Page 309 - Cambridge IGCSE Business Studies

24: Government economic objectives and policies

Import tariffs/customs duty

Governments can also raise money by charging import tariffs or customs duty on
goods that are imported from other countries. This helps the government control

the number of imports, so that local businesses do not incur loss of sales. Import

tariffs may increase the costs of local businesses that rely on imported raw materials

for making their goods. The duty is calculated as a percentage of the value of goods
being imported.
Table 24.2 explains the effects of an increase in import tariff/customs duty on

consumers and businesses and how businesses may respond to this.

Policy change Effect on consumers Effect on businesses Business response

Increase in ■ Imported goods or ■ Lower sales for businesses selling ■ Businesses may decide to use
import tariff s/ goods using imported imported goods. local raw materials which may be
customs duty. raw materials become ■ Increased cost of imported raw cheaper, but quality may suff er as
more expensive. material may lead to higher cost a result.
of production. ■ Local firms may set up more
■ Local firms may benefit as branches and expand.
demand for their products will
increase.

Table 24.2 The effects of an increase in import tariff s/customs duty

Sales tax
This is the tax paid by consumers on the purchase of some items. There will be 307

different rates of sales tax depending on the type of item. Sales tax may be known

by a different name in some countries; in Brazil it is known as IPI.
Excise duty
This is the tax paid by a manufacturer on the production of specific goods within the

country. In India, the government has diff erent tariffs for different classes of goods.

Government borrowing
Tax rates can only be altered to a certain extent. Governments also borrow
money from the public in order to fund their spending. This money can

be borrowed locally by issuing treasury bills and bonds, which people and
organisations of the country invest in. Governments may also borrow from
other countries, but this can be expensive.

How businesses respond to changes in
government spending
The money raised through taxes is used by the government to improve the

infrastructure of its country.

The government can affect economic growth by controlling its own spending.
If growth is slow, the government can increase its spending in areas such as

schools, hospitals and transportation. This will create more jobs in these and
other dependent sectors. For example if the government spends more on roads,
then construction firms that build and repair the road network will benefi t. Th is

will encourage businesses to think about growth. Alternatively, the government

can affect the level of business activity by reducing its spending, or discouraging
businesses from expansion.