Government, business and the economy

Now since we are considering the relationship between society and business, it’s important to realise that all business activity can be either a good thing or a bad thing for society. Often, a business can be both good and bad for society at the same time. Let’s first take a look at how business can impact society positively.

Firstly, businesses provide products for people in society. Without business, the production of many goods would not take place at all, meaning that each of us would have to somehow manufacture the products we need ourselves.

Secondly, businesses employ people. This leads to job creation and income for each employee. As a result of having an income, employees can provide for themselves and their families. This also reduces unemployment and poverty in a society.

If you remember the profit motive, you will also understand that business activity promotes new product innovation and inventions in markets. This moves society forward in its development.

Society also benefits from businesses that pay tax. The tax paid to government should then be used to finance public services, like transport and hospitals.

Finally, businesses that export help to bring in foreign currency to spend on imports. We’ll review imports and exports shortly. For now, let’s say that this is an advantage for society because it means that local businesses can sell to customers overseas.

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Unfortunately, not all the activities that businesses undertake are positive for everyone in society. Business activity can have some harmful impacts.

For example, the location that a business decides to choose could be in an unspoilt, natural area where the environment needs to be preserved and protected. Some businesses could damage this kind of location, which has negative consequences for society.

Some businesses don’t offer very good working conditions for their employees. This might be to cut the costs of the business, even if it means that the employees must deal with difficult, even dangerous, working conditions.

The production methods of manufacturing businesses is an important consideration too. Factories, for example, might pollute the surrounding environment with dangerous chemicals.

Not only can production methods be dangerous and harmful to society, but so can the final product itself. For example, if there were absolutely no regulations about what may or may not be produced in a country, we might find that addictive, harmful drugs could be produced. A more realistic example, perhaps, is the production of cigarettes, which are unhealthy and can badly affect even non-smokers.

Monopolies might form in states were there isn’t very much government control of business. Business owners might have the idea that by operating together and forming a monopoly, they can earn greater profit. However, this reduces customer choice and because there is no competition, prices are higher than they could be.

Some businesses use very persuasive advertising to encourage customers to purchase their goods or services. This can even be misleading advertising, ultimately causing customers to buy something that they normally would not purchase. As a result, resources are wasted.

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Now that we know the possibilities for businesses to both positively and negatively impact a society, such as South Africa, we can now move on to view things from the government’s perspective. Before we look specifically at what government does to encourage the advantages of businesses and discourage the negative things about business, we first need to review the economic objectives it has. Think of these as the goals of government for the economy; in other words, what it wants to achieve.

