Economic policies not only have a direct impact on the business environment, but they also change aggregate demand, which has a significant impact on business activities. Let us look at the various factors that can influence aggregate demand.
To change the level of GDP, the
government can use either fiscal or monetary policy (GDP). If the current level
of GDP is less than full employment, the government may implement expansionary
policies such as:
- Tax cuts
- Increased spending) Increases in money supply to raise the level of GDP and
- Reduce unemployment
Stabilization policies include
both expansionary and contractionary policies. Stabilization policies are a set
of actions designed to reduce the level of GDP to its maximum potential output.
Stabilizing aggregate output is
extremely difficult. This is due to policy lags, or delays in policy stabilization.
Lags occur because decision makers are frequently slow to recognize and respond
to economic changes, and policies take time to implement.
In fact, ill-advised policies
can amplify economic fluctuations. Assume GDP is currently below full
employment but will return to full employment on its own within a year, and
that stabilization policies take a full year to become effective; if
policymakers attempted to expand the economy today, their actions would not
take effect for a year. However, if stabilization policies were implemented
today, the economy would be stimulated unnecessarily, and output would exceed
full employment.
Policy
mix
The combination of monetary and
fiscal policies in use at any given time is referred to as policy mix. A policy
mix consisting of reduced government spending and increased money supply would favor
investment spending over reduced government spending. This is because both an
increase in the money supply and a decrease in government purchases would cause
interest rates to fall, resulting in an increase in planned investment. The
inverse is true for a combination of expansionary fiscal policy and
contractionary monetary policy. This combination prefers government spending to
investment spending. Such a policy will increase government spending while
decreasing the money supply.
Factors
causing change in aggregate demand
Changes
in expectations:
Current spending is influenced
by projected future income, profit, and inflation. Consumer and business expectations
can have a significant impact on economic spending. Expected increases in
consumer income, wealth, or company profits, for example, encourage households
and businesses to spend more, increasing Aggregate Demand. Similarly, higher
expected inflation encourages spending now, before price increases take effect,
giving Aggregate Demand a short-term boost. When confidence falls, we can
expect an increase in savings and some companies to postpone capital investment
projects due to concerns about a lack of demand and a drop in the expected rate
of profit on investments.
Changes
in monetary policy (i.e. a change in interest rates)
Interest rates will fall as a
result of an expansionary monetary policy. This reduces the cost of borrowing
as well as the incentive to save, encouraging consumption. Reduced interest
rates encourage businesses to borrow and invest. There are time lags between
changes in interest rates and changes in aggregate demand components.
Changes
in fiscal policy
Fiscal policy refers to changes
in government spending, welfare benefits, and taxation, as well as the amount
borrowed by the government. For example, the government may increase its
spending, which is financed by a larger budget deficit, and this directly
increases Aggregate Demand. Income tax has an impact on disposable income; for
example, lower income tax rates increase disposable income, which should boost
consumption. An increase in transfer payments raises aggregate demand,
especially if welfare recipients spend a large proportion of their benefits.
Economic
events in the international economy
The business environment is
influenced by international factors such as the exchange rate and foreign
income. A fall in the value of the pound (£) makes imports more expensive and
exports less expensive, discouraging imports and encouraging exports. The net
result should be an increase in aggregate demand. The impact is determined by
the price elasticity of demand for imports and exports, as well as the supply
elasticity of exporters in response to exchange rate depreciation. Increased
overseas income increases demand for exports, and thus Aggregate Demand rises.
A recession in a major export market, on the other hand, will result in a drop
in exports and an inward shift in aggregate demand.
Changes
in household wealth
The value of assets owned by
consumers, such as houses and stocks, is referred to as wealth. A rise in house
prices or the value of stocks increases consumer wealth and allows for more
borrowing to finance consumption, resulting in an increase in Aggregate Demand.
A fall in the value of share prices, on the other hand, will result in a
decrease in household financial wealth and a decrease in consumer demand.
Environmental
degradation and Sustainable development
Environmental
degradation is defined as the deterioration of the
environment caused by the depletion of resources such as air, water, and soil,
as well as the destruction of ecosystems and the extinction of wildlife.
Environmental degradation is one of the ten official warnings issued by the
United Nations High Level Threat Panel. On May 1, 1998, the World Resources
Institute (WRI), UNEP (the United Nations Environment Programme), UNDP (the
United Nations Development Programme), and the World Bank released an important
report on global health and the environment.
Environmental
degradation is defined by the United Nations International Strategy for
Disaster Reduction as "the reduction of the environment's capacity to meet
social and ecological objectives and needs."
There are various types of
environmental degradation. The environment is degraded when natural habitats
are destroyed or natural resources are depleted.
The special section of World
Resources 1998-99 in this report, Environmental Change and Human Health,
describes how preventable illnesses and premature deaths continue to occur in
large numbers. Millions of people will live longer, healthier lives if vast
improvements in human health are made. An estimated 11 million children, or one
in every five, will die before reaching the age of five in the world's poorest
regions, primarily as a result of environmental diseases. Child mortality is
higher than in Norway and Switzerland combined, and is primarily caused by
malaria, acute respiratory infections, or diarrheal illnesses, all of which are
largely preventable.
Sustainable
development (SD) is a resource-use pattern that aims to meet
human needs while preserving the environment, so that these needs can be met
not only now, but also for future generations (sometimes taught as
ELF-Environment, Local people, Future). The Brundtland Commission coined what
has become the most frequently quoted definition of sustainable development as
development that "meets the needs of the present without jeopardizing
future generations' ability to meet their own needs."
An organization operates within
the economic environment and, as a result, has an impact on the environment in
which we live. The importance of protecting the environment and renewing the
resources that are used is a growing concept.
