Government influence on business activity Part 1

Government influence on business activity Part 1

(Monday 23 February 2009)

By : Anang P.Setiawan

How does the government affect business?
Like business, government has objectives. The economic objectives are :
Aiming towards full employment (Aiming to have as many people with jobs as possible)
A low level of inflation (a low rate of increase in the general level of prices)
A stable of payment (to balance the imports againts the exports)
Improving the standard of living
Closing the gap between the rich and the poor (trying to give everyone a more equal income)

It’s very difficult for the government to achieve all these objectives at once.
Governments usually try to meet the five objectives but because they can’t achieve them all at once, they may have to make choices.

In order to achieve of the objectives, the government needs to influence the economy. The three economic policies are :
Fiscal Policy
Monetary Policy
Direct Controls.

Fiscal Policy
Fiscal policy involves the government adjusting the level of demand in the economy by altering government spending and taxation. Government can influence the level of activity. If it can help to raise demand, firms will produce more and employs more people. This can be achieved by lowering taxes so that people will have more money to spend and this will increase demand. Or, the government can spend more on building roads and so forth and create more demand.
Fiscal policy has been used to create demand and thereby reduce unemployment.

Monetary Policy

Monetary policy involves the control of the economy through interest rates and the money supply. The aim is to control inflation. The central bank set the level of the interest rate and supply of money to meet this target. The bank may raise the rate of interest if it wants to control inflation. This will reduce the amount of money the banks lend out and will reduce demand in the economy and discouraging people from borrowing. Furthermore, firms will have to reduce costs when demand falls in order to attract buyers with lower prices. As a result, prices may fall.

Direct Controls
Fiscal and monetary policy are both directed by government but their effects may be unpredictable and they do not control all aspects of the economy. In order to influence the economy in areas other than demand the government may wish to use direct controls. There is a wide range of controls that government can use in order to influence the economy. These include regional policy and monopoly policy.

Regional Policy
Over the years the staple industries of the UK (iron and steel, coal and ship building have declined. (they need to locate near to raw materials). As they began to decline, new, footloose industries began to develop ( industries that are free to locate whereve they choose).
It made some areas developing high rate of unemployment. Government have directed financial policies towards these areas.
E.g : in UK, 2 schemes that have been created to help these regional areas are Regional Selective Assistance and Entreprise Zone.
Regional Selective Assistance offers grants in order to encourage firms to locate in a development area (Merseyside, the highlands of Scotland, South Wales and Tyneside)
Enterprise Zones were created in the 1980s offering rate-free accomodation and tax advantages to firms that moved into the zone. ( Enterprise Zones have been created include Swansea, Corby, Salford and Trafford, and Clydebank and Glasgow.
Grants from EU are also available to regions that qualify for UK grants.
The European Regional Development Fund (ERDF) funds has the aim to create jobs by fostering competitive and sustainable development.

Monopoly Policy
A government is able to influence not only where a firm locates but also the way in which it competes both domestically and internationally.
A firm that controls the supply of a good or service is known as a monopoly.
It controls over the market. (the firm can limit the supply, raise prises and offer a poor quality of product.
The consumer have 2 options : either buy in the condition offered or not.
In the UK, these companies used to owned by government in order that they could watch over the industry to ensure that the customer would be exploited.
In 1980s many of these companies were privitised . In order to avoid any problems, all privatised companies are monitored by their own regulator body. E.g. OFGAS which was set up to investigate complaints by the customers of Centrica (formely British Gas plc) which has been privitised but still has few competitors.
The Office of Fair Trading was established in 1973 to ensure that all businesses compete fairly.
The Competition Commission will investigate any proposed merger or existing monopoly that againts the public interest. The Commission can recommend action to the Secretary of State who may ban an unfair practise or stop a merger that is found to be againts the public interest.

End of Doc. (Anang P.Setiawan)