Government and Economic Influence on Business Activity

Chapter 4

Benefits of Business Activity

Costs of Business Activity

Useful good producedRuins scenery
Jobs and incomes createdVery low wages
Better living standardUnsafe working conditions
Introduction of new productsPollution
Reduced cost of productionDangerous goods produced
Tax paymentsMonopolization
Foreign currency earnedCreates 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
    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
    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

1951 Weights and Measures Actunderweight goods
1968 Trade Descriptions Actmisleading impression
1974 Consumer Credit Actillegal to not give consumers a credit agreement
1979 Sales of Goods Actillegal 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 Actmisleading 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:
Prevention of exploiting unskilled workersIncreases business costs
Encourages employers to give training to their staffIncrease of general prices
Encourage people to seek workEmployers cannot afford high prices
Low-paid workers will earn moreUnemployment 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
    cheap loans
    providing advice and information
    providing college courses/ other training
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:
    tax exemptions
    banks lend at low interest rates
    arranging trade fairs
    credit facilities
    try to keep the exchange rate stable
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


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