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LC: Business & the Economy

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R. Averill

on 23 January 2017

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Transcript of LC: Business & the Economy

Chapter 20:
Business & the Economy
Topic Objectives:

What is the Economy?

How does the Economy impact on Business?

Unemployment/Interest Rates/Exchange Rates
/Taxation/Government Grants

These are all 'economic forces' and they impact
on Business

How do these things impact on Business?
IDEA 3 - The ECONOMY

Economy: We hear this phrase almost
daily in the news:
"how is the economy doing?"
There is an important
link between the economy,
and how well Businesses are doing.
* DEFINITION - ECONOMY:
Activities related to the production and distribution of goods and services in a particular geographic region.
How do we measure the size
of the Economy?
1 United States
2 People's Republic of China
3 Japan
4 Germany
5 France
6 United Kingdom
7 Brazil
8 Italy
9 Russia
10 India

42 Ireland
(3)
(1)
(10)
(16)
(21)
(22)
(5)
(23)
(9)
(2)
(119)
Which Countries have
the largest Economies?
Which Countries have
the largest Economies?
(The LARGEST GNP)
GNP
(GROSS NATIONAL PRODUCT)
is the total value of all the
goods and services produced in a Country
in one year owned by people in that country
If GNP increases
from one year
to the next, we
have
ECONOMIC GROWTH
Economic Boom is when
GNP increases quickly
over a short period of time.
RECESSION is when
Economic Growth is negative
from one year to the next

A Slowdown in economic activity
ECONOMIC DEPRESSION:
When there is negative
economic growth for a long
period of time.
The Celtic Tiger
Ireland's GNP
Approx €160 Billion
LAST YEAR
Our National DEBT
Economic Variables:
(Variables are things
that change)
We must look at a number
of Economic Variables and
see how they impact on
Business Activity.
2. Interest Rates?
The Interest Rate:



High Interest Rates = Loans more
expensive for Entrepreneurs/Business/Households

Low Interest Rates = Loans
are cheaper for business
When a customer
puts money into a
Deposit
account
in the Bank, they
will be paid a small amount
of interest.
However, they will receive
less for 'lending' the bank
money than they would
pay for taking out a Loan.
This is one way the
bank makes a PROFIT
Interest Rates
Unemployment
Employment
Inflation
Exchange Rates
Taxation
Subsidies and Grants
IMPACT
Business SALES
Business COSTS
Consumer Confidence
We are in the EUROZONE
so our Bank Interest Rate
is set by the.......
EUROPEAN CENTRAL
BANK
*** KEY QUESTIONS:
If the Interest Rates
are LOW, how will
this impact on Businesses
and Consumers?
This is expressed
as a percentage of the
amount borrowed
Borrow €10,000
at 5%.

Must repay 10,000
+ 500

€10,500
REMINDER:

How do Business get finance
for Start-Up
and
EXPANSION?
1. If Interest Rates go down, Loans
become CHEAPER

MONEY is Cheaper to borrow, more
Businesses will start-up or expand.

They will invest in new Products (R & D)

= More Jobs being created
If you have a loan out
already and the interest
rate falls, what happens
to your repayments?
2. Repayments on existing loans
will decrease.

Business costs will
decrease, the business becomes more competitive and profits will RISE.
Impact on CONSUMERS?
1. Consumer Mortgage & Loan repayments are LOWER
= More spending POWER

2. Loans are CHEAPER & EASIER to get
= More CARS/HOLIDAYS/EXTENSIONS/TVS

3. People are LESS Attracted to SPENDING (low Rates
of interest) = SPEND rather than SAVE
THIS ALL LEADS to Consumers
spending more money

Which INCREASES BUSINESS SALES
and INCREASES BUSINESS PROFITS
Summary: LOW Interest Rates
= Should be GOOD for Business.

Sales
Profits
Investment
Expansion/Start-Up
What if Interest Rates are HIGH
or they RISE?
1. Decreased Business Activity ->

Business find it is MORE EXPENSIVE
to borrow
= POSTPONE/CANCEL
EXPANSION/START-UP
2. Consumers: HIGH interest
rates mean consumers will tend to
save rather than spend

LOANS are more expensive
so less likely to Borrow for
TV/CAR/HOLIDAY
Business profits will FALL
LOW INTEREST RATES
SOUND GREAT? BUT.....
If Interest rates are low for
a medium to long amount of
time, the BANKS will have very
little money to lend to people.

WHY?
Encourages DEBT.
How?
Businesses and Consumers
tend to borrow too much
if interest rates are very
low.

Some get into trouble and
cannot repay.
3. UNEMPLOYMENT:
The rate of Unemployment is
the percentage or amount
of the workforce who do
not have a job.
What is the LABOUR FORCE?
All people in Ireland who
are available to WORK...
so who is not included?
Students
Kids
OAPS
People who are sick/disabled
Impact on Business
of INCREASING UNEMPLOYMENT?
What does the GOVT.
have to do if there
are many people out of
Work?
1. INCREASED SOCIAL WELFARE
= INCREASED TAXATION to pay for it
Government 'Current Expenditure'
increases (day to day)

Businesses will perhaps face
higher Corporation Tax and VAT
CONSUMERS?
2. When unemployment
is high, CONSUMERS SPEND LESS.

