Macroeconomics entails the study of the overall economy as a whole rather than individuals and companies. Macroeconomic factors or macroeconomic conditions affect the national economy, including geopolitical problems and fiscals. The macroeconomic factors affecting business incorporate inflationary rate, unemployment rate, interest rate, and economic output, among others. The variables in macroeconomics usually affect populations rather than individuals. For example, inflation and unemployment rates affect a population. Also, they are indicators of how the economy performs by looking at businesses and government functions or operations and how they collect revenue. If a nation manages to control inflation, there will be a decrease in the unemployment rates because businesses can hire in mass. The government can collect enough revenue, and the currency will be strong. Microeconomic factors also include regulations and taxes that may affect a business's investment process, which is vital in building a nation's economy.
Macroeconomic factors include:
- Incorporating the study of aggregate: Macroeconomic factors primarily deal with the aggregate concepts and the economy as a whole. They look at all the external factors affecting the economy, such as the national output and employment levels.
- Incorporating the study of income theory: This primarily involves analysis of the aggregate demand and supply. The macroeconomic factors help explain why the national income keeps on fluctuating due to variables such as inflation and deflation.
- Interdependence: Another feature of macroeconomic factors is interdependence between them. This means that a change in one variable, such as the level of investment, will eventually affect other variables such as output, income, and employment levels.
- Policy-oriented: This means they suggest suitable economic policies that promote other variables affecting economic growth such as employment and inflation.
Some of the differences between micro and macroeconomic factors include:
- Macroeconomic factors deal with broader issues such as the unemployment rate that may affect the economy. In contrast, microeconomic factors deal with specific attributes on a small scale that have input on the economy, like consumer behaviors.
- Microeconomic factors address the issue of resource allocation and price-related discrimination that affect the growth of an economy. In contrast, macroeconomic factors deal with national household problems like the unemployment rate affecting the economy.
- Microeconomic factors refer to those elements such as regulations and taxes that may affect a business and individuals' business decisions. On the other hand, macroeconomic factors incorporate external elements that are broad indicators of an economy's financial decline or growth.
Unemployment Rate
The unemployment rate indicates the number of unemployed individuals actively seeking a job but are unable to secure any. It affects the business directly because they lack the required skills due to the lack of money to pay for these talents. Also, if fewer people are in the workforce or are not available for work, business owners may have to increase wages to find great skills and keep the existing talent. The reverse is also true in that they will pay low wages when unemployment is high. A nation needs to be concerned with this macroeconomic factor because if there is a higher employment rate, many households will not have enough income to cater to their basic needs. This may increase cases of insecurity due to theft, making the country unappealing to prospective investors.
Inflationary Rate
Inflationary rates are general factors that cause the increase of prices in all essentials that are important for a business. Inflation results in an increase in the prices of commodities. As such, a business would have challenges in purchasing raw materials. It is important to pay attention to the inflationary rate because it raises the overall costs of running a business and the cost of living. If the rates are low, the economy will remain strong because businesses will manage to pay for operational costs and solve the unemployment rates.
Economic Output
The economic output helps measure a business's value in terms of sales of goods and services. A nation's economic output is measured through the value of total goods and services in an economy, commonly referred to as gross domestic product (GDP). The economy may be uncontrollable at some point generating upward pressure on the inflation aspect requiring the "big" bank to try and lower the pressure by increasing the rates. In essence, if the economic output is booming, the consumer is spending highly, the business is confident in its operations, and the profits are high. Also, unemployment becomes low because the economy is more suitable for creating new jobs. Therefore, it is important to consider this macroeconomic factor for a nation to be keen on factors that will improve the economy, such as managing the inflationary rate.
Interest Rate
Interest rate controls how consumers and business people conduct transactions or business in the market. High interest rates often discourage investment. This is because there will be less borrowing due to the high repayment interest accrued. The lack of flow of money in the market results in low purchases, negatively impacting businesses due to low sales. Therefore, it is important to look at interest rates because they directly impact consumers' purchasing power and investors' willingness to borrow and invest.
Technological Advancements
Technology advancement has been seen in virtually all sectors. In the business sector, it has improved operations by making them a faster and more efficient approach. It is an important macroeconomic factor that a business should consider because the overall productivity of the firm fosters its sustainability. For instance, AI technology is an advancement that may help a business satisfy customer needs effectively and save other costs that can be used to expand the business. Firms that want to remain competitive must constantly scan the market for the latest technological advancements they can implement.
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Macroeconomic factors are important variables that can help determine an economy's strengths and weaknesses. A positive macroeconomic factor will help improve the economy's growth because it creates financial strength or stability. For instance, if the unemployment rate is low, households can manage to cater to their needs, and the environment will be good for conducting business because of fewer insecurity cases. Also, if the interest is high, it affects the circulation of money because people hold it to pay debts rather than buy goods or invest. Macroeconomic factors also help investors make sound investment decisions. By analyzing them, they will know whether or not the economy of a particular country is appealing or not.
