Chapter 4
Benefits of Business Activity | Costs of Business Activity |
Useful good produced | Ruins scenery |
Jobs and incomes created | Very low wages |
Better living standard | Unsafe working conditions |
Introduction of new products | Pollution |
Reduced cost of production | Dangerous goods produced |
Tax payments | Monopolization |
Foreign currency earned | Creates misleading images/concepts |
Government Economic Objectives
- Low inflation:
Inflation is the increase in the average price level of goods and services over time
Real incomes fall
Unemployment
Lower living standards
- Low Unemployment:
When people who are willing and able to work cannot find jobs
Less GDP (total value of output of goods and services in a country in one year)
Unemployment benefit is a burden
- High Economic Growth:
GDP increases
Standard of living will increase
Employment will increase
More income
Businesses will expand
- Surplus Balance of Payment:
The difference between a country’s exports and imports
Exports should always exceed imports
Enough foreign currency
Exchange rate appreciation: the rise in value of a currency in terms of another currency
Trade Cycle
1. Growth:
- GDP rises
- Unemployment falls
- People and businesses do very well
2. Boom:
- Too much spending
- Prices rise
- Shortage of workers
- Business costs will rise
- Rapid inflation
- Leads to conditions which result in a recession
3. Recession:
- Too little spending
- GDP falls
- Less demand
- Unemployment
4. Slump:
- Long and drawn out recession
- Businesses close down
- Unemployment
- Prices fall
Government Economic Policies
- The main ways in which a government can influence the economy are called economic policies.
- Fiscal Policy:
Change by the government in tax rate or public spending
- Monetary Policy:
Change in the interest rate and money supply by the government
This will effect net profits, investment, disposable income, consumer demand and exchange rate
- Supply Side Policies:
Used by government to improve efficient supply of goods and services in their country
Privatization
Improve training and education
More competition
Types of Taxes
- Direct Taxes:
Income tax: tax on people’s incomes which is usually progressive and reduces disposable income
Profit tax: tax on profit made by businesses thus reducing their power to pay back investors
- Indirect taxes (e.g. VAT): tax on all the items purchased thus increasing price and reducing purchasing power/demand
- Import Tariffs and Quotas: a tax or physical limit on imported products to make the country’s own goods more popular but may end up resulting in higher costs and retaliation
Government Controls on Business Activity
- Production decisions
- Responsibilities to employees
- Responsibilities to consumers
- Responsibilities to environment
- Location decisions
Production of Certain Goods and Services
- Some products are so dangerous that it would be unwise for a society to allow them to be made available to consumers
- In cases like these, the government restricts business activity for the sake of society as a whole
Consumer Protection
Laws | Regarding |
1951 Weights and Measures Act | underweight goods |
1968 Trade Descriptions Act | misleading impression |
1974 Consumer Credit Act | illegal to not give consumers a credit agreement |
1979 Sales of Goods Act | illegal to sell items with flaws, problems, those which do not fit the purpose intended or do not perform as described on the label |
1987 Consumer Protection Act | misleading price claims |
- Most people say that consumers need to be protected as much as possible
- It is believed that goods should be safe and suitable for the purpose intended
- Some business managers, however, believe that these laws add to the costs of making and selling products and this increases the price
Competition Policies [Control of Monopolies]
- A monopoly is when one firm controls or dominates the market for a good or service
- The government tries to ensure that monopolies:
do not fix high prices
do not prevent new firms from setting up
are encouraged to be efficient and introduce new products
don’t make decisions against consumer interest
have managed mergers or takeovers
Protecting Employees
Against Unfair Discrimination
- 1975 Sex Discrimination Act
- 1976 Race Relations Act
- 1994 Disabilities Act
- Equal Opportunities Policy
Health & Safety
- No dangerous machinery
- Safety equipment and clothing
- Reasonable working temperatures
- Hygienic conditions & washing facilities
- No long shifts
- Breaks given
- Managers must take ethical decisions which follow the moral code observed in the firm- setting a standard which prevents people from acting in an unfair or dangerous way
Against Unfair Dismissal
- Allowed to join a trade union
- Right to being pregnant
- Warnings given before being made redundant
- Nothing done against contract of employment
- The right to go to an industrial tribunal, which is a legal meeting which considers workers’ complaints of unfair dismissal or discrimination at work
Wage Protection
- A contract of employment is a legal agreement between an employer and an employee listing the rights and responsibilities of the workers
- The employers must strictly follow the contract and pay the employees accordingly
- Legal minimum wage:
Advantages | Disadvantages |
Prevention of exploiting unskilled workers | Increases business costs |
Encourages employers to give training to their staff | Increase of general prices |
Encourage people to seek work | Employers cannot afford high prices |
Low-paid workers will earn more | Unemployment may rise |
Wage differentials may cause business costs to increase even higher |
Location of Industry
- Encourage businesses to set up and expand in areas of high unemployment
- Discourage firms from locating in overcrowded areas
- Protect natural scenery
- Planning controls will be applied and planning permission will be given by a government to allow a business to build in a suitable area
- Regional assistance will be provided to encourage factories to start in developmental areas which is a region with high unemployment
Governments Helping Businesses
- Assisting small firms:
lower rates of profit tax
grants
cheap loans
providing advice and information
providing college courses/ other training
Advantages |
small businesses are labor intensive- thus providing more jobs |
they may operate in rural areas where unemployment would otherwise be high |
they may grow into important businesses |
they provide choice and variety for consumers |
competition for larger firms- less chance of monopolization |
flexible and adapt to meet needs of customer |
- Regional Assistance:
encouraging business development in poorer areas of the country
imposing controls on businesses wishing to start up in wealthy areas
financial grants and subsidies to attract firms to develop in developmental areas
- Encourage exports:
subsidies
tax exemptions
banks lend at low interest rates
arranging trade fairs
credit facilities
try to keep the exchange rate stable
Advantages |
foreign exchange earned |
more jobs provided |
profits increased |
pay off foreign loans |
government gets more profit tax |
aggregate demand increases |
more disposable income due to less unemployment and better standard of living |