Economic Issues
Gross domestic product is the total value of output of goods and services in a country in one year.
The Business Cycle
- Growth- GDP is rising, higher standard of living
- Boom- inflation and shortage of FOPs
- Recession- GDP falls, demand falls
- Slump- Unemployment reaches high levels, prices
A recession is when GDP is falling for two consecutive quarters.
Impact on businesses of changes in employment level, inflation, and GDP
- Changes in employment levels affect the business’s ability to recruit workers
- Inflation may lead to an increase in business costs and reduced spending by customers
- Increasing GDP means that the country is growing. Generally, businesses will benefit from increasing sales as more people have jobs and have more income.
Government Economic Objectives
- Low inflation – inflation is the increase in the average price level of goods and services.
- Low unemployment – unemployment exists when people who are willing and able to work cannot find a job.
- Economic growth – is when a country’s GDP increases
- Balance of payments – balance of payments records the difference between a country’s exports and imports
Exports are goods and services sold from one country to another countries.
Imports are goods and services bought by one country from other countries.
The exchange rate is the price of one currency in terms of another.
Exchange rate depreciation is the fall in the value of a currency compared with other currencies.
Government economic policies
Fiscal policy is any change by the government in tax rates or public sector spending.
Direct taxes are paid directly from income.
Indirect taxes are added to the prices of goods and taxpayers pay the tax as they purchase the goods for example, VAT.
Disposable income is the level of income a taxpayer has after paying income tax.
An import tariff is a tax on an imported product.
An import quota is a physical limit on the quantity of a product that can be imported.
Monetary policy is a change in interest rates by the government or central bank.
Supply side policies try to increase the competitiveness of industries in an economy against those from other countries. Policies to make the economy more efficient.
| Government policy change | Possible business decision | Problems with this decision |
| Increase income tax – this reduces the amount consumers have to spend | Lower prices on existing products to increase demandProduce ‘cheaper’ products to allow for lower prices | Less profit will be made on each item sold (reduces gross profit margin) |
| Increase tariffs on imports | Focus more on the domestic market as locally produces goods now seem cheaper | It might still be more profitable to exportForeign materials and components might be of higher quality |
| Increase interest rates | Reduce investment so future growth will be lessDevelop cheaper products that consumers will be better able to affordSell assets for cash to reduce existing loans | Other companies might still grown so market share will be lostDepends on the product but could consumers start to think that the quality and brand image are lower? |
| Increase government spending | Switch marketing strategy to gain more public-sector contracts e.g. building or equipping schools and hospitals | May be great competition if other businesses take same action |
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