In particular, people cut down on
non-essential items: New cars, holidays etc

People have less money so Business
sales and profits will fall.
3. FINDING STAFF:
Firms will find it easier to
fill staff vacancies. They
will have their choice of
available candidates .

-> PERHAPS LOWER WAGES to be paid...
WHY?
Falling profits can bring
more unemployment.
Why?
SO Lower Business Costs
4. Business Confidence:
How will things be in the future?

IF unemployment is expected to rise
or continue, investors will be unlikely
to put money into expansions/Start-Ups
CURRENTLY: Ireland = 7.3%
November 2016
3. TAXATION:

The government sets the rate
of TAXATION in the economy.

The different TAX levels impact on
Business.
IF TAX RATES ARE INCREASING,
Is this good or bad for Business?
GENERALLY ....BAD!
-> Consumers keep less of their income if income tax increases
-> Businesses keep less of their profits if corporation tax increases
-> VAT increases make products more expensive
LOW TAX ->

LOWER VAT or LOWER INCOME TAX
should increase consumer spending
and benefit Business
Lower Corporation TAX:
Business will earn more profits
and might be in a better position
to EXPAND
4. INFLATION
What is it?
When prices are rising.
Inflation is the annual percentage
increase in the general cost of living.
BUT How is it measured?
Consumer Price
Index (CPI)
The general price
of a 'basket' of
commonly used products is checked
every month
The price of an average
family's shopping is checked
every month.
**POSSIBLE QUESTION:
If inflation is HIGH,
what is the impact
on Business & the Economy?
1. WAGE DEMANDS:

Workers have to spend
more money to live.
They will demand higher wages.

Costs increase -------- Profits decrease
IF THEY DON'T give
Higher wages ?
Industrial Conflict, Strikes, Low Morale,
Staff leaving
2. CONSUMERS Spend less.
If prices are increasing,
Consumers have to be more
careful about spending.

LESS 'Spending Power'
Less Disposable Income

Shop Around
for the Best Price.
Cut spending.
3. Business require RAW MATERIALS
and other Products.

These prices also rise, so ...
Business Costs increase & bring profit levels down.
Ireland's current inflation
= Approx -0.1% (November 2016)
So actually - 'deflation'

4. Competitiveness:
If Inflation is high, our products
will be more expensive when
compared with Foreign Goods.

Less EXPORTS.. = Bad for Business

DEFLATION:

This is when the prices of
goods and services in the economy
decreases.

When inflation is below 0%.

5. Fall in SPIN-OFF BUSINESS
Manufacturers will look abroad for their Raw Materials and Services.
This will impact negatively
on Irish Business
("SPIN-OFF" Business will fall)

5. Exchange RATES:
*** Definition:
Exchange rate is the price at which a currency can be exchanged for another i.e. the price/value of the currency of one country in terms of the currency of another country.

How much will
one euro buy me in
DOLLARs/STERLING/ etc

-> Example:

Irish Firm sells Whiskey
to a US Shop for €100.

€1 = $1.20
So €100 = $120

The shop in the USA had
to 'buy' 100 Euros

It cost them 120 Dollars

If the RATE of Exchange increases
to €1 = $1.40
then the same bottle of Whiskey
will cost $140

So if the Euro becomes
STRONGER against the DOLLAR
i.e. Worth More, Irish Exports
will become more expensive abroad.

If the EURO becomes
weaker, our exports
will become cheaper for
foreign consumers


What sort of Items go into
this BASKET?
Short Questions
on this Topic
Economy & Business

Outline 2 ways in which
high interest rates can affect
Business

Outline 2 ways in
which high taxation
can affect Business

'Inflation was four percent during the
last three months'

Explain what this statement means
Explain what is meant by the
term Interest Rates
Explain the term
Inflation and how it is
measured.
What is meant by
the term 'Exchange rates'

Outline two effects of high employment
on the economy

Inflation affects Business by....
Indicate four effects of
an increase in Interest Rates

Outline the negative impact of business
on the national economy

If Interest Rates
are low, established
Businesses who have
a large amount of money
in the Bank will earn less
on their SAVINGS
Common Food Items
Cleaning Products
Energy
Transport
Fuel
Internet
Phone
Entertainment
Clothes
Cigarettes/Alcohol
Causes of Inflation?

Cost of Raw Materials Rise
e.g. Oil/Steel/Timber etc

So cost of production rises.
Prices must rise to cover this.

