External Influences On Business Activity: Economic (Copy)
6.1 External Influences On Business Activity
6.1.2 Economic
Government Intervention To Help Businesses And Encourage Enterprise
| Method | Explanation | Business Impact | Example |
|---|---|---|---|
| Subsidies | Government provides financial support to lower production costs or encourage investment. | Lowers costs, increases competitiveness, encourages expansion. | Agricultural subsidies, renewable energy grants. |
| Tax Incentives | Reduced corporation tax, tax holidays, or investment allowances. | Increases retained profit for reinvestment. | Special Economic Zones in many developing countries. |
| Grants & Loans | Government provides grants or low-interest loans to start-ups or SMEs. | Easier access to finance, supports innovation. | UK government’s Start Up Loans scheme. |
| Infrastructure Development | Government invests in transport, communication, and utilities. | Better logistics, reduced costs, access to markets. | CPEC in Pakistan improving road and trade links. |
| Training & Education | Investment in workforce skills and vocational training. | Improves labour productivity and reduces training costs for firms. | Apprenticeship schemes in Germany and UK. |
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Government Intervention To Constrain Business Activity
| Method | Explanation | Impact On Businesses | Example |
|---|---|---|---|
| Legislation | Laws to protect environment, consumers, and workers. | Higher compliance costs. | Ban on harmful chemicals in manufacturing. |
| Regulation | Monitoring of industries to prevent monopolies or unfair practices. | Encourages fair competition, but may limit market power. | Competition law against cartels. |
| Taxation | Imposing corporate, income, or indirect taxes. | Reduces profits and consumer spending. | Higher excise duty on cigarettes. |
| Interest Rates | Raising rates to control inflation. | Increases borrowing costs, discourages investment. | Central Bank raising rates to 12%. |
| Trade Restrictions | Tariffs, quotas, import bans. | Reduces market access, may raise costs for firms using imports. | Tariffs on imported steel to protect local industry. |
How Governments Deal With Market Failure
| Market Failure | Government Action | Example |
|---|---|---|
| Public Goods | Provide directly as private sector may not supply them profitably. | Street lighting, national defence. |
| Externalities | Taxation on negative externalities; subsidies for positive ones. | Carbon tax on pollution; subsidies for education. |
| Monopolies | Enforce competition law, prevent abuse of market dominance. | Breaking up monopolies, regulating prices. |
| Information Gaps | Consumer protection laws, advertising standards. | Banning false health claims on food labels. |
| Unemployment | Job training schemes, employment subsidies. | Government-funded vocational training. |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Business Full Scale Course
Key Macroeconomic Objectives Of Governments
| Objective | Meaning | Importance For Business | Example |
|---|---|---|---|
| Low Unemployment | High % of workforce employed. | Increases consumer spending power, larger market. | Government job creation schemes. |
| Low Inflation | Keep general price levels stable (target often 2–3%). | Predictable costs, stable demand, easier planning. | Central bank adjusts interest rates to manage inflation. |
| Economic Growth | Increase in GDP (Gross Domestic Product). | Expands demand, creates business opportunities. | China’s rapid growth increased demand for consumer goods. |
| Balance Of Payments Stability | Balance between imports & exports. | Encourages trade policies that affect exporters & importers. | Tariffs to reduce imports in developing countries. |
| Stable Currency/Exchange Rate | Keeps currency stable to encourage trade & investment. | Reduces uncertainty in export/import costs. | Pegging currency to US dollar in some economies. |
Government Policies To Achieve Economic Objectives
| Policy Type | Explanation | Examples | Impact On Businesses |
|---|---|---|---|
| Monetary Policy | Control of money supply and interest rates by central bank. | Cutting interest rates to stimulate borrowing. | Lower interest rates → cheaper loans → expansion possible. |
| Fiscal Policy | Use of government spending & taxation. | Increasing government spending during recession; reducing income tax to raise demand. | Higher demand for goods/services, but possible higher taxes for firms. |
| Supply-Side Policies | Improve efficiency and productive capacity. | Training, investment in technology, deregulation. | Improves productivity, lowers costs, enhances competitiveness. |
| Exchange Rate Policy | Managing currency value to support trade. | Depreciation boosts exports (cheaper abroad). | Exporters benefit from weaker currency, importers face higher costs. |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Business Full Scale Course
Impact Of Changes In Government Policies On Business
- Change In Interest Rates
- Higher rates → higher borrowing costs, reduced consumer spending, lower investment.
- Lower rates → cheaper borrowing, encourages expansion, boosts demand.
- Change In Taxation
- Higher corporate tax → lower retained profits.
- Lower income tax → higher consumer spending.
- Change In Government Spending
- More spending → more contracts, higher sales.
- Cuts → reduced demand in public sector.
- Change In Exchange Rates
- Depreciation → exports more competitive, imports more expensive.
- Appreciation → imports cheaper, exports less competitive.
- Change In Employment Laws
- Stricter laws → higher labour costs, better working conditions.
- Relaxed laws → lower costs, but risk of exploitation claims.
- Change In Environmental Laws
- More rules → higher compliance costs, need for eco-friendly tech.
- Looser rules → lower costs but possible damage to reputation.
Quick Examples
| Government Action | Effect On Business |
|---|---|
| Reduced interest rates | Firms expand using cheaper loans; consumer demand rises. |
| Higher corporate tax | Cuts into profit → less money for reinvestment. |
| Increased government spending | Boosts demand for construction, infrastructure firms. |
| Tariffs on imports | Helps local producers, increases costs for importers. |
| Strict safety laws | Higher compliance costs but safer working environment. |
| Minimum wage increase | Higher costs for firms, but better motivated workers. |
| Currency depreciation | Boosts exports, hurts import-dependent firms. |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Business Full Scale Course