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The first common objective is to keep inflation at a low level. But what is inflation? Inflation is the increase in the average price level of goods and services over time. The cost of groceries for a family, say, 10 years ago was a lot less than it is now – that’s because of inflation. Prices have risen.
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Inflation isn’t necessarily a bad thing, but rapid inflation is definitely something government wants to prevent, and here’s why:
If prices rise very quickly, There is a decline in employees’ real income – wages cannot buy as many goods as they could before. By real income, we mean the value of the products that can be purchased. Now if inflation rises faster than wages, then real income will have declined – for instance, if prices rise by 10 percent but salaries increase by just 5 percent, then real income will decline by 5 percent.
The economy becomes less competitive against other economies. Foreign goods may be more affordable, leading to unemployment and a weaker currency. Since prices rise so quickly, customers might find that products overseas are more affordable.
Finally, because prices rise so quickly, businesses can’t plan effectively for the future and will most probably not be able to expand. They might actually become smaller, meaning that some employees could no longer have their jobs. This has another effect on the employees: they will have reduced incomes and therefore lower living standards.
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Government also aims to keep unemployment levels as low as possible. the level of unemployment is the number of people who are willing and able to work, but are unable to find employment. If unemployment levels are high, many people will be without work and therefore without income – this has serious consequences for an economy.
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Firstly, there is a loss of overall productivity in the economy. Since so many people do not have jobs, their time and skills are not being used to produce goods or provide services. In other words, they are idle. This means the economy performs below its ability and does not reach its full potential.
Also, unemployment is costly for the government and the economy as a whole. Some states help the unemployed by providing them with grants to help them survive. The problem is that those grants could have been used for other public services if unemployment wasn’t a major problem. Basically, the economy operates more in survival mode instead of thriving.
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The third objective governments normally have for the economy is to encourage a high rate of economic growth. What exactly is economic growth? When we talk of economic growth, we are actually referring to something called GDP – gross domestic product. This is the total value of the output of goods and services in an economy in one year. An economy therefore grows when the value of goods and services increases in one year.
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However, there are times when economies do not grow – in fact, they can sometimes have an output that is of lower value than the previous year and even fall into recession. This affects an economy in three main ways
Firstly, reduced output of goods and services leads to higher levels of unemployment. Fewer workers are required since less is produced.
As a consequence of the first effect, there is a decline in the standard of living; goods and services are no longer affordable since people are without work or having lower wages.
A further effect is that businesses do not have much incentive to expand because the market for their products have not grown.
One way of analysing how an economy has grown or declined over a period of time is by the business cycle, also known as the trade cycle.
During the growth or expansion stage, the GDP is rising. This is the stage at which output increases and businesses generally perform well. They employ more workers and so living standards often rise.
When the economy grows to its greatest point, a peak or economic boom is reached. This is a result of excessive spending in the economy, causing prices to rise very quickly. As a result of such rapid growth, skilled workers become scarce and businesses experience a rise in costs. The economy has grown too quickly and battles to operate at such a level.
This can bring about a recession – the GDP declines. At this stage, businesses have a decline in the demand for their products and become less profitable. Unemployment could also be a problem here.
Finally, there can be a slump trough or slump. This is a severe recession where unemployment soars and prices fall greatly due to such low demand. It’s often the case that only the businesses that can afford to make losses will survive this period.
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The last government objective we will consider is the balance of payments. This is the difference between an economy’s exports and imports.
 Exports are products sold to other countries; they are taken out of the country. For example, South Africa is a major exporter of diamonds and gold to other parts of the world.
Imports are products purchased from other countries; they are bought into the country. An example of imports are the electronic products South Africa imports from countries like China and Japan.
To understand the balance of payments further, let’s think about trade between South Africa, which uses the Rand as its currency, and America, which uses the U.S. Dollar.
Exporting products from South Africa to the U.S. leads to Dollars flowing into South Africa – we then have more dollars in reserve with which to purchase products from overseas.
When importing products into South Africa from the U.S., South Africa loses Dollars in our supply.
As a result, governments aim to balance exports and imports so that there is no shortage of foreign currency.
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When an economy does imports more than it exports, there is a deficit in the balance of payments. Basically, the country buys in more products than it sells to other countries. There is great demand for overseas products, but we supply very few to other countries.
One problem that can arise as a result of this is that South Africa might experience a shortage of foreign currencies. This makes importing products difficult, as we will have to borrow currencies from overseas.
The second serious issue is an exchange rate depreciation. A depreciation means that the Rand becomes weak in relation to other currencies. Each Rand purchases less imports than before. We will also take a closer look at currencies and exchange rates at a later stage.
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When an economy imports more than it exports, there is a deficit in the balance of payments. Basically, the country buys in more products than it sells to other countries. There is great demand for overseas products, but we supply very few to other countries.
One problem that can arise as a result of this is that South Africa might experience a shortage of foreign currencies. This makes importing products difficult, as we will have to borrow currencies from overseas.
The second serious issue is an exchange rate depreciation. A depreciation means that the Rand becomes weak in relation to other currencies. Each Rand purchases less imports than before. We will also take a closer look at currencies and exchange rates at a later stage.
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Now that we have learnt about the objectives government normally has for the economy, we can also review some of the policies used to reach those goals. Think of the objectives as the ‘where’ we want to be, and the policies as the ‘how’ we get there. The policies are like a map that helps us to reach the final destination, our objectives.
The first set of policies that government uses to reach its objectives are fiscal policies. Fiscal policy deals with government changes in taxes and spending on the public sector.
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Income tax is probably the most common tax that governments use to raise revenue. Essentially, it is a tax on the income that individual employees earn. The amount or percentage that an employee is taxed depends on how much he or she earns; many governments use what is called a progressive income tax, meaning that the more you earn, the greater the percentage of your salary is taxed.
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A tax on businesses is called profits or corporation tax, and normally applies to the profits of companies. An increase in this type of tax could impact business in two ways.
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The third type of tax is indirect tax. In South Africa and other countries, this normally takes the form of Value Added Tax (or VAT). This is a tax that is added to the prices of goods and services, resulting in higher prices.
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Lastly, governments can raise revenue and impact the balance of payments through import tariffs and quotas.
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The second set of economic policy set by government is the monetary policy.
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