What Are the Advantages and Disadvantages of Economic Environment Factors?

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In business, the economic environment describes several factors beyond marketers' control that directly impact the performance of companies and the buying habits of customers. Economic environment factors include large or macro environment factors and small or micro environment factors, all of which can influence marketing strategy.

TL;DR (Too Long; Didn't Read)

A nation's economy is affected by a number of large (macro) and small (micro) factors that represent its economic environment. These factors change often, and businesses must adapt and remain resilient to succeed and for the economy to remain stable.

Macroeconomic Factors

Macroeconomic factors assess economic demand and are managed at government levels. These factors include gross domestic product (GDP), interest rate trends, inflation, exchange rates, unemployment, tax rates and recessions.

Gross domestic product, the total value of goods and services provided in a year, measures how favorable a business environment is. Sustainable growth in a strong market is considered ideal for businesses. Conversely, negative GDP trends represent an unfavorable economic environment.

Companies rely on interest rates to determine how cheaply businesses can borrow money. Lower interest rates make it easier for businesses to expand or refinance debts. This results in lower payments and therefore frees money for investing back into a company. However, higher interest rates discourage borrowing and expansion. These rates also affect customers’ borrowing habits for goods such as automobiles. Interest rate changes therefore represent potentially significant risk for businesses, because asset values can change with the rates.

Inflation represents the rising price of goods and services over time. Low inflation rates indicate a healthy economy, whereas high inflation rates result in marked price increases that may outpace wage increases. This leads to less consumer spending, and as a result, businesses do not increase production. Deflation, the declining rate of goods and services, is also problematic. Consumers tend to curtail spending, so companies produce fewer products. This creates a negative cycle of reduced workforce needs.

Undulating exchange rates affect international supply chains especially. They affect businesses that import or export goods. When exchange rates change, companies may have to pay overseas suppliers more; this would in turn affect a company's profit. Taxes can affect company behavior as well because tax cuts may encourage raising output, whereas tax increases may reduce output.

The unemployment rate refers to the number of unemployed people as a percentage of the labor force and who are actively searching for work. This rate serves as an economic predictor because without jobs, workers lose wages and therefore purchasing power. This affects other businesses due to the loss of spending for goods or services. A higher unemployment rate also indicates competition for jobs between skilled and unskilled workers. This can produce continued unemployment as lower-skilled workers are pushed out.

Microeconomic Factors

Microeconomic factors are related to consumer spending behavior and their income. These factors include suppliers, competition, demand for products and services, resellers, company distribution chain reliability and the general public.

Consumers drive the demand for goods and services. Suppliers control the amount of product available, so their availability and quality must be taken into account. Resellers work between retailers and wholesalers. Competition exists among businesses with similar products and services. Businesses also must rely on a solid distribution chain to move products to consumers. The general public’s behavior drives all these factors.

A Dynamic Environment

A nation’s economic indicators give a broad spectrum of economic health, which ebbs and flows based on response to the dynamic environment. On a smaller scale, these larger indicators affect how consumers behave and therefore drive business. The public will behave based on how strong people believe their economy to be. A strong economy portends increased consumer spending, which drives companies to increase production. The rise and fall of economic cycles, and unforeseen threats to economic health can threaten sustainable business growth. While any one company cannot control many of these factors, risks can be assessed and addressed to remain resilient.

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About the Author

Dianne dreamed up other worlds and their characters as a child in the 1980s. She formed her own neighborhood astronomy club before age 10. In addition to writing stories, she drew and painted her characters, designed outrageous space fashions, and created travel guides for the worlds she invented. As an adult, Dianne earned a life science degree and worked in research for several years. Dianne also composed content for a biotech career website. Today Dianne writes both fiction and non-fiction.