B- THE ECONOMY
6. WHAT are the main economic forces that impact on business? /ECONOMIC VARIABLES
Exchange
rates
Economic
growth
Environmental
issues

Unemployment
Govt
grants
Taxation
Interest
rates
Inflation
Business
7. HOW does inflation affect business?
Inflation “is the rise in price of products from one year to the next”

Low inflation is associated with periods of prosperity
It is also good for
encourages business confidence
creating competitive prices for customers
Exporting product to foreign markets
Keeping unemployment levels low as businesses are generating good profits
High inflation
damages business confidence
Reduces the willingness to invest
Reduces customer disposable income
Can lead to foreign investors withdrawing their capital form in economy
Causes interest rates to rise
Means exports are uncompetitive
8. Interest rates
Influence the cost and supply of money. Low interest rates instil confidence.
Lower interest rates lead to
businesses borrowing large sums of money to invest. This creates jobs.
More disposable income for consumers due to lower mortgages, cheaper car finance deals etc.
The negative side of the low IR would be for savers in banking institutions. They would be getting a low return on their savings.
High interest rates can lead to less spending and if continued could lead an economic recession

NOTE: 2008 –2009 Ireland is amongst one of the worlds leading countries that are in an economic recession
9. Levels of unemployment
When unemployment is high
it reduces the amount of disposable income, which can have negative implications for business
means higher taxes as well as high crime levels
People find it difficult to get work and may have to be retrained. For many there would be a confidence factor as well as there world of work having changed.
10. Government Grant Aid
The grants offered to Irish businesses are a huge incentive to develop company’s in this country.
These grants act to encourage indigenous (home grown) firms to set up here. (O’ Brien Sandwich Bar, Bewleys café)
It also helps to attract large TNC’s (Boston Scientific, Nortel, Google) to locate in this country.
This in turn helps to boost levels of employment and increases the wealth of the state.
Grants that from a particular sector of the economy, (i.e.) agriculture, enterprise, environment, technology & science etc. receive financial support from that area
NOTE:
Grants for expansion can be sourced from FORBAIRT, CEB’s, IDA Ireland.
11. Level of economic growth
Economic growth can affect business in the following ways
Confidence & sales: If GNP increases this has a knock on effect to the production and sales in the economy. This leads to confidence being instilled in consumers, businesses etc.
If GNP falls there will be a fall of in sales and this leads to business failures and possible unemployment/redundancies
2. Profits
One negative of excessive levels of GNP would be workers demanding wage increase in line with wealth of economy.
This could see increases in prices of goods and in turn high levels of inflation.
Also a decline in GNP will see increases taxes
12. Environmental Issues
Electronics, agriculture, tourism and services are Ireland’s main wealth generating industries and all stand to gain from a healthy environment. However the confidence of these areas may decline if the government continues in their belief to introduce “green taxes” .
The continued awareness of green products is hugely beneficial for Ireland as it already has a clean, healthy green image. This led the way for Irish firms to turn to the green way of thinking and as a result improve sales.
Product areas that were to the forefront of these sectors include, organic food, recycled products, eco-tourism, bottled water etc.
13. Taxation
Low corporation tax has played a prominent role in attracting foreign businesses to this country.
High corporation tax reduces the amount of profits the owners of a business can earn
If prices of goods are increased, the VAT added can discourage sales i.e. the price is to expensive
High employers PRSI contributions increase the cost of employing staff, therefore it may discourage businesses from employing new staff
ALSO the reduction in capital gains tax CGT from 40% to 20% has stimulated investment in the Irish economy.
14. Exchange Rates
Exchange rates are the “prices of one countries products expressed in terms of another currency”
Having strong currencies attracts overseas capital into an economy. A strong currency may lead to exports being over priced in foreign markets.
When a currency weakens it favours exporters, whose produce becomes cheaper.
A weak currency results in imported inflation. This could lead to industrial unrest, with workers demanding higher pay levels.
KEY DEFINITIONS
Downsizing
Inflation
Direct Foreign Investment - DFI
Manufacturing Industry
Recession
Depression
GNP
LC EXAM QUESTIONS
2004 20 marks
Using examples analyse the role of the Irish government in creating a suitable climate for business enterprises.

2001 25 marks
Analyse how the economic variables in the Irish Economy have an impact on a local economy?

2001 10 marks
Illustrate your understanding of the term “inflation”?
LESS DISPOSABLE INCOME
Spanish Unemployment: 20%
Greek Unemployment: 23%

Youth Unemployment in Spain = 42%
(16-24 year olds)
Is 0% unemployment
(FULL EMPLOYMENT)
possible?
Usa = 4.6%
Japan = 3.0%
UK = 5.4%
Average EU Unemployment
= 9.3%
6. Grants
& Subsidies
A Subsidy is a payment
from the Government to a Company
to support that company.

It is like a 'reverse tax'
For example:
Dublin Bus/Irish Rail do not
make a profit.

They must provide a public service,
so the Government supports them
financially.
Final Points on
Unemployment
Why does the Government
provide GRANTS?
Encourage Enterprise
and Business Expansion

Attract Foreign Companies
Job Creation
Wealth Creation
Where to get GRANTS?

IDA Industrial Development
Authority (for Foreign
Companies investing in Ireland

Local Enterprise Offices
-> For small local
companies

Enterprise Ireland
Bigger Companies aiming
to export internationally
Whether you
are successful and
how much you get:

Depends on......

What is the Grant for?
Is there good potential
for the Business?
Where will you locate?
Can the Government afford it?
IMPACT OF GRANTS:
1. Increase SALES:

Help Businesses start up
Help Businesses to MARKET
their products.

This should mean increased SALES
& Profits
2. JOBS:

Grants help businesses
to get STARTED and EXPAND.

