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Unit 6: External Influences

IGCSE Business Studies revision

Government Objectives

We can identify five main government objectives when discussing the economy. The economy refers to the activity of all businesses within a country and can be manipulated by the government. Indeed, the government's aims are:

  • Economic growth
  • Low and stable inflation
  • Low and stable unemployment
  • Balance of Payments stability
  • Income equality
  • These will now be explained individually

    1. Economic Growth

    Economic growth is an increase in the value of goods and services produced in a country over time. The value of goods and services is the total price of all goods/services multiplied by the total amount produced, in a time period. This is also known as Gross Domestic Product. Therefore, when our GDP increases, we get economic growth.

    Reasons why economic growth is desirable

  • It indicates more jobs are available (so employment increases)
  • If there are more jobs then more people have an income, so spending rises, creating even more jobs
  • The government receives more tax revenue and spends less on benefits
  • It indicates a wider variety of goods and services available in the economy
  • 2. Low and Stable Inflation

    Inflation is the continuous increase in price levels in an economy in a certain time period. Governments like to have a target of 2-3% inflation in a year.

    Reasons why low and stable inflation is desirable

  • If prices are rising too quickly, businesses may stop investing as they are worried about profits
  • If prices are rising quickly, profits may be harmed as supplies become more expensive
  • It is easy to predict future earnings and investments when inflation is low and steady
  • High inflation puts off investors, leaving companies with less money
  • 3. Balance of Payments stability

    The Balance of Payments are a record of all flows of money made from international trade for a country. It is broken down into three sections (the current account, the capital account and the financial account). The current account records the value of all exports - the value of all imports. If the value of exports is greater than the value of imports then there is a trade surplus but if the value of imports exceeds the value of exports then there is a trade deficit

    Reasons why a stable Balance of Payments is desirable

  • If we run a trade deficit then money will be leaving the country, leading to less production and less jobs, so less economic growth
  • Trade deficits eventually have to be paid back, one way or the other.
  • A continuous trade surplus leaves companies reliant on other countries purchasing their products
  • A continuous trade surplus means most goods and services leave the country, leaving poor domestic choice
  • 4. Income Equality

    Income equality refers to the gap in earnings between the richest and poorest members of society. It can be measured in terms of income earned or as a percentage. It is usually achieved through a fair taxation system.

    Reasons why a income equality is desirable

  • An unfair tax system leads to a large black market, which means less government revenue
  • High income inequality may mean a lot of unemployment and even immigration
  • High income inequality means that a large section of society are not spending money, leading to less jobs than the potential in a country
  • Poor tax systems mean the government is not getting the most it can in revenue
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    Video: The Trade Cycle

    The Business Cycle

    This attempts to show fluctuations in real GDP over time. Economists generally predict rising GDP over time (this is known as a trend , but sometimes we achieve above or below our estimated figures.

    When GDP is increasing, we enter into a boom . During this period, jobs are increasing, people are spending money and money is entering the economy. This does not last forever though. The highest point during a recovery or boom is a peak .

    After this, for various reasons, unemployment starts to rise and people begin to spend less money. As a result incomes fall and we enter a recession . A long recession may also be knnown as a slump . The bottom of a recession is known as a trough .

    The distance between two peaks or two troughs is known as an economic cycle , hence the title trade cycle diagram .

    The video to the right further illustrates how trade cycle diagrams can be constructed and used.

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    Government tools

    The government may use two types of tools to achieve its aims. These are known as Demand-side policies and Supply-side policies . Demand-side policies attempt to get or stop people spending in an economy, whilst supply side policies aim to encourage or reduce production. We can look at these further, below.

    Demand-side Policies

    These can be broken down into two types:

  • Fiscal Policies - This is the use of government spending or taxation.
  • Monetary Policies - This is changing interest rates. The interest rate is the price of saving or borrowing money. If you take $100 out of the bank you will have to pay back a percentage more than the $100 - this is the interest on borrowing. Similarly, banks offer interest on saving by promising to add a % to the money you put into a bank. The Central Bank sets the minimum interest rate
  • How fiscal policy affects business activity

    How interest rates affects business activity

    Supply-side Policies

    These can be broken down into two types:

  • Interventionist - This is when the government gets actively involved in an economy to increase production
  • Market Policies - This is when the government retreats from the economy to let it naturally adjust
  • How taxes affects business activity

    Taxes can either be direct (on income, profits or wealth) or indirect (on spending, like VAT, customs duties and excise duties).

    Business and the Environment

    Businesses have a direct effect on the environment around them, and likewise the environment effects them. Global warming causes problems for farmers and tourism, whilst extreme temperature changes may change spending habits. It is neccessary, therefore for businesses to treat the environment with respect by being sustainable. Sustainable development involves meeting the needs and wants of the present generation without compromising those of future generations. This therefore means trying to do more with less. There are several ways we can do this:

  • Wasting less and being more efficient - through production techniques like Kaizen and Just-in-Time
  • Recycling materials - by doing this we do not exploit more of the earth's natural resources
  • Re-using instead of replacing machinary - looking after existing capital will mean less new ones needed
  • Using bio-friendly materials - like paper bags instead of plastic bags
  • Tasks

    1. Read through the hyperlinks above
    2. Pick three of the best ways to be sustainable, and explain them to a partner
    3. What do you think the disadvantages of your choices for a business and government are?
    4. Why do you think it's in a firm's interest to be sustainable?

