1. Macroeconomic Policy

1.1 Economic Policies and objectives
Microeconomics is concerned with the economic behavior of individual firms and consumer or households.
Macroeconomics is concerned with the economic at large, and behavior of large aggregates such as the national income, the money supply and the level of employment.
 

（1） FISCAL POLICY
Fiscal policy is an action by the government to spend money, or to collect money in taxes, with the purpose of influencing the conditions of the national economy.
Government spending: ‘injection’ into economy
Taxes: ‘withdrawal’ from the economy
If government spends moreà increase expenditureàraise demand （expansionary policy）
If government reduces taxàstimulate demand （expansionary policy）
If government raise tax or reducing spending àreduce demand （contractionary policy）
 

（2） MONETARY POLICY
Monetary policy is the regulation of the economy through control of the monetary system by operating on such variables as the money supply, the level of interest rate and the conditions for availability of credit.
Money supply
Money supply increase à price increase à money income increase à demands increase
Interest rate
Interest rate has a strong influence on economic activity.
Interest rate rise à saving rise/borrowing fall à demands fall à price fall àinflation rate fall
Interest rate policy and business
Interest rate rise --- cost of borrowing rise – deterring business investment/expansion
 

（3） EXCHANGE RATES
√An exchange rate is the rate at which one country’s currency can be traded in exchange for another country’s currency.
√Exchange rates are determined by supply and demand in foreign exchange market.
√Government manage exchange rate to influence import/export and balance of payments.

Consequences of an exchange rate policy
●To rectify a balance of trade deficit（import>export ）à make fall in the exchange rate à stimulate export
●To prevent a balance of trade surplus àmake limited rise in the exchange rateàstimulate import
●To stabilise the exchange rate of the currency, as exporters and importers will then face less risk of exchange rate movements wiping out their profits; a stable currency increases confidence in the currency and promotes international trade.

Exchange rate system
◆Fixed exchange rates
◆Floating exchange rates
√Managed floating exchange rates （sometimes called a 'dirty float'）
√Freely floating exchange rates （sometimes called a 'clean float’）

Exchange rates and business
◆A lower exchange rate
√Domestic goods are cheaper in foreign markets à demand for export increases
√Foreign goods are expensive à demand for import decreases
√Imported raw materials are expensive à costs of production increase
◆A higher exchange rate
√Domestic goods are expensive in foreign marketsà demand for export falls
√Foreign goods are cheaper à demand for import rises
√Imported raw materials are cheaper à costs of production fall
 

1.2 Competition policy
The Government influences markets in various ways, one of which is through direct regulation （eg the Competition and Markets Authority in the UK）.
Regulation: any form of state interference with the operation of the free market.
Examples: regulating demand, supply, price, profit, quantity, quality, entry, exit, information, technology, or any other aspects of production and consumption in the market.
Monopoly
A monopoly situation can have some advantages:
In certain industries, achieving a monopoly a company will be able to benefit from the kinds of economies of scale and hence minimize prices.
Establishing a monopoly may be the best way for a business to maximise its profits.

Adverse consequences:
Companies can impose higher prices on consumers.
The lack of incentive of competition may lead to companies have no incentive to improve their products or offer a wider range of products.
There is no pressure on the company to improve the efficiency of its use of resources.

Oligopoly
●The Competition and Markets Authority can also be asked to investigate 'oligopoly situations' involving explicit or implicit collusion between firms, who together control the market.
●The investigation is not automatic. Once the case has been referred, the Authority must decide whether or not the monopoly is acting 'against the public interest’.
●If so, the possible results:
>>Price cuts
>>Price and profit controls
>>Removal of entry barriers
>>The breaking up of the firm （rarely）
 

Merger
●A prospective merger may be referred to the Competition and Markets Authority for investigation if a larger company will gain more than 25% market share.
●Their investigations may take several months to complete during which time the merger is put on hold. Thus giving the target company valuable time to organise its defense. The acquirer may abandon its bid as it may not wish to become involved in a time consuming Competition Commission investigation.

Restrictive practices
Some countries have legislation which deals with restrictive practices that distort, restrict or prevent competition.
Examples:

price-fixing agreements : agreements with direct competitors resulting in them colluding to the disadvantage of the consumer
predatory pricing :The abuse of dominant position offences, charging low prices to unfairly destroy competition.
 

Deregulation
Main aim is to introduce more competition
Removal or weakening of statutory regulation of free market activity.
Allows free market forces more scope to determine the outcome.

Benefits:
Improved incentives for cost efficiency:
eg .greater competition compels managers to try harder to keep down cost.
Improved allocative efficiency
eg. competition keeps down prices closer to marginal cost, and firms therefore produce closer to the socially optimal output level.
 

Privatisation
It is a policy of private enterprise into industries which were previously state-owned or state-operated.

Three types:
Deregulation of industries, to allow private firms to compete against state-owned businesses
eg. Bus and coach services, postal services
Contracting out work to private firms which were previously done by government employees
eg. Refuse collection, hospital laundry work
Transferring the ownership of assets from the state to private shareholders.

Advantages:

Increase competition, to improve allocative efficiency
Make industry more cost-conscious （shareholders as owners and under scrutiny from stock market investors
Provide immediate source of money for government
Reduces bureaucratic and political meddling
Wider share ownership

Disadvantages:
State-owned industries are more likely to respond to public interest
Encourage private competition may cause potential monopoly operation

 

1.3 Government assistance for business
High technology industries
High unemployment areas
Economically depressed area
Selective firms and industries: robotics or fiberoptic
 

1.4 Green policies
There are a number of policy approaches to pollution, such as polluter pays policies, subsidies and direct legislation.
Externalities are positive or negative effects on third parties resulting from production and consumption activities.
Examples:
Production: river pollution from various manufacturing processes.
Consumption: motor vehicle emissions causing air pollution and health hazards.

Solutions:
Levy a tax on polluters equal to the cost of removing the effect of the externality they generate: the polluter pays principle.
The application of subsidies which may be used either to persuade polluters to reduce output and hence pollution, or to assist with expenditure on production processes, such as new machinery and air cleaning equipment, which reduce levels of pollution.
Impose legislation laying down regulations governing waste disposal and atmospheric emissions.

Advantages of ‘environmentally friendly policies’ for a business:
●If potential customers perceive the firm to be environmental friendly, some may be more inclined to buy its products.
●A corporate image which embraces environmentally friendly policies may enhance relationships with the public in general or with local communities.
●People （potential employees） may prefer to work for an environmentally friendly business.
●‘Ethical’ investment funds may be more likely to buy the firm’s share.

 

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