What are responses may a business have to a increase in import tariffs/custom duty?
- Businesses may decide to use local raw materials which may be cheaper, but quality may suffer as a result
- Local firms may set up more branches and expand
What is sales tax?
The tax paid by consumers on the purchase of some items.
What is excise duty?
The tax paid by a manufacturer on the production of specific goods within the country.
What is government borrowing?
- Tax rates can only be altered to a certain extent
- Governments also borrow money from the public in order to fund their spending
- Can be borrowed locally by issuing treasury bills and bonds, which people and organisations of the country invest in
- They can borrow from other countries but may be expensive
What’s the difference between treasury bills and bonds?
Treasury bills are short-term investments, with a maturity between a few weeks to a year from the time of purchase.
Treasury bonds are more varied and are longer-term investments that are held for more than a year.
How do businesses respond to an increase in government spending?
- The government can affect economic growth by controlling its own spending
- If growth is slow, then the government can increase its spending in areas such as schools, hospitals and transportation
- Jobs will increase in these sectors + other dependent ones
- E.g. if the government spends more on roads, then construction firms that build and repair the road network will benefit (people will be needed to
- This will encourage businesses to think about growth
How do businesses respond to an decrease in government spending?
- This can discourage businesses from expansion
- Less jobs available
What is monetary policy?
Monetary policy is how a country’s government or central bank controls how much money there is in circulation. The government or central bank uses interest rates to maintain economic growth and keep inflation low.
What do interest rates determine?
- The money that an individual or a financial organisation can gain when they deposit money with a bank
- The cost of borrowing money from a bank
How does an increase in interest rates affect consumers?
- Cost of borrowing increases, thus people will borrow less
- More incentive to save so they will spend less
How does an increase in interest rates affect businesses?
- Credit/cost of borrowing is more expensive; interest costs rise
- With people spending less, business sales will drop
How does an increase in interest rates affect a business’s response?
Firms may delay or cancel their plans to expands as the costs of borrowing money is high.
What are the long term effects of an increase in interest rates on the economy?
- Reduced business activity leading to slow economic growth
- High rate of return from savings will encourage individuals and financial institutions from other countries to invest their money with the banks in that country
- This strengthens the national currency and leads to exchange rate appreciation
- Imports become cheaper
What types of businesses are usually affected the most by changes in taxation and interest rates?
Businesses that produce non-essential/luxury goods and services such as the tourism industry.
What types of businesses are usually affected the least by changes in taxation and interest rates?
Businesses that produce essential goods and services as people can’t do without essential goods and have to buy them no matter how expensive they are.