This should increase employment
The grants offered to Irish businesses are a huge incentive to develop company’s in this country.

These grants act to encourage indigenous (home grown) firms to set up (O’ Brien Sandwich Bar, Bewleys café)

It also helps to attract large TNC’s (Boston Scientific, Nortel, Google) to locate in this country.
Cost-Push Inflation:



If demand for
certain products
is very high, the
manufacturer can
bring prices up
e.g. HAPPENS WITH
LOW INTEREST RATES!!!

Demand-Pull Inflation






1 EUR = 1.05 Dollars (1.34 last year)
1 EUR = 0.84 GBP

Today's Rates
2011 Leaving Cert Question
Higher LEVEL

Discuss the effects of increasing Unemployment
on the Irish Economy.

Not just on Business, but the
Economy as a whole

(A) Social Problems ->
Crime, poverty, drug abuse, alcoholism
(B) Long-Term Unemployment can mean many 'deskilled' workers

(C) Emigration -> BRAIN DRAIN -> Skilled people leaving for Canada/UK/Australia/USA
Increased spending
on Healthcare and
Law and Order
Simple Example: HIGH INTEREST RATES

A company borrows €100,000 for 1 year
Interest rate is 10%
You pay back €100,000 + interest of €10,000
ECB Rate is just a GUIDE to the real
interest rates...usually a few points
above this.
The Government
wants to keep unemployment
as low as possible...
5. OTHER SOCIAL IMPACTS of UNEMPLOYMENT?
Government & Business

Textbook Page 378

From Unit 6 Domestic
Environment

Chapter 19
What is this topic all about?
-> Businesses don't
just operate alone
buying and selling goods.

The Government plays a
role too.
What role does it play?
Why does it get involved?
How does it get involved?
What is Privatisation?
-> Seahorses Ireland Article

Read the text:

Think of examples: WRITE THEM DOWN

How has the government
intervened in the economy?
-> Taxation
-> Inflation
-> Interest Rates
-> Exchange Rates
-> Unemployment
-> Government Spending
And their
IMPACT
The things you hear on the news
We discussed the
FACTORS of PRODUCTION

LAND, LABOUR, CAPITAL, ENTERPRISE

Ireland has limited supply of these
things, so we must make
CHOICES on how they are used

-> The Government must make choices
on how it uses the LIMITED BUDGET
is has
1. Spend on a new School
2. Spend on a new Hospital
3. Give a Grant to a Foreign Company to
set up in Ireland
The Government has a choice
in HOW it runs the country

HAVE To decide....

What is PRODUCED
HOW it is PRODUCED


This is known as the ECONOMIC
MODEL
Intro
Free Market

Centrally Planned

Mixed
3 Economic Models
1. Free Market:

Private business provides
most Goods/Services
(They own the factors of production)

Profit is very important

Government intervenes very little
Hospitals are mostly private (Fee paying)

e.g. only 20% of Hospitals in USA are
Government-Owned

Schools are mostly private (Fee paying)

WHY not totally private?
No country is TOTALLY
FREE MARKET
Free Market
Mixed
Centrally Planned
Unit 6: Chapter 19 Economic Models
2. Centrally Planned:




'Command' economies
The government owns most or all
of the factors of production. They
decide what is to produced.
perhaps
more 'equal'



All employment is 'government' jobs.
can be INEFFICIENT (no profit motive)
No innovation/enterprise
3. Mixed Economy:

Basically a mix of the the
other two.

A strong private sector which is encouraged

A large Public sector to provide services
(financed through taxation)
See can you place the following nations
on the spectrum

USA
Ireland
United Kingdom
China
North Korea
Sweden
Germany
Japan
Russia
Cuba
IDEA 1
Economic Models
IDEA 2

Why does the Government
get involved in the Business World?

**Possible LC QUESTION
THINK


(i) Provides Services:

Provides essential services
such as?
Health,
Education,
Security,
Communications,
Transport,
Energy,
Water
Why does the Government
bother to provide these?

Just let a Company do it....
A Private Company only
wants to make profits.

They will ignore those
who cannot pay, or areas/places
where they can't make a profit.
EXAMPLE: Transport Services?

Education?
(ii) MAKE LAWS AND RULES:
Government Regulation
EXAMPLE

->How Businesses can be set up
and how they can operate


EXAMPLE: Companies Act 1963->
Deals with formation of companies
(iii) PROTECTS Consumers
and Employees
Consumer Laws: Protect
against faulty products/false advertising

Employment: Discrimination, Equality,
Unfair Dismissal, Health and Safety
in the Workplace
(iv) Provides INFRASTRUCTURE:







Government spends their
CAPITAL BUDGET on...

Roads, Railways, Water pipes,
Gas pipes, Electricity Grid,
Telephone Network,
Broadband,
Airports
Once again, the idea is that
a Private Business would not / could
not pay
for these things.

