Government Objectives (Edexcel IGCSE Business)

• Most governments pursue similar objectives for their national economies
  • They use a mix of government spending and taxation in order to achieve these objectives
    
    

• The government has many policy options available that can be used to meet the targets of their macroeconomic objectives
  • Any policy action taken is likely to have a direct impact on business

Diagram: Government Economic Objectives

Governments typically look to achieve economic growth, low inflation, low unemployment and a positive balance of payments

The government's macroeconomic objectives

Positive economic growth

• Positive economic growth is the increase in the amount of goods and services produced per head of population over a period of time
  
  
• The standard of living of the population is likely to increase with GDP growth
  • As output is rising, more workers are needed, and high levels of employment are achieved
    
  • Households can afford to buy more goods and services as most people become richer
    
  • Business owners expand their business as people have more money to spend on their products and revenue rises

Low levels of inflation

• Inflation refers to a general increase in prices and fall in the purchasing value of money over time
• Both the UK and US governments set their Central Bank an inflation target of 2%
• Central Banks have a range of tools they can use to achieve this target, such as base rates and quantitative easing
  

Low levels of unemployment

• Unemployment refers to the number of people without a job who are actively seeking and available for work
• Low unemployment increases national output, improves workers’ living standards and reduces government spending on welfare benefits
  

A healthy balance of payments

• The balance of payments is the relationship between the value of imports and exports over a period of time
  • A balance of payments deficit occurs when the money spent on imports is higher than the money received from exports
  • A balance of payments surplus occurs when the money received from exports is higher than the money spent on imports
     
• If a country has an ongoing deficit, it means there is possibly less support for domestic business (imports preferred)
  • The country's residents may need to borrow more money to fund these imports
     
• Maintaining a healthy balance of payments helps to avoid some of these issues

The impact of the objectives on business

Examples of Government Action Aimed at Meeting Their Macroeconomic Objectives

Example	Explanation	Impact on Business
The government raises the interest rate in order to reduce the level of inflation	Higher interest rates mean that businesses and people will borrow less money as they will have to pay back more	Demand for goods typically purchased using credit is likely to decline, causing revenue to fall
The government places a tariff on imports in order to reduce foreign purchases	Tariffs increase the price of imported goods compared to those that are domestically-produced	Increased demand for businesses that sell domestically-produced goods is increasing revenue Higher costs for businesses that import goods from overseas, which they may choose to pass on to customers
The government allows fewer low-skilled workers to enter the country and be available for employment	Low-skilled jobs are filled by the domestic workforce, reducing both the level of unemployment and government spending on welfare benefits	Businesses may have to offer higher wages to compete with rivals and attract enough workers Staff shortages may encourage some businesses to move towards capital-intensive production methods