Topic 6 Government Influences on business activity

Government Aims

1. Balancing the income between the rich and poor
2. Providing social and physical security
3. Controlling the economy, hence guiding workers to a progressive economic structure
4. Generating laws and regulations which will control the activities of the economy. They are external shareholders
5. Controlling the Balance of Payments[The total income a country generates by buying and selling goods with the rest of the world]

Business Trade Cycle

The trade cycle shows the stages that an economy must pass irrespective of time, showing the different levels of GDP.

GDP stands for Gross Domestic product and shows the total value of goods and services provided by an economy within a particular period of time, usually a year.

The Stages are:

• Boom - Positive growth of GDP
• Recession - Negative growth of GDP
• Peak - Highest period of economic growth after which the economy goes towards recession
• Slump - Lowest point of economic growth after which the economy starts to recover
• Recovery - After recession when the economy goes towards boom

A successful government will prolong the period of boom and shorten the period of recession

During boom, an economy will grow and more business ventures will open. Unemployment rates will fall and people will have more disposable income. This will increase overall consumer spending which will increase aggregate demand. The challenge of the government is to balance the increasing demand with an increase in supply. Any difference between demand and supply for a prolonged period of time will lead towards recession.

During recession, the unemployment levels of the economy will continue to increase. As a result disposable income continue to fall and consumer spending will fall as well. In this case, firms will face a shortage of sales and this will decrease profits, which will lead to a further reduction of the workforce and more unemployment.

Government policies:

1. Fiscal policy - deals with taxation and government spending
2. Monetary policy - deals with money supply and interest rates
3. Supply side policies - increases total supply of an economy

Competition policies:

• Encouraging the growth of small firms, which is the easiest way develop a business environment
• Lowering the barriers to entry by helping businesses in various ways such as providing training and interest free loans
• Introducing anti competitive laws which will prevent any kind of private monopoly

Environment legislation will help reduce the level of pollution and increase awareness among the common public against the companies which contribute towards negative external costs such as pollution and congestion.