THEY USE THEM all the time, but
they couldn't afford to provide them.
(V) Develops Natural Resources:

Again, private companies will not
develop natural resources because
they won't make enough profits
or they think it would be too risky:

Bord Na Mona - Turf/Peat
Bord Gais - Natural Gas Network
Coillte - Grow and Cultivate Forests
?
Why does the
Government
Intervene in the
Business World
(the Economy)?
(VI) Redistribute Wealth

Many people in society get
caught in 'poverty traps'
due to health issues/disadvantage
etc

The govt. intervenes to try to
CREATE A MINIMUM standard of living

Tax the well-off more
to pay for Social Welfare
(VII) Stimulate Economic Growth

-> The Government will try to help
businesses to START in Ireland

-> Try to attract Foreign Companies

To get people working if the economy
isn't providing enough....

e.g. Give Grants

USE what is known as FISCAL POLICY
(Govt. Spending Money)
WHY
1. Taxation POLICY



Taxes are 'Mandatory payments
of money to the government'
Used to pay for Government
services.
Main
TYPES of TAXATION?
Corporation Tax
PAYE
VAT
Excise Duties
Import Duties
PRSI
Stamp Duty (1% of House Purchases)
Local Property TAX (new)
*The Government decides
the level of Tax in the Economy.

They can increase and decrease the
levels.
Try a LEAVING CERT QUESTION on TAX

2009: Discuss how the Irish Government
could use the TAX System to create a positive climate for business in Ireland.
Use examples to illustrate your answer (20 Marks)
You can be asked to
'DISCUSS the impact
of an increase in TAXATION
on

Consumers
Employers
Enterprise (people starting
a new business)
*You need to know how a change
UP OR DOWN in one of these
might IMPACT on the economy
EXAMPLE of GOVERNMENT USING TAX SYSTEM to boost the Economy

*Low Corporation Tax (12.5%)

The Government is using this to Stimulate
Economic Growth

Very High Taxes can bring FRAUD/CORRUPTION

If taxes are high people will try to EVADE them

e.g. get paid in CASH, SMUGGLE goods

This is known as the
BLACK ECONOMY
Current TAXES in Ireland

Income Tax
Low Rate is 20%
HIGH RATE is 40%

VAT (Valued Added Tax)
Current Rate is 23% for most
items

Corporation Tax (business profits)
12.5%

MOTOR TAX
Ranges from €200 to €2000

Property Tax
Ranges from €90 to over €2000

Universal Social Charge
Another tax on income

STAMP DUTY
Tax on buying a House - 1% of Price

Slight Change in Budget 2016 -> We will Pay LESS USC

** LEAVING CERT

Potential over the next
few years that TAXES will
be lowerd sightly.

-> What is the impact of
this for business?
* The Government could TARGET
Taxes e.g. offer companies
a special low rate of corporation
tax if they setup in the
WEST of IRELAND ...Why?
Low
Tax
Example 2:

REAL EXAMPLE
The IFSC

When the IFSC opened,
companies were given
a special CORPORATION
tax of 10%
Intro:
Ireland is currently in an economic downturn. The government can try to use the tax
system to create a positive climate for business.

1. Value Added Tax: (Explain/Example)

2. Corporation Tax: (Explain/Example)

3. PAYE (Income Tax) : (Explain/Example)

4. Other Taxes (Property/USC/Motor): (Explain/example)

5. Direct Targeting of Taxes (Corporation): Explain/example
1. TAX
**VERY IMPORTANT

Taxes are used to CHANGE BEHAVIOUR

Can be used to change....

1. SPENDING BEHAVIOUR

2. ENCOURAGE INVESTMENT

Trend had
been taxes
increasing
What does a
Positive climate
for
Business mean?

-> Low Corporation Tax
-> Consumers with lots of money
(Lower VAT and Lower PAYE)
-> Other taxes on consumers removed (USC? Property Tax)
-> Tax Incentives e.g. Tax Relief
for 3 years for new business
If Businesses weren't regulated,
they could

Treat Employees badly (Unfair Dismissals Act)

Produce without caring about the Environment (Pollution Laws)

Say whatever they want in Adverts (Consumer Protection Act)

Not worry about Health and Safety (Product Safety Laws)

Become a Monopoly (e.g. Ryanair/Aer Lingus -> Competition Law)

Government sets down the rules
and regulations which Businesses
must follow so they don't.....

CUT CORNERS or
Act Unfairly
The Economic Cycle:

The GROWTH in a country
tends to go UP and DOWN
over time.
Economic Policy
by the Government
Fiscal Policy
Monetary Policy
FISCAL POLICY = Spending Money
(got from Taxes)

Current Budget = Day to Day expenses
e.g. Public Sector Wages
Capital = Long Term Projects
(infrastructure) Schools/roads etc
Every Year (December) the government does
their Budget for NEXT YEAR.
This shows both Current and Capital

AT THE MOMENT - LOTS OF CUTBACKS!!!!
We have a budget deficit
WE SPEND MORE THAN WE MAKE in TAXES
= NATIONAL DEBT -> Have to borrow...
Sometimes it is good to spend more than you have

-> 'Kick Start' the economy
-> spending = money in people's pockets
-> But you will pay for it 'down the line'

WITH TAX INCREASES AND LESS SPENDING
MANAGING DEMAND
The government changes
tax and spending
to try
to alter the level of
business
activity.
(PEOPLE BUYING THINGS)

-> Spend more & tax less
= Good for business (increases demand)

-> Spend less & tax more
= Bad for business (decrease demand)
This means trying to control the amount
of money available in a country

e.g. Printing or creating more money
Encouraging people to SAVE/BORROW

The European Central Bank does this
for us now.