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Some examples of macroeconomic factors include:
- The rise of inflation currently experienced in the world. It causes businesses to raise the prices of commodities or lay off employees to remain afloat.
- Government budget deficits is another example of a macroeconomic factor indicating that the economy is not strong enough for the nation to collect enough revenue to have a stable budget.
- Also, the tax charged on goods can be unreasonable, indicating an economy's situation, either weak or strong.
- Finally, the unemployment rate is a major macroeconomic example indicating people do not have jobs to manage their daily needs.
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Macroeconomics is the study of the overall economy as a whole rather than individuals and companies. Its various macroeconomic factors help determine the performance of the economy. They include inflationary rate, economic output, unemployment rate, interest rate, and technological advancements. Inflation results in an increase in commodity prices. The unemployment rate may affect labor costs and demand for its goods and services. For instance, employees are likely to get higher wages when there is low unemployment and low wages when unemployment is high.
The economic output of a country is measured using its gross domestic product. One also needs to look at the interest rates because high interest rates often discourage investment and lowers consumers' spending power. Overall, all macroeconomic factors require attention because they determine how businesses perform and consumer purchasing power. If these factors are unfavorable, there will be less circulation of money, and the economy will suffer.
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Video Transcript
Macroeconomics Defined
Betty is a small business owner of a successful coffee shop in a large metropolitan city. She is thinking about expanding her operations by opening a new shop in another part of town. However, before she takes the plunge, she needs to examine the current macroeconomic conditions to determine whether expansion is a good idea right now.
Macroeconomics relates to how an overall economy works and performs. In other words, it looks at the big picture instead of focusing on individuals. Let's take a closer look at some key macroeconomic factors that Betty should consider before expanding her business.
Unemployment Rate
Betty needs to pay special attention to the unemployment rate, which is the percentage of people in the workforce that are unemployed and actively looking for work. A high rate of unemployment is a mixed bag for Betty but is generally not good for her expansion plans.
A high rate of unemployment may mean that Betty will be able to hire employees at a lower wage. This will save her money and improve her profit margins. However, Betty needs customers with paychecks so they can spend some of that money on espressos, lattes and cappuccinos. In other words, generally speaking, since people that are unemployed don't have much, if any, disposable income, high unemployment tends to lower demand for goods and services, which hampers economic growth and business expansion.
Inflation
Betty also needs to pay attention to inflation, which is the general rate of price increase in an economy. If the inflation rate is high, the costs for goods and services will increase. If the inflation rate is too high, people may decide to change their purchasing decisions.
For example, if the price of the premium coffee beans Betty buys increases significantly, she'll have to either increase her prices or take a hit on net revenue. If she increases her prices too much, she may lose customers who decide to purchase cheaper java elsewhere or make it at home.
Economic Output
Betty will also want to pay attention to the rate of growth or decline in the economy's economic output, which is measured by the gross domestic product (GDP). GDP is the total value of all goods and services produced in an economy during a specific period of time. If an economy's output is growing, this means that people are employed and spending money and businesses are investing. If an economy is declining, unemployment tends to increase and investments decline. Betty wants to see economic expansion so there's more money and customers in the market to buy her coffee.
Interest Rate
Interest rates will also heavily influence Betty's decision whether to expand her business. An interest rate is the annual rate of return for an investment. Why does this matter for Betty? If Betty wants to borrow money for her expansion, she'll seek a bank loan, and banks don't loan money out of the goodness of their hearts; they expect to be paid interest for the use of their money because that's how they make a profit. In other words, as interest rates increase, investments tend to go down as people either can't pay or won't pay the interest to create or expand their businesses.
Interest rates can also affect the demand for goods and services. If interest rates are high, people will be unwilling to finance purchases and demand may decrease. On the other hand, if interest rates decline, people may be more willing to finance purchases and demand may increase.
A Note on Technology
Betty will also want to keep her eyes peeled for technological advancements. Technology can have significant effects on the economy. For example, technology can improve productivity and reduce costs. Just think how much more it would cost Betty to make coffee without bean grinders and coffee machines. Of course, technology can also displace workers that are no longer needed, creating unemployment.
Lesson Summary
Let's review what we've learned. Macroeconomics is concerned with how the overall economy functions. Macroeconomic factors not only affect the entire economy but can also affect individuals and businesses. Key macroeconomic factors that businesses should pay close attention to include unemployment, inflation, economic output and interest rates. Technology can also both positively and adversely affect these variables.
Learning Outcomes
Completing this video lesson could enable you to:
- Remember the focus of macroeconomics
- Explain why businesses should pay attention to key macroeconomic factors such as unemployment, inflation, economic output and interest rates
- Evaluate the relationship between macroeconomics and technology
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