Economic issues

(GDP) gross domestic product is the total value of output of goods and services in a country
in one year.
The main stages of the business life cycle

GROWTH
● gdp is rising
● unemployment is falling
● Higher standards of living
● Businesses do well
BOOM
● Too much spending
● Prices start to rise
● Shortages of skilled workers
● Business costs rise and become uncertain about
future
RECESSION
● Too little spending
● Gdp falls
● Businesses experience falling demand and falling profits
● Workers lose jobs (unemployment increases)
SLUMP
● Long drawn out recession
● High levels of unemployment
● Prices may fall
● Most businesses fail to survive this period.

Governments try to avoid the economy moving towards a recession or a slump as well as
reduce the chances of a boom.
Avoid boom because there is rapid inflation and higher business costs that will lead to a
condition that results in a recession.

Impact on businesses of changes in employment levels, inflation and gdp

Changes in unemployment levels

● Affect the ability to recruit new employees
● Affect the incomes of customers
★ If unemployment increases
➔ Easier to recruit employees (more people to choose from)
➔ Customers may have lost their jobs (income levels fall) reducing the amount of sales
➔ Businesses that offer cheaper products will experience an increase in sales because
customers will shift to buy cheaper alternatives and cut spending back.
Risking inflation
● Increase in business costs
 ● Prices of products increase (falling sales for the business)
● Effect of increasing inflation on a business depends on the type of products they sell.
★ Rising price for essential goods
➔ Customers have less income available for the purchase of non essential products.
Increasing gdp
● Means that the economy is growing
● Businesses will benefit from increasing sales (employment levels high, income high,
expenditure high)
● Difficult to recruit new employees (if unemployment falls)

Government economic objectives

LOW INFLATION
Inflation occurs when there is a rise in price of goods and services over a period of time.
Real income: is the value of the income, it falls when prices rise faster than money income.

Problems with rapid inflation

● Fall in real income,
➔ Workers wages will not buy as many goods as before
➔ Workers may demand for higher wages for their real income to increase
● Increase in prices of goods produced in the country than those in other countries
● People may shift to buy foreign goods
● Jobs in country will be lost
● Businesses will be unlikely to want to expand and create more jobs
● Living standards will fall.
Low inflation
★ Encourages businesses to expand
★ Makes it easier for a country to sell its goods and services abroad.

LOW UNEMPLOYMENT
When people want to work but cannot find a job, they are unemployed.
Problems caused by high unemployment
● Total level of output in the country will be lower than it could be. (unemployed people do
not produce any goods or services)
● Cost the government a great deal of money, opportunity cost (govt pays unemployment
benefits to those without jobs)
Low unemployment
★ Increase the output of a country
★ Improve workers living standards
ECONOMIC GROWTH
An economy is said to grow when the total levels of output of goods and services in the country
increase.
Fall in gdp, meaning no economic growth because
● Unemployment increases (output decreases, fewer workers required, retrenchment
occurs)
● Hardly any expansion in businesses (people will have less money to spend on their
products)
● Poverty increases and average standard of living decreases (the number of goods and
services they can afford to buy in one year will decline)
Increased gdp
★ Standard of living of the population increases
★ Makes a country richer

BALANCE OF PAYMENT
The difference between a country’s exports and imports is called balance of payment.
Imports and exports must be purchased with foreign currency so these lead to money flowing
out of a country. Governments aim to achieve equality between these over a period of time.
Country’s imports is greater than its exports - balance of payments deficit
Problems caused of bop deficit:
● Run out of foreign currencies, leading to have them borrow from abroad
● Exchange rate depreciation occurs and the country’s currency now buys less abroad
than it did before depreciation.

Government economic policies

● Raise taxes and spend it on
➔ Range of services
➔ State benefits
● Have control over 40-50% of a country’s gdp through the taxes

WAYS IN WHICH GOVERNMENTS INFLUENCE THE ECONOMY \ ECONOMIC

POLICIES

FISCAL POLICY: taxes and government spending

Governments spend money on
● Schools
● Hospitals
● Roads
● Defence (army)
This expenditure is very important to some businesses
➔ Construction businesses will benefit from a new road building scheme
➔ Defence industries will gain if government re equips them
➔ Bus manufacturers will benefit from the government spending on public transport.
Government raises money from
★ Taxes from individuals and businesses
Main types of taxes
★ Direct taxes on the income of businesses and individuals
★ Indirect taxes on spending
Taxes affect business activities
★ Number of different ways like through
➔ Income tax
➔ Profits tax or corporation tax
➔ Indirect taxes (value added tax)
➔ Import tariffs
● Income tax
A set percentage on income
● Tax on people’s income (higher the people’s income higher the tax they pay)
● Income tax is progressive (rich pay tax at a higher percentage than poor)
How are businesses affected by an increase in income tax?
★ Individual taxpayers will have a lower disposable income (less money to spend & save)
★ Fall in sales
★ Produce fewer goods (as sales are lower)
★ Workers could lose their job (unemployment increases)
Which businesses are most like to be affected?
➔ Businesses producing luxury goods which consumers do not necessarily have to buy
Which businesses are least likely to be affected?
➔ Businesses producing essential goods and services, consumers will have to buy these
products despite an increase in price.

