A2 External Influences

Government policies affecting business

Government Policy

Government seek to control the business environment to achieve a range of objectives.

These include economic policies such as fiscal and monetary policy

Student Task: Complete the worksheet using the textbook to learn about economic policies (page 390)

Governments key economic objectives

Encouraging economic growth

Controlling and reducing inflation

Maintaining a satisfactory level of employment

Achieving a satisfactory balance of payments

Maintaining a stable exchange rate

Fiscal Policy

The use of taxation and government expenditure to influence the economy

Monetary Policy

Controlling the money supply and the rate of interest in order to influence the level of spending and demand in the economy

Fiscal policy uses taxation and government expenditure, whilst monetary policy uses the supply of money and controlling interest rates to control the economy.

Answers to student questionsThe circular flow of income The circular flow of income ––

illustrates the interrelationship between the mainillustrates the interrelationship between the mainparts of the macro economy, companies,parts of the macro economy, companies,

households the Government and other countrieshouseholds the Government and other countries

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Withdrawals:

•Purchasing imports

•Savings to bank

•Taxation to Gov.

Injections

•Investment

•Governmentspending

•Sale of exportsabroad

1.

Answers to student questions

2.

Direct tax is taken from income whereas indirect is added to the value of goods.

Answers to student questions

3. Increase spending power through:

Low interest rates Tax cuts Government spending has multiplier effect

E.g. Building new hospital = employment for builders and eventually medical staff. They will have incomes which they will spend in the local economy. Suppliers will also receive money.

Answers to student questions

4. Reduce spending power and demand through:

Higher interest rates = cost of borrowing, credit sales and mortgages

Tax increase

Cut government expenditure

If left too long this may lead to low business investment and higher unemployment

A2 External Influences

Government policies affecting business – Lesson 2

Other economic policies Exchange rate policies - extent to which

government will intervene by buying and selling currency or by changing interest rates. Aim is to influence international competitiveness.

Protectionism - Controls to restrict imports.

Supply-side policies - Focus on particular parts of the economy, the micro-economic level. Making sure all markets work efficiently to produce optimum output. E.g. improving training and reducing power of trade unions to make the labour market more efficient

Government Policies

Privatisation

Privatisation

When state-run industries and state-owned assets are returned or sold to the private sector

Privatisation Video Watch the video and answer the following questions:

What are the arguments for privatisation?

What are the arguments against privatisation?

Why was the privatisation of BT not initially a success?

What are the benefits to customers of BT’s privatisation?

Arguments for and against Privatisation

For:

Introduction of competition and reduction of bureaucracy. Public owned companies are not driven by profits and are therefore often less efficient.

Competition = more choice for the consumer = Quality and prices .

Encourages individuals to become shareholders

Against:

Companies may exploit consumers by charging higher prices as now run for profit. State services are often run with the public in mind.m

Is it a consumers basic right to enjoy a high quality low cost service?

May become a privatised monopoly

BT

It initially faced difficulties when first privatised because it still acted as a monopolist and did not improve its efficiency.

It took deregulation and the introduction of competition to do this.

Consumers then benefited from increased competition through cheaper prices, more innovation and better quality of services.

Regulation and watchdogs

Success of privatisation depends on the degree of competition and regulation

Government set up watchdogs such as OFWAT (water supply) and OFTEL (telecoms) to prevent privatised monopolies exploiting their customers.Watchdogs must:

Monitor behaviour and price Set performance standards Allow or forbid entrants to the market

Government Policies

Intervention Vs. Laissez-faire –

Lesson 3

Intervention

Policy based on the belief that government should exert a strong influence on the economy, rather than allowing market forces to dictate conditions

E.g. Economic policies (Fiscal + Monetary) Support for new firms and rescue packages Regional policies e.g. funding from EU to regenerate

areas of high unemployment and social deprivation Policies to influence exchange rates Worker and consumer protection Competition policies

Laissez-faire

Policy based on the belief that the free market will maximise business efficiency and consumer satisfaction

Government therefore tries to avoid interfering in the running of business or any part of the economy

Intervention Vs. Laissez-faire

Countries approach to this vary

Eastern European countries under a communist regime were very interventionist but now with political change are moving towards laissez-faire

The UK moved to a more laissez-faire approach with privatisation and deregulation in the 1980s and 1990s

Student Activity Using the January 2004 exam paper you must

answer question 1, 3 and 4.

Before attempting to answer each question you must brainstorm a plan of what theory and how you will analyse and evaluate the question. Do this in groups of 3/4

Then attempt to answer each question based on the essay plan.

Remember Content, Application, Analysis, and Evaluation

Easter holiday homework

Complete all questions to the case studies provided.

These must be handed in on the first day back from the holiday.