Approx €205 Billion
IDEA 4
IDEA 5: Economic Variables
The Government always wants steady, gradual growth
= GOOD FOR WINNING ELECTIONS/GETTING VOTES!
*INCOME TAX (PAYE)

Pay 20% on 33,800 of your wages
anything over that you
pay 40%

These are known as BANDS

The government can change these
(i) Increase in VAT

MEANS PRICES in SHOPS GO UP


HOW THIS IMPACTS on the ECONOMY
Consumers have to spend more
so they have
less disposable income

Bad for business = less sales = less Profits

Businesses have to buy things (raw materials) so this price goes up -
Some companies can claim VAT back

Business have to collect this money (more admin)

Confidence for the future would be NEGATIVE
You try a DECREASE IN VAT

Say the government decided to reduce VAT from
23 % to 20% -> How would that impact on Business?
(ii) Change in Corporation Tax:

Increased from 12.5 to 15%


COMPANIES KEEP LESS PROFITS

= LESS money to EXPAND
= LET PEOPLE GO
= LESS PRODUCTION

= CLOSING DOWN/LEAVING IRELAND
= UNEMPLOYMENT
(iii) Increase INCOME TAX/LOWER TAX BANDS

E.g. increase from 20% to 23%

=> People bring home less money
=> Less SPENDING
=> LESS SALES
=> LESS PRODUCTION
=> LET PEOPLE GO

FEWER NEW COMPANIES STARTING *****
-> As there is low Consumer Confidence
and a Negative 'Climate'
What about a decrease
in Corporation Tax?
What about a decrease in
INCOME TAX?
Example 3: Tourism Tax Rate (2011)

In Ireland, VAT on tourism
e.g. Hotels/Restaurants/Sites
is 9% (not 23%)

= Can keep prices a little lower
= Attract Tourists
= More SALES/PROFITS






Borrow €100,000 for 1 year
Interest Rate is 1%

You pay back €100,000 + interest of €1,000

* People and Businesses will be more likely
to SPEND / SETUP / EXPAND
* Profits will be higher as costs are lower
LOW INTEREST RATES
*The Profits the business can make
are reduced because they have to
pay back more interest
READ EXAMPLE PAGE
393 of your TEXTBOOK

"Explain why a rise in interest
rates is bad for the business in this example"
The ECB set what is known as
the 'BASE RATE' of interest for
the Eurozone.

Banks use a slightly higher rate
but are INFLUENCED by the ECB

e.g. ECB lower the rate
the banks lower their rates
The Government measures Unemployment
every Month with the
LIVE REGISTER

= Amount of people drawing social welfare

Also every Quarter using the
Quarterly National Household Survey
LC QUESTION

2011 Higher Level

"Discuss the effects of increasing unemployment
on the Irish Economy" (20 Marks)

4 Points (Headings/Explain/Example)


BE CAREFUL -> effects on the Economy
= Discuss impact on Business (Positive & Negative)
= Discuss impact on Government Expenditure
= Discuss social effects (impact on Government Spending)
NEXT: Still 'Idea 5' -

We looked at TAX + did L.C Question
NOW:
-> Interest Rates
-> Unemployment
Because.... people don't
put their money into
SAVINGS accounts if interest
rates are very low.
2006: LC question

"Evaluate the Impact of Interest Rates
and Inflation on Irish Business" (20 Marks)


Look at 'Interest Rates' half of this question

10 Marks
HOW TO APPROACH IT
Define Interest Rates

Briefly explain the impact of an interest rate rise
on Business (EVALUATE is it good/bad)
Briefly explain the impact of an interest rate fall
on Business (EVALUATE is it good/bad)

This leads to a COMPARISON
for one month to the next

Finish Question from 2006 (we did the first half)

'Describe the impact of inflation and interest
rates on the Irish Economy' 20 Marks

We have done the first half of that question...
Try the second half...

If inflation is happening (prices rising? impact?)
If it is steady or deflation (prices same/falling impact?)

BE BRIEF... remember only 10 Marks going for this.

KEY IMPORTANCE!!!! NEED TO GET THIS IDEA
good or bad for business?
Generally BAD....
for EXPORTING




Good or bad for business?
Exchange rates change
from DAY TO DAY based
on supply and demand
for different currencies

*This can be difficult for
business...How can you
judge future costs of
raw materials from China etc?

We are in the EUROZONE

so when we trade with other
Eurozone countries, there is
no difference...
Imagine the EURO becomes
stronger e.g.

€1 was = $1.20
Now €1 = $1.40

For €1,000 we can now buy American raw materials
worth $1,400 instead of $1,200

good for Importers
Worksheet REVERSE...you fill it in

If the EURO becomes WEAKER...what
effect does this have?

Read EXAMPLE:

Page 397

What about CONSUMERS?

