Business is affected by the external environment as it is by the competitors. It is important that firms are aware of the changes in the external environment to be successful. Understanding the influence of Macroeconomic factors helps the firms to determine the current market conditions and how beneficial will they be for the success of their business. Various macroeconomic factors that influence the business are:
a. Economic Growth. Economic activities refer to the level of buying and selling activities happening in an economy over a time period. It is a highly complex activity and keeping accurate track of it is beyond comprehension. Economic activity is not constant and can change rapidly, thereby affecting the business.
Economic activity changes could happen due to the following reasons:
- Changes in income levels
- Future prospects of individuals.
- Future of the economy
- The level of economic activity in the world as a whole
- Political activities around the world
- Natural disasters - like hurricanes, earthquakes, or flood etc
- Changes in prices of raw materials - oil, metals, fuel, energy and so on
- Changes in world stock markets
The level of economic activity is usually measured by GDP (Gross Domestic product). It refers to the total amount of goods and services a country produces. Businesses are greatly influenced by the economic activities. When GDP rate falls or slows down, there will be a fall in demand for good or services offered by businesses. As a result, businesses will witness a fall in revenues and profit margins. To curb this business will have to reduce their prices to increase the sales. This could further lead to increase in unemployment. On the other hand when there is an increase in GDP, the demand for products will automatically increase and hence the prices will go up. To cope with the increase in demand business will need to employ new people resulting in reduction in Unemployment rates.
b. Inflation: With the increase in Inflation there will be an increase in the level of prices of products and services over a specific period of time. As a result the firms will have to incur higher costs of operations. This will be also due to the increase in wages of the employees.
c. Interest Rates: Interest rates are the charges levied by the banks for lending a loan. Increase in Interest rates will directly influence the business as businesses borrow money from the banks from time to time. Increase in interest rates will lead to higher interest expense: Businesses will have to incur higher costs to repay the loan. Interest rate changes also affect customers who in turn will affect the business. In case of increase in interest rates the amount that individuals need to pay to borrow the money will increase thereby, reducing the demand for large products in the market. Further, if the interest rates decrease then the charges on a loan to buy larger items like cars, electrical equipments are likely to fall. As a result, a large number of people might be willing to buy such items. There will be a sudden increase in the demand for the products offered by such businesses.
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