    Nevertheless, businesses will always have an effect on the environment. We can calculate how beneficial or how costly a business is to society. We do this through the following equation:

  • Social Benefit - Social Cost
  • If Social Benefit is greater than Social Costs then the business is good for society and we want it to set up. If Social Benefit is less than Social Costs then the business is not good for society and we do not want it to set up.

    But what is social benefit? Social benefit is how much everyone in society - Producers AND Consumers - are better off by the presence of a company. We can therefore break social benefit down into two componants: Private Benefit (the revenue that the producer gets) and External Benefit (the value that consumers are better off by through the actions of the firm). For example:

      Private Benefit: $150 000(revenue)
      External Benefit: $20 000 (wages to new staff, value of using new infrastructure, health benefits etc)
      Social Benefit: ($150 000 + $20 000) = $170 000

    Similarly, we must break down Social Costs. Social costs are how much everyone in society - Producers AND Consumers - are better off by when a company is at work. We can therefore break social cost down into two componants: Private Cost (the costs the producer pays e.g. materials) and External Costs (the value that consumers are worse off by through the actions of the firm). For example:

      Private Cost: $30 000 (costs of production, advertising)
      External Cost: $40 000 (pollution, value of congestation etc)
      Social Cost: ($30 000 + $40 000) = $70 000

    In this example above Social Benefit = $170 000 and Social Cost = $70 000 so we can clearly see that overall, this company benefits society by $100 000 ($170 000 - $70 000). The company is therefore valuable for society

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    Video: Sustainable Development
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    Pressure Groups and Environmental Laws

    Case Study: Paua New Guinea Rainforest destruction & sustainability Tasks Use the following links to put together a case study; 1 page maximum: include; Map locating Papua New Guinea Brief summary of the problems the country faces & some of the effects they are having. Schemes or efforts to make the country/operations more sustainable. Conclusion - are these schemes having much sucess. Links Papua New Guinea - Case Study revision notes - Papua New Guinea Main page Extract from a report on achieving sustainablility in Papua New Guinea Guardian 2012 - video about the problems in Papua Guardian article supporting the video above

    River profile & characteristics: upper, middle & lower valley. Bradshaw model. Waterfalls. River discharge: define, measurement (cumecs).


    Ethical issues a business might face; conflicts between profits and ethics • How business might react and respond to ethical issues, e.g. child labour

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    Figure A1.2 Storm Hydrograph


    Pakistan Floods 2010

    Flooding is the most obvious and devastating hazard of living close to rivers. Pakistan experienced severe flooding in 2010 that displaced millions of people.


    1. Watch Video 2.31 and use these links:Interactive map, about news.
    2. Identify the main physical and human causes of the floods
    3. Describe the main effects of the floods (people, economy, food supplies).
    4. Use this article to describe some of the methods being used to reduce the impact of future floods.
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    Watch the video and answer the following questions

    1. What is globalisation?
    2. Give three reasons why globalisation has been increasing
    3. Explain 3 positive effects of globalisation
    4. Explain 3 negative effects of globalisation
    5. Do you think the positives outweigh the negatives for businesses in your country? Explain your answer
    6. What do you think the government could do if business were being harmed by globalisation in your country?
    7. In your country, can you identify the effects of globalisation in the last 10-15 years?

    Responses to globalisation

    Protectionism involves governments attempting to reduce imports (goods being bought from abroad) or increase exports (goods being sold to other countries). There are several ways this could be done.

  • Tariffs
  • - These are a tax on imports. If a country wants to protect a domestic industry they could tax imports of the competing firms. Foreign prices are therefore higher, leading consumers to buy the domestic goods instead.

  • Quotas
  • - These are a physical limit on the amount of imports allowed into a country. A country can protect domstic producers through these since once the import quota is reached everyone else has to buy domestic alternatives.

  • Embargoes
  • - These are a complete ban on a country’s exports. Examples would include countries that are at war (in the 1920s the equivalent of the UN tried to put an embargo on oil against Italy for their invasion of Abyssinia).

  • Subsidies
  • - Subsidies are when a government seeks to stop imports by making domestic goods cheaper. They do this by giving money to small domestic firms. This protects them from large companies that can create economies of scale through trade.


    1. Read this article, identify which types of protectionism are mentioned and explain why they are being used.
  • Multinationals

    Reasons for Multinationals

    You should be able to explain where these erosional processes take place eg: attrition and abrasion occur largely in the upper course where the larger more angular rocks scrape and collide when they move.

    • Hydraulic Action: pressure/force of the water loosening material & widening cracks in the river bank.
    • Abrasion: the scraping action of material being transported.
    • Attrition: the breaking of stones when they collide with other material.
    • Corrosion: the dissolving of rock (limestone etc) by acid in the water.

    Advantages to Host Country of Multinationals

    You should be able to describe the changes in the typeof transportation that occur with distance from the source.

    • Traction: the rolling of stones & rocks. Usually larger rocks.
    • Saltation: stones/rocks bouncing. Usually smaller rocks due to the energy required.
    • Suspension: very small particles being carried along in the river current.
    • Solution: dissolved material (invisible).
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    Disadvantages to Host Country of Multinationals