GCSE Business Studies
The External Business Environment
Revision
Unit 3 Part 3b
3.5.4 to 3.5.7
Government and the Economy
Types of Economies:
 Planned: Government control the production and
distribution.
 Market: Private individuals make the majority of
decisions on what to produce.
 Mixed: Goods and services are provided by both
the private sector and the Government
Managing the mixed economy
In the UK there are 3 levels of Government that
affect business and the economy:
– Local Government—local county decision making;
– Central Government—nationally elected, makes major
laws about the economy;
– EU Government—run from Brussels and responsible
for devising some common policies such as the Social
Charter and Common agricultural policy
Government Objectives
In the mixed economy, government makes decisions to
operate efficiently. Government objectives include:
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Steady growth of output
Low and stable inflation
Low unemployment
Balancing imports and exports
 To achieve their objectives, government uses 3 types
of policies
◦ Monetary Policy—interest rates and the money supply;
◦ Fiscal Policy—taxes and government spending
◦ Supply side policies—policies aimed at increasing the
production potential of the economy
Fiscal Policies
Changing the level of public spending and/or taxation to affect
the level of demand
Direct Taxes: Taxes on income: income tax, corporate taxes,
national insurance contributions
Indirect Taxes: Taxes on spending: VAT, and excise duties,
business rates
Government spending includes: public services such as the
health service, roads, education and redistributing income
including benefits
Monetary Policy
The purpose of Monetary policy is to
safeguarding the value of the currency by
ensuring price stability, (low inflation) and
confidence in the currency.
The Bank of England sets the basic interest rate
to control inflation by influencing the amount
of money that businesses and consumers
borrow and save.
Supply side Policies
 Spending to improve employment prospects:
 Education and training and other incentives to get
people working harder; such as reducing the
marginal tax rate.
 Spending to improve competition
 Removing restrictions/barriers to trade, removing
monopolies, predatory pricing, price fixing and
encouraging privatisation
 Spending to increasing enterprise and
productivity:
◦ Grants, subsidies, reducing corporation tax
Government spending and the
economy
 Government spending, taxation and interest rates
can all effect how much a business is willing to
produce, (supply), and how much consumers are
prepared to buy, (demand). This depends on:
◦ The amount spent or change in the rate
◦ The type of business-some goods are necessities and
the amount of government spending and taxation has
little affect on demand.
 The multiplier effect: the amount of increase or
decrease in spending in the economy has a
“knock-on” effect on the total spending in the
economy.
How government supports business:
• Improving supply to enable greater
competition with foreign suppliers includes:
– Cutting taxes on business profits
– Providing grants and subsidies to business
– Cutting income tax, so consumers buy more
– Education and training to improve workforce
productivity
– Improving infrastructure
– Providing information to help businesses export
their goods and services
Government and the environment
• Governments sometimes action to deal with externalities,
(when business activity leads to costs to society such as
congestion and pollution).
• Government action sometimes involves making the business
activity more expensive, to compensate for the loss to society.
Government intervention can include:
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Taxation
Rules and regulations
Information, (advertising and labelling)
Pollution permits, (carbon permits)
Subsidies for the development of green technologies
Opportunities to recycle
Problems with Government
intervention
• Taxes imposed in one country but not another may simply
encourage firms to switch production to a country that does
not have the tax.
• It might be considered “unethical” for developing nations
such as China to take costly measures to reduce pollution that
has occurred as a result of other nation’s manufacturing.
• It is difficult for governments to set the appropriate level of
legislation because it is difficult for governments to determine
which policies are going to have the best effect and reducing
the externalities.
Globalisation
• How businesses in different countries have become
increasingly dependent on each other. Examples of
globalisation include:
– International trade
– Production abroad
– Outsourcing abroad
– Multinational corporations
– Global branding
– Migration and immigration
Benefits of globalisation
Demand:
• Greater consumer choice
• Lower prices
• More jobs—inward investment
Supply
• Cheaper labour
• More skills
• Larger market for business
• Economies of scale
Disadvantages of globalisation
Demand
 Workers in developing countries may be
exploited
Supply:
 Lower profits
 More competition may lead to lower sales
 Business closure and loss of jobs
 Increased costs of transportation
Whole Economy
 Pollution
 Loss of resources
Government and international trade
Protectionism
• Safeguarding home markets by introducing
– Tariffs: taxes on imports which add to the price
making home goods seem more competitive
– Quotas: restrictions on the amounts that can be
imported
– Technical restrictions: specifications which limit
imports
Results of Protectionist activities:
• Retaliation: quotas set against the
protectionist country
• Consumer discontent: resulting from price
rises, (resulting in the current party falling into
disfavour)
• Legal Issues: it may be illegal to set tariffs
and/or quotas
• Reduced efficiencies: countries may be
protecting inefficient industries at home
Exchange Rates
• The price/value of one currency against
another.
• When UK exchange rates decrease, its goods
and services become cheaper to other
countries but the cost of imported goods rises
• When UK exchange rates increase, its goods
and services become more expensive to other
countries but the cost of imported goods falls.
Effects of Exchange rates
• Exchange rate falls: Exporters benefit: goods sold to
foreign countries will seem cheaper; exporters can
expand through capital investment and more
employment but imported goods are now more
expensive.
• Exchange rate rise: Exporters lose because goods appear
more expensive in other countries but imports are
cheaper so sales will rise and some jobs may be created.
Changes in exchange rates
• The effect of a change in exchange rates
depends on:
– The size of the rise or fall
– If the cost of the import is a large or small
proportion of the total costs of the business
– Whether there are any substitutes for the import
– Whether the cost can be passed on to the buyer.
The EU and Government
EU: 27 Countries aiming to co-operate on trade and social
affairs. Enables free trade with member countries without
tariffs or quotas and freedom of labour force movement.
– Advantages:
• Enables firms to sell to a larger market leading to
economies of scale and cost savings.
• Common standards on safety and quality.
• Availability of grants and subsidies;
• Social charter for workers rights
• Sets environmental standards
• Guarantees minimum prices for crops
Key terms: EU
• Single Market: a market without barriers
• Social Charter: worker protection against
unfair practices
• CAP: common agricultural policy controls price
and production levels for farming
• Single currency: the use of the EURO within
the EU
• Euro zone: 15 countries within the EU that
share a common currency, the Euro
Advantages and Disadvantages of
having a common currency
• Advantages:
– Cost savings-no exchange rate
– Removes uncertainty about prices
– Business confidence in shared currency
• Disadvantages
– Initial cost of transferring computers and
machinery to Euros
– Confusion regarding value
– Difficult to change back