Government objectives and policies

Legal framework

Structure of a society, or a legal or political system

Constraint

Limitation that restricts a business's operations or ability to achieve its goals

What is government spending?

Examples?

Money spent by public sector to provide range of public service

• health care

• education

• child protection

• policing

• transport networks

Fiscal policy

using changes in taxation and government spending to manage and control economy

How is money raised from taxation used?

Used by a government to help fund its spending on public services

What are direct taxes charged on?

Examples?

Direct taxes are charged on income

• Income tax - paid on personal income

• Corporation tax - paid on company profits

What are indirect taxes levied on?

Example?

Indirect taxes are levied on spending

• Value Added Tax (VAT) - paid when buying goods and services

Effects of fiscal policy

• If income tax is lowered - more spending in the economy

• Businesses may respond to higher corporation tax by cutting investment or reducing dividends

Disadvantages of high taxes on businesses

• Reduce demand

• Discourage work and enterprise

Why do governments cut rates of corporation tax?

• Attracts foreign businesses to locate operations in their countries

• Help to create jobs

• Improves living standards

How do governments constrain public spending?

• Funding cuts for public sector organisations that supply services directly

e.g hospitals, schools, universities, libraries

• Cuts in pension and other government payments like social security payments

How are business affected by funding cuts?

Demand in the economy lowers

Social security payments

Money taken by government from people wages to pay for system of payments to people who are unemployed or ill

How can governments affect business activity?

• Change the law

• Change levels of government expenditure and taxation

• Influences interest rates and exchanges in economy

• Introduce policies that have direct impact on businesses

e.g giving subsidies to farmers

What role does government play in infrastructure provision?

Examples?

The government is responsible for developing and maintaining nation’s key infrastructure

e.g building roads, bridges, dams, railway systems, government offices

What is the purpose of legislation?

• Protects vulnerable stakeholders from exploitation

• Prevents businesses from making false claims about performance of their products

• Prevents businesses from selling goods that are not fit for human consumption

• Prevents businesses from selling goods that are not fit for purpose

Anti-competitive practices (restrictive trade practices)

actions taken by businesses to reduce or eliminate competition in a market

Barriers to entry

obstacles and restrictions that make it difficult for new companies to enter a market and compete with established firms

Government intervention

When a government becomes involved in a conflict in order to change outcome

Fit for purpose

Usable by consumer for purpose it was intended for

Examples of anti-competitive/ restrictive practices?

• Increasing prices to higher levels than they would be in competitive market

• Price fixing - where number of firms agree to fix price of product to avoid price competition

• Restricting consumer choice by market sharing

• Raising barriers to entry

Market share

percentage of the total revenue or sales in a market that a business makes up

What are the consequences of businesses breaking consumer laws?

• May be fined

• Have to compensate consumers for any loss

What are consumer issues covered by legislation?

• Prices

• Information given about products

• Safety of products

• Quality of products

• Consumer rights

Levy

Impose(tax, fee, fine)

What are the four main government objectives?

1. Low unemployment

2. Low inflation

3. Economic growth

4. Healthy balance of payments

Balance of payments

A summary of the economic transactions between a country's residents and the rest of the world over a specific period

When is a country’s balance of payments positive?

When value of exports is greater than value of imports - a balance surplus

Balance surplus

When the value of exports is greater than the value of imports

Balance of payments deficit

When the value of imports is greater than the value of exports

Inflation

Decrease in purchasing power of money, reflected in general increase in prices of goods and services in economy

What are the benefits of low unemployment to the government?

• More contribution to total output of country → improve economic growth

• People can earn money and have better standard of living

• Government does not have to spend money on unemployment benefits → use that money on other public services

• Higher level of employment = more income tax

What is a measure of economic growth?

Gross Domestic Profit (GDP)

If GDP increases → more good and services have been produced in the country compared to the previous year → more business opportunities

If GDP falls → lower output so few employees needed → people experience lower standard of living + cannot afford as many goods and services

Level of unemployment

Percentage of unemployment in total labour force

Tax

Amount of money that a government requires people to pay according to income, etc.

Boom

Peak of business cycle when:

• Business investments and profits are at highest levels

• Most sectors of economy are performing at their best

• High levels of demand for good and services → prices rise

• Very low unemployment rates → better jobs to choose from → increased wage costs for businesses

Direct tax

Tax paid directly to government

Indirect tax

Tax levied on goods and services

4 stages of business cycle

Growth

Boom

Recession

Slump

Why do government try to promote competition?

Helps to prevent anti-competitive practices + consumer exploitation

How do governments promote competition?

With competition policy, such as:

• Encouraging the growth of small firms → with more firms, the market is less likely to be dominated by one firm

• Lowering barriers to entry

  E.g In some countries public transport is provided only by public sector. However laws changed to allow private companies to provide public transport services.

• Introduce anti-competitive legislation → designed to protect consumers from exploitation by monopolies, mergers and restrictive practices

What is the purpose of environmental legislation?

Prevent pollution caused by business activity

• Warriors fans have pollution caused by dumping waste into rivers, lakes, the sea