If the Euro is STRONGER...we can
import things cheaper...

so we will buy from abroad
instead of .....?
STRONGER EURO
Buying IRISH
/Domestic Goods...


* Hasn't come up as
a LONG question
in the LC Higher Level

2010 Short Qs
BUDGET 2016

Some Small Changes

TAXES / EXCISE:

No VAT changes
Corporation = 12.5%
*Kept the 9% VAT in Tourism Sector

Rolling Tobacco 20cent increases
Cigarettes -> extra 40cent on 20 Pack

2014

*New 'start your own business' scheme for
those unemployed for at least 15 months
-> No income tax for 2 Years
= TARGETED TAX INCENTIVE


FISCAL Policy
* Changes in SPENDING

The Irish Government
and the Labour force
Workers & Employment
are a hugely important
in the economy

How can the Govt
impact on the
Labour Force?
1. ->
AS AN Employer:
Up to
300,000
people work for the state:
Running education, health,
security, govt. departments,
transport, local authorities etc

almost 20% of the work force
Directly reduces
unemployment
2. ->
Low Income Tax/VAT:
Will boost job numbers
Why? More people will want
to work + higher sales for companies
= more jobs
4. ->
Govt Spending:
on
infrastructure, education
and training will bring
increases in employment
3. ->
Grants/Community
Schemes
will bring
employment through
encouraging enterprise and
business.
Enterprise Ireland & the IDA
works to entice Foreign-based
companies into Ireland to
provide jobs & Irish entrepreneurs
to get started or expand
e.g. Construction Jobs
Potential Exam Question:
"How does the Government
affect the Labour force?"

Meaning increase it? Decrease it?
Government
Worksheet Activity: 2004 LC Question

How could the government create a positive climate
for Business?

Use the worksheet, fill in bullet points in each box







FOR EACH POINT, You need to provide a REASON
e.g.
Keep Interest Rates Low - Reason -
Encourage spending,
encourage businesses to setup and expand
Imports become
more expensive
for Consumers

Raw Materials become
more expensive for Business

Euro becomes stronger vs Sterling
Enterprise Ireland: Success Stories

1. Name the companies mentioned in the video

2. What do they do?
Final Section

a small number of ideas...
HEADING:
The Government as an EMPLOYER
Different STAGE AGENCIES:

State agencies exist to provide
services

MIX AND MATCH -> See can you
match the Agency with the
'Type of Service' being provided
In the last chapter, we
discussed
Privatisation
and
Nationalisation

REMINDER?
*PPP: Public-Private Partnership

This is where the State is providing a service
but they allow a Private Business to get involved

e.g. A private company will have a contract
to build a motorway.

They design/build/run it
Sometimes pay for it
They can charge for it
(e.g. sections of the M50 and other major Roads)
Why do it? Advantages?
Disadvantages?
Advan:
Managed by a business -> Quicker/more efficient
Cheaper usually, less delays/problems

Disadvan:
Lose out on Charges/Fees


Problems of State Ownership?

What do the state do badly?
****
LC 2008
Evaluate the arguments in favour
and against privatisation

Privatisation vs
Nationalisation

We need to know
the arguments in favour
of Privatisation and
against it
Privatisation &
Nationalisation
?
Semi-State Companies are
organisations created by
the government for various
reasons.
1. Commercial State Companies:
TRY TO MAKE MONEY
Dublin Bus, Irish Rail,
RTE, ESB etc
2. Non-Commercial
State Companies
IDA, Enterprise Ireland,
Equality Authority etc
DON'T CHARGE FEES
Privatisation:
Selling of the state companies
to buyers in the private sector
Telecom Eireann (1999)
Irish Sugar
Irish Steel
Aer Lingus
Irish Life
Nationalisation:
Is the transfer of ownership of
firms from the Private Sector to
the public sector.
The Govt buying
private companies:

e.g. Anglo Irish Bank
What do you need
to know about this?
define: Privatisation/Nationalisation

Give Examples of each.

Give the arguments for and against
FOR:
1. Raises Money
Government sells off something
they make money e.g. Telecom Eireann
2. Reduced Expenditure:
Many of these
state companies made a LOSS so you
no longer have to cover that loss.
3. Efficient/Better Run:
Private companies are usually run and
managed better. They are focus on making
money = PROFIT MOTIVE
4. Access to CAPITAL:
Private firms can borrow money
from banks etc. State run agencies
can't do this
5. Competition:
Often state owned companies had a monopoly.
When they are privatised it opens the doors
for more competition which is good for consumers
AGAINST:
1. Losing Important Services:
The government will no longer control
important state companies e.g. Transport, communication,
energy etc
2. Unemployment:
Many people work in these state
companies. Often when they are sold,
many people are made redundant as the
private owners 'downsize'
3. Services will stop:
Poor people, vulnerable people, people in isolated
areas will no longer have services provided for them
4. Profit Motive/Prices:
Private companies want
profits = prices going up
5. Costly:
It is expensive to sell
a state company. Must pay
for advertising, marketing,
preparing accounts etc
Divide your Notes
page half and half
Read Journal Article
Handout

