The government has several aims that are beneficial for business activity, they are:
1. Low Inflation: It means that the prices keep rising at a normal rate, and they don’t rise too fast and if they are rising too fast the government will get involved. A low inflation encourages businesses to expand and it makes it easier for a country to sell its goods and services abroad.
2. Low Levels of Unemployment: This is too keep the number of people who don’t have a job low, because people that are unemployed produce no goods or services so the lower of output in the country will be lower than it could be.
3. Economic Growth: This is when the level of output of goods and services in the country increases. This means that the GDP increases and so does the standard living of the population.
4. Balance of Payments: The aim is to have balance between exports and imports. This is means that there should be more exports than imports.
The government has 3 economic policies to achieve the aims above. This policies influence business activity in a variety ways and I will explain them further. The way in which they influences business activity are many and the variety of strategies used are extensive. The economic polices used by the the government are:
1. Fiscal Policy – taxes and government spending
2. Monetary Policy and interest rates
3. Supply Side Policies
Fiscal Policy is any change that the government makes in tax rates that are put on businesses or public sector spending.
These are the most common taxes:
1. Income Tax: This is a tax on people’s income. The higher the income the greater the amount of tax. This affect businesses because individual taxpayers would have a more limited income. The most affected businesses are the ones that produce luxury goods.
2. Import Tariffs and Quotas: An import tariff is a tax on an imported product and a import quota is a physical limit to the quantity of a product that can be imported. These are to reduce the number of imports. How do they affect? Well, first local firms will have an increase in sells since the price of exported products is higher. Second, business which import raw materials or components for their own factories would have to pay more. Finally, other countries may take the same action so exporting would be more difficult.
3. Profits Tax or Corporation Tax: This is a tax on the profits made by the business. This affect business activity because: 1. Businesses would have less profit. This makes it more difficult for the business to expand. 2. There would be less money to pay back to the original owners of the business.
4. Indirect Taxes: These are added to the prices of the products we all buy. They make goods and services more expensive. It affects business activity in two ways. First, prices at shops would rise. Therefore, consumers may buy fewer items making the demand lower, affecting many businesses.
All the governments spend money in different things to make their country or city better. This expenditure is very important to some of the businesses there.
1. Construction of firms will have advantages of new road building scheme.
2. The defense industries will gain if the government decides to re equip the army
3. Bus manufacturers will benefit from the government spending on public transport.
Monetary Policy and Interest rates:
This is a change in interest rates by the government or a central bank. An interest rate is the cost of borrowing money. In some countries business and individual people can borrow money and pay interest on the amount of money they borrow. This affect business activity in many ways. First, firms with existing loans will have to pay more in interest to the banks. This will reduce their profits. Also, new investment in business activity will be reduced because the price of money is too high. Therefore, factories and offices will not be built. Next, if consumers have taken out loans such as mortgages to buy a house then the higher interest payments will reduce their disposable incomes. Therefore the demand would fall. Finally, consumers will not want to buy things like car and house because the price of money is too high.
For example, a borrower is likely to feel a lot happier about a car loan at 8% when the inflation rate is close to 10% (as it was in the late 1970s) than when the inflation rate is close to 2% (as it was in the late 1990s). In the first case, the real (or inflation-adjusted) value of the money that the borrower would pay back would actually be lower than the real value of the money when it was borrowed. Borrowers, of course, would love this situation, while lenders would be disinclined to make any loans.
Supply Side Policies:
These are used by the government to improve the efficient supply of goods and services in there is in their country. Government have try to make their economy more efficient. Their aim is no increase their competitiveness against the industries from other countries. They want their businesses to succeed expand and employ more workers. This is when they created some policies that are called supply side policies.
Some of the policies are:
1. Privatization: it is the aim is to use the profit motive to improve business efficiency.
2. Improve training and education: it is when the government plans to improve the skills and education of the country’s citizens to have more skilled workers.
3. Increase competition in all industries: this may be done by reducing government control over industry or by acting in opposition of monopolies.
