1. The Changing Business
Environment
Government influence over decision making by using
economic policy measures

2. Key Words
 Inflation  Policy instrument
 Real income  Public expenditure
 Unemployment  Interest rate
 Economic growth  Direct tax
 Imports  Disposable income
 Exports  Indirect tax
 Balance of payments

3. Why Do Governments Intervene Directly in
Business Activities?
 To achieve their national economics objectives,
governments will try to encourage more business
activity in their economies because:
 It produces goods and services people need and want.
 It creates jobs and incomes, and helps to raise living
standards.
 It earns foreign currency from goods and services sold
overseas. This can be used to buy imports that cannot
be produced at home.
 It helps to fund the provision of public services from taxes
paid by businesses, workers and consumers.

4. Why Do Governments Intervene Directly in
Business Activities?
 While the governments work for the interest of the
nation, most producers and consumers make decisions
that are in their own best interests. E.g. business
owners will choose a location, materials, workers and
production methods that will help them make as much
profit as possible. Consumers buy those products that
give them the most satisfaction.

5. Why Do Governments Intervene Directly in
Business Activities?
 As a result, they may therefore fail to take full account
of any negative effects their decisions can have on
other people, businesses, workers, the environment or
their national economy. Sometimes, their decisions
can also be bad for themselves. E.g. if consumers
ignore the risks of smoking to their health.
 Thus, the governments often intervene to stop or
correct those decisions that have negative impacts on
others. E.g. high taxes on tobacco, requiring warnings
printed on cigarettes boxes, laws to ban smoking under
the age of 18.

6. Different Policy Instruments
 A government will use different policy instruments to
influence business decisions, activities and outcomes.
 A policy instrument is a tool or action a government can
use to help it achieve its objectives.

7. Different Policy Instruments
 Public expenditure
 In many countries, the government is a major consumer
of goods and services. It also provides jobs and incomes
for many people.
 Government spending or public expenditure accounts for
a large share of total spending in many economies.
 The public sector in an economy may spend money on
hospitals, education, roads, schools, a police force,
national defence, welfare payments and much more.

8. Different Policy Instruments
 Many businesses therefore benefit directly from
different public expenditures or indirectly from their
impact on consumer incomes and demand.
 E.g. Construction firms benefit from contracts to build
schools and other buildings.
 Office equipment manufacturers benefit from spending
on equipping public offices.
 Public sector workers use their incomes to buy goods
and services from businesses.

9. Different Policy Instruments
 As a result, cutting or raising public expenditure can
have a big impact on business decisions, activities and
profitability.
 E.g. many governments are increasing grants to
businesses to encourage them to invest in electric
vehicle development and manufacturing, and in other
low carbon technologies and skills, not only to reduce
damage to the environment but also to develop new
products they can then sell, including to other
countries, to meet growing consumer demand.

10. Example on Raising Public
Expenditure
China goes green.
In 2009 the Chinese government launched the world’s
largest green stimulus plan of $221 billion in support of its
state-owned enterprises and private sector to develop the
green technology industry.
China’s companies have since raced past competitors in
Denmark, Germany and the United States to become the
world’s largest producers of wind turbines. China has
also become the world’s largest manufacturer of solar
panels.

11. Different Policy Instruments
 Taxation
 To finance (support) public sector spending, many
governments collect taxes from businesses and
individuals, either directly from their incomes and wealth
or indirectly when they spend money.

12. Different Policy Instruments
 When the government increases taxes, this will reduce
the amount of income people have left to spend on goods
and services. This policy may be used when there is high
and rising price inflation caused by rapidly rising demand
for goods and services.
 But business revenues and profits are likely to fall and
following this, output and employment may be cut.
 In contrast, reducing the overall level of taxation can
boost total demand for goods and services and boost
business activity.

13. Different Policy Instruments
 Government can also use taxes to:
 Discourage the consumption and production of harmful
products, such as cigarettes, by raising their prices.
 Protect the environment by discouraging damaging and
polluting activities, e.g. by taxing gasolline, air travel.
 Encourage businesses to invest in new technologies and
job creation by cutting and removing the taxes on their
profits.
 Reduce inequalities in income and wealth, by taxing
people and businesses with higher incomes more than
others

14. Different Policy Instruments
 Interest rates = the price of money
 If interest rate falls, people and firms will be able to
borrow money more cheaply than before from banks or
by using their credit cards.
 Lower interest rates also make saving money less
attractive.
 Hence, reducing interest rates in an economy can help
increase consumer spending on goods and services
and increase business investment. This can help boost
output and jobs.

15. Different Policy Instruments
 If we raise interest rates, borrowing money becomes
more expensive and reduce consumer spending.
 Businesses that have borrowed money or are seeking
to borrow money from banks or other lenders to finance
their activities will face an increase in their repayment
costs. This will reduce their profits and may cause
them to delay their investment plans.

16. Different Policy Instruments
 Most governments are able to change interest rates in
their national economies using their central banks.
 The central bank is at the centre of the banking system
in an economy. Its main function is to maintain the
stability of the banking system ad national currency on
behalf of the government.

17. Different Policy Instruments
 Laws and regulations
 These can be introduced or existing ones changed by a
government to control or even outlaw some business activities
to:
 To protect key industries and businesses from unfair competition
 To protect employment and the rights of employees to fair
treatment and to work in a healthy and safe environment
 To protect consumers from misleading advertising, harmful
products, powerful businesses and dishonest business
practices.
 To protect the environment and reduce harmful emissions to
limit climate change.

18. Different Policy Instruments
 In some cases, new or toughened laws and regulations
can increase business costs. E.g. businesses may
have to employ additional staff and invest in new
equipment to ensure they comply with laws and
regulations. These additional costs will reduce profits
and businesses may have to find ways to offset them,
for example, by cutting some jobs and production.

19. Different Policy Instruments
 In contrast, some business can benefit from new laws
and regulations. E.g. manufacturers of helmets for
motorcycle riders enjoy increased sales when the
government passed a law to mandate all motorists and
passengers to wear helmets