How Macroeconomics affects business
How Macroeconomics affects business
Macroeconomics is a branch of economics that explores trends in the national economy as a whole considering the study of the sum of individual economic factors. Macroeconomics considers the larger picture, and an understanding of how do business operates is crucial to understand macroeconomics. Macroeconomics is intertwined with business because business is affected by the factors that constitute macroeconomics. Circular-flow diagram: a visual model of the economy that shows how dollars flow through markets among households and firms. Using this diagram it can be clearly observed how some factors can influence business operations..
Business is affected by many economic activities.
These activities are: Interest rate increase, taxes increase, unemployment rate increase, Inflation.
Interest rate is a rate which is charged or paid for the use of money. Increase of interest rate has a great affect on several consumption opportunities.
1. As it can be observed from the graph, if interest rate increases the consumption expenditures of households will decrease, which means that company’s profit will decrease. In future it will lead to decrease in production output. In order to be competitive companies will need to cut wages or even fire somebody from the personnel, which will again lead to decrease in consumption opportunities. 2. Affect on cost of borrowing.
Many companies around the world make their business by loaning money from the bank. If interest rate increases, the interest payments on credit and loans become more expensive. Therefore this discourages companies from borrowing and widening its business. Companies who already have loans will have less disposable income because they spend more on interest payments. 3. Increase in mortgage interest payments.
In majority of cases companies borrow mortgages to buy already existed place for operations or to build a new building. And if the mortgage interest will increase even by very little percent, it will have significant impact on businesses disposable income. That’s why it will be more profitable for them to rent an apartment rather that to buy a new one. 4. Reduced Confidence. Interest rates have an effect on business confidence. A rise in interest rates discourages investment; it makes firms less willing to take out risky investments and purchases
A fee charged by a government on a product, income, or activity.
Here are some effects of taxes on business operations.
1. Taxes lower overall gains.
There is a statement in accounting which calls income statement. In income statement all revenues and expenses are written. After subtractions of all expenses out of revenues there is a column which name is Earnings before interest and taxes. Results of “before tax” and “after tax” business cases can look quite different. Where the business case shows gains or net cash inflows, taxes operate to lower overall gains because operating income and capital gains are normally taxed.
2. Low wages
Multiple governments levy so many taxes on businesses that “taxes” is the highest budget items on the ledger sheets of most businesses. These taxes take away some of the money otherwise used to pay wages. That’s why employers can’t pay good wages. 3. High prices
In many countries governments put many taxes on businesses that “taxes” is the highest budget items on the ledger sheets of most businesses. Businesses have to raise prices to get money to pay these taxes. So product prices go up. This leads to inflation.
Unemployment is an economic condition marked by the fact that individuals actively seeking jobs remain unhired.
There are several reasons of unemployment in a country. They are:
1. Worldwide financial crisis
Companies do not have enough money to hire new staff to the company and to increase their outcome.
2. Population increase
When, for example, baby boomers reach the age of 18, they start to search for a job, but the number of work places did not increase. That’s why many of them become unemployed.
3. Low qualification
The majority of companies nowadays try to employ more qualified workers, and people that are less qualified fail to find a better job
4. Replacement of workers by technologies
In todays world technological progress is very visible. In many factories people force is replaced by machine. And if 10 years ago in order to produce one detail you need 10 people, today you need only one or two persons who will watch after this process of production
Unemployment has a direct impact on all business. People buy products and services and if they do not have a job they will buy less products and services. That is why increasing unemployment often results in many businesses reducing inventories because they expect to sell less. Another reason is that many companies in order to develop and reach the new level of production need more qualified personnel. But if there is a shortage of qualified people, company can not develop at all and should whether stay at the same level of find other ways to improve. The third reason is that during the recessions and crisis companies should cut their expenses, that’s why in order to be competitive and do not decrease the level of production they should fire some workers
Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Effects of inflation on business.
1. People try to get rid of cash before it is devalued, by saving food and other commodities creating shortages of the saved objects. That’s why in a specific period of time, for example, one week, people will consume a lot of goods, but one week later they will not consume at all.
2. Increased risk – Higher uncertainties. Uncertainties in business always exist, but with inflation risks are very high, because of the instability of prices.
3. Existing credit companies will be hurt, because the value of the money they will receive from their borrowers later will be lower than the money they gave before.
4. Fixed income recipients will be hurt, because while inflation increases, their income doesn’t increase, and therefore their income will have less value over time.
5. Companies will think they were making profits while in reality they’re losing money if they don’t take into consideration the inflation rate when calculating profits.
6. Many companies will have to go out of business because of the losses they incurred from inflation and its effects.
7. Rising prices of imports if the currency is debased, then it’s purchasing power in the international market is lower.For the same amount of money companies will be able to buy less.
8. Competition. If there is a lot of competition in a market, businesses try harder to keep prices low to keep buyers. It means that companies will have less and less profit. Sometimes they will need to cut the wages. But staff do not like when the wages are cut. And if they will not find something else in order to cover their costs, they will soon become a bankrupt. In conclusion it can be said that Macroeconomics has a very big impact on the business operations. Economics intersect with business in almost everything. And whatever changes will occur in economics it will for sure display in business.