Gross Domestic Product ( GDP ) : is the total value of output of goods and services in a country in one year
The main stages of the business cycle :
Growth
GDP is rising
Unemployment fall
Higher living standard
Most business will do well at this time
2. Boom
Cause by too much spending
Increase in price
Shortage of skilled workers
Business cost will rise and uncertainty about the future
3. Recession : is when there is a period of fall in GDP
Cause by too little spending
GDP fall
Business fail
Unemployment is falling
4. Slump
High unemployment
Price start to fall
Business will fail to survive
- Gov will try to avoid the economy fall into recession or slump but also want to reduce the chance of boom.
-Boom with rapid inflation and higher business cost can often result in recession
Impact on businesses of changes in employment level, inflation and GDP
Changes in employment level
Changes in employment level will affect the ability of the business to recruit new employee
Changes in employment level will affect their customer income
If unemployment go up then it may be easier to recruit employee as there are more people to choose
If unemployment go up then the customer might lost their jobs -> their income fall -> reduce the amount of sale for the business
However if the business sell cheaper product, they might see increase in sale as customer cut back on spending -> buy cheaper alternative
Rising inflation
Rising inflation may result in business costs increasing
Price of product increase -> falling in sale
Rising price of essential product -> customer have less income to spend on non-essential products
Effect of rising inflation may depend on the type of product they sell
Increase GDP
Increase in GDP means that the economy is growing
More people will have shop -> have more income to spend buying product -> businesses will benefit from increasing sales
difficult to recruit employee if unemployment start to fall at the same time
Government economic objectives
Low inflation : is the increase in the average price of good and services over time
When price rise rapidly:
Worker wages will not buy as many goods as before -> before real income will fall
Worker may demand higher wages -> real income increase
Real income : is the value of income and it falls when price rise faster than money income
Price of goods produce in the country increase -> people will buy foreign goods instead -> jobs will be lost -> income fall
Business is unlikely to expand -> less job created -> living standard fall
Low unemployment : exits when people who are willing and able to work can not find a job
Problems unemployment cause :
Unemployment people do not produce any goods or services -> total GDP will lower
Gov have to pay unemployment benefits -> less money to spend on things such as school, hospital
- Low unemployment -> increase ht output of a country -> higher living standard
Economic growth : is when a country's GDP increases -> more good and services produced than un the previous year
GPD: the value of goods and services produced in a country in one year
When GDP falling, there is no economic growth:
As output is falling -> fewer workers are needed -> unemployment occurs
No. of goods and services they can afford to buy in 1 year will decline -> average living standard of the population will fall -> most people become poorer
People have less money to spend on product business made -> lesser sale -> business will not likely to expand
- Economic growth -> standard of living of the population is likely to increase
The balance of payments : records the difference between a country's exports and imports
Exports : are goods and services sold from one country to other countries
These bring money ( foreign currency ) into the country
Imports : are goods and services bought from other countries
Must be purchased with foreign currency -> money flowing our of a country
- Gov will aim to achieve equality or balance between export and import over a period of time
- The difference between country's exports and import is called balance of payment
If the value of import is greater than value of export -> Deficit
Problem deficit cause:
Country could run out of foreign currency -> may have to borrow from aboard
The exchange rate will fall -> cause exchange rate depreciation -> the country's currency now can buy less aboard than it did before
exchange rate : is the price of one currency in term of another
eg. 1.5$ = 1€
exchange rate depreciation : is the fall in the value of a currency compared with other currencies ( US currency is depreciating )
eg. 2$ = 1€
Government economic policies
- Gov have great deal over economic policies
-They raise taxes and spend this money on wide range of services and state benefits
-Control over 40-50% of the country's GDP through taxes they raise
-Gov use this over to achieve their economic objectives
Their decision have great effects on all businesses -> way gov can influence the economy :
Fiscal policy - taxes and government spending
Monetary policy - interest rates
Supply side policies
Fiscal policy : is any changes by the government in tax rates or public sector spending
-Businesses that will benefits from gov spending :
Construction businesses will benefit from a new road-building scheme
Defence industries will gain if the gov re-equips the army
Bus manufacturers will benefit from gov spending on public transport
Where do the money for gov spending come from?
- from taxes on individuals and businesses
Main type of taxes :
Direct tax : are paid directly from income
Income tax
profit tax ( corporation tax )
Indirect tax : are added the price of goods and taxpayer pay the tax as they purchase the goods
Indirect taxes
Import tariff
Income tax : tax on people's income
-The higher a person's income, the greater will be the amount of tax they have to pay to the gov.
-Income tax is a certain % on their income -> the rich pay a higher % than the poor
How a business is affected by increase in income tax ?
