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6.1 Economic Issues

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6.1 Economic Issues

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aahanag10
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© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Economic

6.1
issues
Stages of business cycle
Business Cycle (trade cycle) – the cyclical movement of
economic growth characterised by recovery, boom,
recession, slump.

Boo
m Grow
Recessi th Economic
GDP

Grow on activity
th Slum
p

Years
Stages of business cycle
Boom – Increase in consumer expenditure, investment and
export earnings. Low unemployment.
Recession – Fall in GDP for 2 consecutive quarters. Declining
aggregate demand, lower investment, falling export sales and
rising unemployment. Businesses with small range of products
suffer the most as their products are sensitive to changes in
incomes.
Slump – Bottom of recession. High unemployment, low
consumer spending, investment and export earnings. Poor cash
flow and closing down of businesses.
Growth – GDP starts to rise again. National output and
income begin to increase, level of consumption, investment,
exports and employment will gradually rise.
Growth
• Increasing sales;
• Increases employment;
• Small increases in production;
• Businesses begin to consider investment;
• Growing business confidence, although still
some uncertainty.
Boom
• High capacity utilisation;
• Low unemployment;
• High levels of demand leading to inflation;
• Wage increases due to labour shortages;
• Significant business investment and
expansion;
• An increase in new business start ups;
• High confidence;
• Unnecessary risks.
Recession
• Falling demand (increased promotion, price
cut, special offers);
• Businesses will cut output;
• Unemployment will rise;
• Businesses will cut back on investment;
• Business closures will increase;
• There will be a fall in business confidence.
Slump
• Falling demand;
• Low production;
• Little if any business investment;
• High unemployment;
• High number of business closures;
• Low business confidence.
Government economic
objectives
• Economic growth - Increase in GDP;
• Low unemployment;
• Low inflation;
• Positive Balance of payments.
Economic growth – Increase in GDP
• Increase in GDP leads to increase in production
leads to increase in employment;
• Standard of living of the people rises – people will
become richer;
• Business owners will expand as people will have
more money to spend.
• However, rapid growth leads to pollution,
overcrowding and environmental damage.
• Also, little incentive to control costs, management
attention is on external growth rather than
internal efficiency.
Economic growth – Increase in GDP
Factors affecting economic growth –
• Labour – more skilled labour leads to growth;
• Natural resources;
• International trade – If exports are more than
imports;
• Technology – Increases business ability to
produce goods;
• Government impact – through taxation, govt
spending and regulations;
• Confidence – more investment, new products.
Unemployment
• When people want to work but cannot find a
job;
• They don’t produce anything so total level of
output in the country is lower;
• Many governments provide unemployment
benefits – increases cost to the government
hence they reduce spending on schools and
hospitals.
• Reduced standard of living of the people.
Inflation
• Increase in the average price level of goods
and services over time;
• Workers wages shall not buy as many goods
as before, this means REAL INCOME falls;
• Prices of goods shall be higher in comparison
to other countries. Hence, more imports;
• Jobs lost as not much demand for goods and
services;
• Living standards will fall.
Balance of payments
• Difference between country’s exports and
imports;
• If the value of imports > value of exports =
BOP deficit;
• The country can run out of foreign currencies
and then the country will have to borrow;
• Price of own country’s currency against other
currencies will fall – exchange rate
depreciation.
Activity
For Country A, identify which of the following are imports or
exports:
i Washing machines purchased from Country B

ii Cars made in Country A’s factories and sold to a garage in


Country B

iii Machines sold to Country A from Country B

iv Tourists from Country B who spend two weeks on holiday in a


hotel in Country A.
Activity
The government has decided to increase
spending on the road network throughout the
country. To do this it needs to raise an additional
$1 billion.
Suggest how the government might raise this
money.
Explain the effect of the government’s actions
on the country’s business and economy.
Government economic policies
Fiscal policy – Government economic
policies based on taxation and public
expenditure.
Monetary policies – policies aimed at
influencing business and the economy by
controlling the money supply through
changes in interest rates.
Supply side policies – policies aimed at
improving the supply of goods and services.
Types of Taxes
Income tax- Less disposable income to purchase
goods and services
Corporation tax – Less retained earnings &dividends
Indirect taxes - VAT, GST – makes goods expensive
Import tariffs – makes imports expensive and if
retaliated then exports too
Import quota- a physical limit on the quantity of a
product that can be imported- to protect domestic
industries from foreign competition
Fiscal policy – expenditure & income of the
government.
The government get their income from taxes.

Government spends money on –


•Building infrastructure- roads , ports
•Subsidies
•Welfare benefits – unemployment benefit, pensions
•Public services - schools and hospitals
•Defence, law & order
Activity
Sales of 4 of the below items will fall due to
increase in income tax. Identify –
- Bread;
-Petrol;
-TVs;
-foreign holidays;
-cooking oil;
-jewellery;
-salt;
-home computers.
Activity
The government announces the following policies.
Discuss the likely impact of each of these policies on
your business –

Reduction of income tax rates on high income


earners;
Lower corporate tax;
Higher import tariffs on all imports;
Higher interest rates;
New training colleges to increase the supply of
qualified workers;
Strict controls on monopoly businesses to encourage
new businesses to be formed.
Monetary policies – change in bank interest
rates and exchange rates of the currency by
the government.
The money supply is the amount of money that is
available for people and businesses to spend. It doesn’t
just include cash but also the amount you can borrow
too.
Borrowing money allows consumers to buy more goods
and services. This leads to an increase in demand and
possible inflation (a general increase in the level of
prices)
How do changes in interest rates
affect business?
■An increase leads to reduction
in borrowing because it will cost
the company more to borrow the
same amount of money
therefore unwilling or unable to
invest in new facilities to
increase production.

■A decrease in interest rates


leads to an increase in
borrowing. Companies are able
to borrow to expand and
demand increases as customers
Activity
1. Find out some rates of interest charged on loans by
banks and building societies or other financial
institutions.
2. Are the interest rates charged to the borrowers
different from the rate of interest paid to savers?
3. Suggest reasons for any differences.
4. How much more would someone have to pay on a
loan of £18500 if the interest rate was increased by
0.75%?
5. Explain the effects that an interest rate increase of
0.75% might have on inflation, production and
Supply side policies- to improve the
efficient supply of goods and services
Privatisation – Transfer of control of
Government organisations to the private
sector so that they can run the same
profitably.
Improve training and education –
Improving the skills of the workers.
Increase competition in all industries –
Reducing government controls over
industry or by acting against monopolies.

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