● Profits tax\ corporation tax

Tax on profits made by businesses
How are businesses affected by an increase in the rate of corporation tax
★ Lower profits after tax
➔ Less money or finance to put back into the business
➔ Difficult to expand (new projects- additional factories\ shops may stand cancel)
★ Lower profits after tax
➔ Less money to pay back to the investors in the business.
➔ Fewer people would want to innovate and start their own businesses considering
taking large shares of profit by the government.
➔ Companies’ share prices could fall

● Indirect taxes
Added prices of the products we all buy.
➢ More expensive for consumers (goods and services)
 ➢ Avoided on really essential items like food (considered unfair due to unequal
distribution of income)
How are businesses affected by an increase in indirect tax?
★ Increase in price of goods
➔ Reduce demand
➔ Decrease sales
★ Decline in real income observed by workers
➔ Pressurise businesses to raise wages
➔ Force up the costs of making products (variable costs increase)

● Import tariffs and quotas

~done to reduce the import of products from other countries.
Import tariff is a tax on imported product
How would businesses in a country be affected if the government puts tariffs on imports into the
country?
● Benefits for a business to be competing with imported goods. The goods become
expensive and lead to an increase in sales of home produced goods.
● Businesses will have higher costs- import raw materials or components for their own
factories. As they will become more expensive
● Retaliation might take place and cause a business trying to export to that country to
have lower sales than before.
Retaliation : other countries introducing import tariffs too.

Import quota is the physical limit on the quantity of a product that can be imported.

Changes in government spending

Governments spend tax revenue they receive on programmes such as:
● Education
● Health
● Defence
● Law and order
● Transport- road and railways
Boosting economic growth is done by govt by increasing their spending
This creates:
● More demand in the economy
● More jobs (employment increases)
● Gdp will increase
To save money or incase of over borrowing they cut spending.
This can bring an impact on businesses producing related goods and services
● Cutting on education would affect a business producing equipment for school
● Cutting on healthcare would affect a business producing equipment for healthcare
● Cutting on spending in infrastructure would affect a business providing construction
services such as building roads, railways or bridges.
MONETARY POLICY- interest rates
A change in the interest rates by the government or central bank.
An interest rate is the cost of borrowing money
Effects of higher interest rates:
● More interest is to be paid to banks in case a firm has variable interest loans existing.
➔ Reduce profits
➔ Less financial resources for expansion
➔ Less available to distribute owners
● New investment in business activities might reduce
➔ Managers may delay their decision to borrow money for expansion
➔ Fewer new factories offices will be built
● Entrepreneurs might be discouraged to start a new business due to a lack of affordability
to borrow the capital needed.
● Demand for all goods and services decrease as consumers have less money to spend.
(mortgages taken by consumers leading to higher interest payments reducing their
available income)
● A business producing expensive consumer items then it will notice a fall in demand
➔ Consumers will be unwilling to borrow money to buy expensive items if interest
rates are high)
➔ These businesses may have to reduce output and make workers redundant.
● Higher rates in a country Encourage foreign banks and individuals to deposit their capital
in that country.
➔ Earn higher rates of interest on their capital
➔ Increased demand for this country’s currency as money from another country is
switched into it.
➔ Exchange rate will rise- exchange rate appreciation
➔ Making imported goods cheaper, exports expensive.

SUPPLY SIDE POLICIES

Try to increase competitiveness of industries in an economy against those from another
countries
- Trying to improve the supply of goods and services efficiently.
- Allow businesses to expand, produce more, and employ more.
● Privatisation
~ use the profit motive to improve business efficiency
● Improve training and education
~ done to improve the skills of the skills of country’s workers
● Increase competition in all industries
~ reducing government controls over industry by acting against monopolies.
HOW BUSINESSES MIGHT REACT TO CHANGES IN ECONOMIC POLICIES

Increase income tax (reduces the amount consumers have to spend)

● Lower prices on existing products to increase demand
➔ Less profit will be made on each item sold (reducing gross profit margin)
● Produce cheaper products to allow for lower prices
➔ Damage in brand image by releasing cheaper versions

Increase tariffs on imports

● Focus more on domestic market as locally produced goods now seem cheaper
➔ It might still be more profitable to export
● Switch from buying imported materials and components to locally produced ones
➔ Foreign materials and components might be of higher quality

Increase interest rates

● Reduced investment so future growth will be less
➔ Other companies might still grow so market share will be lost
● Develop cheaper products that consumer will be able to afford
➔ Brand image could be ruined
● Sell assets for cash to reduce existing loans.
➔ Assets might be needed for future expansion.

Increase government spending

● Switch marketing strategy to gain more public-sector contracts
➔ Competition might increase if other businesses take some action.