- Individuals taxpayer would have a lower disposable income -> less money after tax to spend -> business see falling in sale -> manager may decide to produce fewer goods as sale are lower -> some worker could lose their job ( unemployment )
Disposable income : is the level of income a taxpayer has after paying income tax
Which business will be the most affected by the increase in income tax?
- Business that produce luxury goods -> consumer not likely to buy as they are cutting back on their spending
-Business that produce essential goods and services will be less affected -> customer still have to buy these products
Profits tax ( corporation tax ) : tax on profit made by the businesses
How would increase in rate of corporation tax affect the business?
Business would have lower profit after tax -> managers will have less finance to put back into the business -> business will find difficult to expand -> new project or additional factories might have to cancel
Lower profit after tax -> less money to pay for shareholders -> fewer people would want to start their own company -> company's share will fall
Indirect taxes : are added to the prices of the product we all buy ( e.g VAT )
-Gov usually avoid to put VAT especially on essential item -> make goods and services expensive -> unfair ( especially on the poorer consumer )
How would businesses be affected by an increase an indirect tax?
Price of goods would rise -> customer buy fewer item -> reduce in demand for the product. However not all business are affected -> if the product is essential, sale cans till be made
As price rise -> worker real income fall -> demand for higher wages -> increase the cost of good sold
Import tariff : is a tax on an imported product
-Gov use import tariff to reduce the import of products from other countries -> raise money for the gov
-Many International organisation ( World Trade Organisation ) are trying to reduce the no. of gov which do this
How would the business in a country be affected if the gov put tariffs on import into the country?
Business would be benefits if they are competing with imported goods -> imported goods now are expensive -> increase in sale for local products
Business will have higher cost of materials if they have to import raw material -> increase cost of good sold per unit
Other country might also put on tariff : Retaliation
Import quotas : is a physical limit on the quantity of a product that can be imported
- Quota can be use selectively to protect certain industries from foreign competition that seems unfair or damaging to jobs
Changes in government spending:
Gov spend most of their tax on:
education
health
defence
transport- roads an railways
law and order
When gov want to boost economic growth -> increase in spending on these programmes -> create more demand -> more jobs -> higher GDP
Monetary policies : is the change in interest rates by the government or central bank
-Interest rate is the cost of borrowing money
-Interest rate is fixed by the gov or central bank via monetary policies
The main effects of higher interest rate :
Firm with existing loans have to pay more interest -> reduce their profit -> less retain profit -> unlikely for business expansion
Delaying on borrowing money to expand their company -> new investment will be reduced -> less new factories and office can be build -> entrepreneur hoping ton start the business may not be able to afford to borrow the capital needed
If consumer have taken out loans to to their houses -> reduce their income -> demand for goods and services fall as customer have less money to spend
Luxury business will see a fall in demand as customer unwilling to take loans to spend on unnecessary items -> reduce output -> make worker redundant
Encourage foreign banks and individuals to deposit their capital in that country -> they can earn higher rate of interest on their capital -> by switching their money into this country's currency -> they are increase demand for it -> exchange rate appreciation -> import goods cheaper -> export more expensive
Supply side policies : try to increase the competitiveness of industrial in economy against from other countries. Policies make economy more effective
Privatisation : the aim is to use the profit motive to improve business efficiency
Improve training and education : gov plans to improve the skills of the country's workers.
-this is particularly important for industry such as computer software ( often short in skilled staff )
Increase competition in all industries : may be done by reducing gov control over industry or by acting against monopolies
How business might react to changes in economic policy ?
Increase income tax - this reduces the amount consumers have to spend
Business decision :
-lower price on existing products to increase demand
-Produce 'cheaper' products to allow for lower prices
Problem with the decision:
- Less profit will be made on each item sold -> reduces gross profit margin
-The brand image of product might be damaged ( by using cheaper version of the product )
Increase tariffs on imports
Business decision :
- Focus more on the domestic market as locally produced goods now seem cheaper
-Switch from buying imported materials and components to locally produced ones
Problems with this decision:
-It might still be more profitable to export
-Foreign materials and components might be of higher quality
Increase interest rates
Business decision:
-Reduce investment -> future growth will be less
-Develop cheaper products that consumers will be better able to afford
-Sell assets for cash -> reduce existing loans
Problem with this decision:
-Other companies might still grow -> market share will be lost
- ( Depends on the product ) as the product are now cheaper -> they might think the quality and brand image are lower
-Assets might be needed for future expansion
Increase government spending
Business decision:
-Switch marketing strategy to gain more public-sector contracts
e.g: building or equipping schools and hospitals
Problem with this action:
-May be greater competition if other businesses take the same action
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