It’s pretty obvious that the economy has an impact on businesses in many ways. But, how exactly does an economy impact businesses? Are there more positive or negative impacts? And, most importantly, why does this matter?
I will be going over some key economic factors that are significant to our capitalistic businesses in the US. Before we dive into the topic for today, let’s make sure we have a clear definition of what an economy is and what economic factors are. First, an economy “is the total of all activities related to the production, sale, distribution, exchange, and consumption of limited resources by a group of people living and operating within it”, based on a clear-cut definition from investopedia. Economies are measured through economic indicators, like Gross Domestic Product (GDP) or the Consumer Price Index (CPI). Moreover, economic factors typically include unemployment, exchange rates, interest rates, inflation, wages, and supply and demand. These factors impact businesses because they cause prices to fluctuate. Thus, fluctuations in costs, like interest rates or inflation, determine supply and demand businesses experience. Because the market is volatile, the economic factors are constantly impacting businesses. This is why it is important to carefully understand these factors for businesses to strive.
Businesses require careful planning, like plans on budgets, marketing, and how to provide goods and services. Furthermore, land, labor, capital, and entrepreneurship, are the four vital resources a business needs. As a result, informed decisions regarding this information are made. In addition, it is the financial state of a business that is affected. For instance, if there is high inflation in an economy, consumers are unlikely to consume more non-durable goods; consumers would rather save their money. Thus, businesses selling non-durable goods would have low demand, and high supply. In macroeconomics, the theory here is that supply and demand have an inverse relationship. So, a company must identify the state of the economic factors to forecast how to generate maximum revenues. They must prioritize the customer’s need, their rate of returns on investments, and the valuation/
Us, customers, are affected by the economy. We are the bsuiensses’s labor, capital, and/or entrepreneurship. If our purchasing power is collectively low for a certain period, business's capital would decrease, vice-versa.
Three other economic factors I will touch on are the following: exchange rates, interest rates,, and unemployment. Take note, that there are many more factors that you can find on the sources below.
First, exchange rates are the value of a country’s currency. For example, the US currency, the dollar, and Japan’s currency, yen, have different values, so they must be exchanged, They affect the prices of imported and domestic goods. Thus, if a business depends on another country’s imports, they must determine if the exchange rate would boost profits or not. If their country has a weak currency, then that would increase the price. The sales of goods are influenced.
Second, interest rates affect the cost of borrowing- it can make it more or less expensive. The lower the interest rate, the better, because it means there is more money available to invest. Businesses and companies would have incentives to take risks when investing.
Third, unemployment deals with labor. The word “unemployment” can be misleading. Many assume that unemployment means that you don’t have a job, when in reality it means that you are actively searching for a job but cannot get a job. High unemployment usually resonates with recessionary states in an economy because it reduces our purchasing power and economic output. So, demand decreases, which means a business will be unlikely to make much profit. As a result, 49% of small businesses believe that the US is in a recession. Smaller companies have less resources available to them, so they more directly experience the volatility of consumer spending and its effects.
All in all, economic factors cause businesses to regularly adjust their system. They must critically evaluate their supply and demand, their employment rate, and their costs. If you aren’t making a profit, what’s the point, right?
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