Grants are offers of
funding (money) for certain
things -> Generally don't need to be repaid
FREE MONEY
2013 - > This topic came up in
a rather different way..
LC Question: 2013
Outline the Role of the Irish Government
in ENCOURAGING and in REGULATING business in
Ireland (20 Marks)

Divide this up -
1. Encouraging (2 Points)
2. Regulating (2 Points ) e.g.
Consumer Law, (2 Laws Page 19,22)
Data Protection, (Page 95)
Unfair Dismissals (Page 47)
Employment Equality Act (Page 46)
Industrial Relations Act (Page 40)
Homework Question


2008 Higher Level Paper

'Evaluate the Arguments For OR Against
the privatisation of state Assets' (20 Marks)

Be very careful...it is FOR OR AGAINST

20 marks -> 3 Key Points + Evaluation
5 Marks for each point, 5 for evaluation

Point 1

Point 2

Point 3

Evaluation of all 3, this is good because/bad because
The Government uses
National Development
Plans
to set out their ideas
for spending over approx 5 Years
National Development Plan 2007-2013
Capital Investment Plan 2012-2016
Capital Investment Plan 2016-2021
Government Spending

See Print out


USC

Small Changes which
will result in people
paying less.

JobPath
€12 million will be provided for the new employment activation programme JobPath.

EDUCATION:
Increased spending on schools and universities

BUSINESS:
Government planning a 'knowledge box' tax incentive. For companies who are innovative
and come up with new patents/ideas, any profits
from these ideas are charged at 5% Corporation Tax

Homework
Question

2009
Think of LAWS
we deal with
in this subject..
What are the reasons
for their existence?
Over the last 5 years
the govt. has been cutting
expenditure to IMPROVE
the Deficit
http://www.irishtimes.com/news/ireland/irish-news/capital-investment-plan-2016-2021-the-main-points-1.2371783
Look at the
Capital Development
Plan 2016-2021
Example 4: (2015)
Knowledge
Development Box

Special 5% Corporation Tax rate for
unique or innovative
patents developed
in IRELAND
One method
is measuring the
Gross National Product
of a Country (GNP)
If Income Tax decreased
from 20% to 18% at the lower band
and 40% to 39% at the higher band

What would be the IMPACT on the ECONOMY?
Consumers = More Disposable Income = More Spending

For Businesses = More Sales, More Profits, Increasing
Employment, Expansion -> More optimistic about the Future
but this seems
to have stopped

-> we expect
slightly lower
taxes over the
next few years
Put €10,000
in a savings account
at 3%

Receive
€10,000 + 300

= €10,300
Rates in Ireland
are quite Low at
the moment.

You will earn between
2% and 3% for your Savings

A small Business Loan
has an interest rate of 5-7%
They will fall!



This is good for
a Business with
existing loans
LOW INTEREST RATES & CONSUMERS
Look at the difference
in the Question
from 2015
Generally
Countries aim
for 3-4% unemployment
2015 Higher Level

"Discuss the economic effects on the Irish economy of the growth in employment in recent times." (20 Marks)
1. More Consumer Spending
2. Companies expanding more and investing more, Foreign Companies coming in
3. Government day to day spending drops - Less Jobseeker's Benefit spending
4. Government will take in more Income Tax, VAT and Corporation Tax and will
have to borrow less
5. Less Emigration, Less Brain Drain, Less Crime/Fewer Social Problems
Unemployment has fallen from 14.4% in 2011 to 8.8% in 2015
The EURO has become significantly
weaker against the Dollar in the last year

from €1 = $1.34 to €1 = $1.07

So an Irish Product that cost €100
last year cost Americans $134
now costs $107 = good for Exporters

53,000 items
are PRICE-CHECKED
PROBLEMS SUCH AS:
Simple Example:

Bus fares rise from
€3.50 per day to
€4.00.
A person who uses
the bus 300 days a year
Price goes from
€3.50 x 300 = €1,050
€4.00 x 300 = €1,200
= Costs 150 per year
= Less Disposable Income
= Cut other spending
Oil
Steel
Timber
Food
Plastics
*** Problems of Deflation ***
NOTE: Ireland is experiencing this!

Consumers in the short-term have more spending power
so can buy more things.
If they think prices will fall further, they HOLD OFF making big purchases
This drains demand from the economy
So Businesses suffer lower sales/profits and people get laid off
Summary:

Stronger Euro
= Good for Importers
= Bad for Exporters

Weaker Euro
= Good for Exporters
= Bad for Importers
Example: USA
Linked
with COMMUNIST
REGIMES
e.g. Ireland, Germany,
Sweden, Denmark
BREXIT meant that
Sterling Dropped in value
against the Euro

This was BAD for Exporters
-> People in the UK could
buy fewer Euros for their
Sterling = Less buying
from Ireland
Also how the Government
can influence them...
WHAT WE NEED TO KNOW......
(i) Increase in VAT..

e.g.

Government changes
VAT from 23% to 30%.

A car that cost
12,300, now costs
13,000.....
Example 1:
Regional Low
Taxes
This attracted Banks, Accountancy and Insurance Firms to Ireland
These are all examples
of the Government using
TAXES to try to 'encourage
a positive economic climate' -> See Exam Qs
Full transcript