profit will be made Business needs to raise the price to make the same amount of money as before – less competitive

Question 60

Exchange Rate –

Answer 60

the price of one currency in terms of another currency

Question 61

However, there are potential drawbacks of multinational companies (MNC) to the country:

Answer 61

Less sales for local businesses, might go bankrupt ‘Repatriation of profits’ – profits are sent back to home country and doesn’t benefit country located Business has lots of influence on government – they can threaten to leave the country They can use up scarce resources in the country

Question 62

Benefits of multnational companies to the business

Answer 62

Producing goods at lower costs Closer to resources (i.e. oil) Closer to market Avoid expensive taxes of import of goods (i.e. Korean cars (KIA) being produced in EU to benefit from free trade) Spread risks (if there are low sales in one country and high sales in another)

Question 63

Benifits of multinational companies to the country

Answer 63

Jobs are created Investments in development of infrastructure in country More exports Tax – more money to government Increased product choice for consumers

Question 64

Two policies set by gov to influence businesses

Answer 64

Monetary Through interest rates Fiscal Gov adjusts taxes and public spending to influence national economy

Question 65

4 types of taxes in fiscal policy

Answer 65

Income Profit Indirect

Question 66

Monetary policy

Answer 66

Gov have the power to change internet rates through central bank. It affects the people who borrow or loan money from the bank

Question 67

Effect of interest rates rising on business

Answer 67

Businesses who owe the bank will have to pay more interest leading to lower retained profit People are more reluctant to start new businesses businesses expand existing businesses Consumers who took loans will be left with less disposable income, limiting their spendings on other goods. Demand will fall for businesses producing luxury or expensive goods such as cars as people are less willing to loan money from the bank (due to high interest interest rates)

Question 68

GST

Answer 68

Goods and service tax

Question 69

VAT

Answer 69

Value added tax

Question 70

Diff VAT and GST

Answer 70

Same thing