The areas that are mainly directly controlled by the government are:
1. Production decisions – what firms cannot produce and can produce
2. Responsibilities to employees
3. Responsibilities to consumers
4. Responsibilities to the natural environment
5. Local decisions
How does the Salvadorian government affect my business?
My business “Pitas & Nudos” is in the Art and Crafts Centre, so the government does indeed affect my business. All the economic policies are applied on my business that means that I have to pay taxes and all those things, this is not so good for me and my income, but the money gained in taxes will later help the government build things for the public.
The Fiscal Policy affects my business because I am a sole trader (my own boss) therefore I pay taxes on the incomeI gain. In El Salvador it is called the “Ministerio de Hacienda” which is the ministry that puts taxes on businesses and on individuals like me. The Ministerio de Hacienda would put a tax rate on my business to pay for roads, hospitals,public schools, etc.
The government can also affect the location of my business and if I want to locate my business in a park or beach the salvadoran government might not allow me to do that because I could damage the park, beach and its environment or disturb other people. That means I can’t locate my business wherever I want, this means that the government may have some restrictions. Also, I can’t locate my business in a residential area, because the government will not allow me to do it.
Monetary Policy affects inflation in a way that wages and prices will begin to rise at faster rates if monetary policy stimulates aggregate demand enough to push labor and capital markets beyond their long-run capacities. In fact, a monetary policy that persistently attempts to keep short-term real rates low will lead eventually to higher inflation and higher nominal interest rates, with no permanent increases in the growth of output or decreases in unemployment. As noted earlier, in the long run, output and employment cannot be set by monetary policy. In other words, while there is a trade-off between higher inflation and lower unemployment in the short run, the trade-off disappears in the long run.
Policy also affects inflation directly through people’s expectations about future inflation. For example, suppose the Fed eases monetary policy. If consumers and business people figure that will mean higher inflation in the future, therefore they’ll ask for bigger increases in wages and prices. That in itself will raise inflation without big changes in employment and output and this affects my business in an extreme way.
El Salvador Government has put certain laws like “La Ley del Consumidor” or in english The Consumer Law, this is a law that protects the consumer like my costumers to not be mistreated or unfairly for example if I am making the people pay for me giving them classes to do jewelry and bags I have to ask for a accessible price not an ginourmous amount. Also, I have to give good quality classes. So the government will make sure that the consumer is not wasting its money on unnecessary things. Therefore this law makes things like giving high prices for one class or other things illegal.
There is also a Salvadorian law which protects the employees. So, I will be employing people to help me in my business. This law protects them from being exploited or mistreated. This law makes me have suitable working conditions for my employees. A place which is clean and that has enough room for everyone. Also, it makes me have give my employees a limited amount of work hours. I can’t give them for than the limit, it is illegal, and I have to pay them for extra hours. Another thing, is that this law makes me have some safety regulations at work for my employees not to be injured. So, I have to warn them if I am using sometime of machinery that it is dangerous. Additionally, the law makes me pay them no less than the minimum wage. If they work extra hours I have to pay them. Also, I have to pay them according to how much work they do.
There is also a ministry in El Salvador called “El Ministerio del Medio Ambiente” which protects the environment. So, if I am producing many waste in my business and I have to get rid of it, this ministry makes me get rid it in a garbage bin or in recycle bins but not in rivers or in the sea, this can cause many diseases that can lead to death or other things. This law also doesn’t allow me to burn the garbage because that can damage the atmosphere and the environment.
“La Superintendencia del Sistema Financiero” this is a part of the government which is the one that control how much you have to pay when you do a loan. So, if I want to make a loan to pay for air conditioning if this sector want to put a high interest rate I wouldn’t be able to make the loan. So, they affect my business in that way.
Finally, you can see that the government makes a huge impact on business activity and on businesses, as you can see they make all these policies to find a way to gain money for the public, but they are also looking for ways to make businesses succeed and expand. I can also conclude saying that without this economic policies businesses would be a chaos and there would be no expanding or output for the government so this might not help the country.