A healthy concern for the state of the economy at large is critical for the success of your business. The study of individuals, like you, and your business decisions is called micro-economics. Micro-economics is the economics with which you, as a business owner, are generally concerned – it considers issues like how supply and demand influence the price of your goods and services, how regulations and legislation might affect decisions you make, or how to improve capacity and production so that you can become more competitive in the marketplace.
Micro-economics is often referred to as a ‘bottoms-up approach’, as it zones in on a specific business or market and places it at the centre of things. Macro-economics, on the other hand, is a ‘top-down’ approach which considers the bigger picture to understand how the economy as a whole functions.
Macro-economic factors impacting family business
Macro-economics can be applied at a regional, national and global level. Government takes into account macro-economics when formulating economic policies, as do big corporations when developing their business strategies.
When analysing the performance of your business, strategising about its future direction or thinking about how to maximise business opportunities, do consider the following key factors in the macro-economic environment:
- Gross Domestic Product (GDP)
- Unemployment rate
- Inflation and deflation
- Consumer confidence.
Gross Domestic Product (GDP)
GDP is the total value of all the goods and services produced in a country in a given period of time (usually expressed in US Dollars). GDP represents the size of a country’s economy, which is why it’s important to consider.
GDP is usually assessed quarterly; when one quarter is compared to the previous quarters, it gives an indication of how the economy is faring – if GDP is greater, the economy is growing; if it’s less, the economy is contracting and if it’s negative, the economy is in recession.
In short, take note: the better the GDP, the healthier the economy, and the better the trading environment.
This is the percentage of unemployed persons in a country’s population. Generally, the better performing the economy, the lower the unemployment rate; whilst the higher the unemployment rate the worse the economy.
Importantly, the unemployment rate only takes into consideration those without work who are actively seeking work; not those who can work but have become discouraged and given up the job search. How does the unemployment rate affect your business? Well, the higher the unemployment rate, the lower will be the demand for goods and services, which translates into lower revenues.
Inflation and Deflation
Inflation is the general rise in the price of goods and services over time. With each price increase, a unit of currency can buy less and less. The inflation rate is the rate of change of prices (expressed as a percentage), calculated on a monthly or annual basis.
Be advised to watch for rises in the inflation rate – as a result of a currency losing its value (a high inflation rate), consumers have less purchasing power. Thus, they’ll curb unnecessary spending, which could mean lower revenues for your business.
Deflation is the decrease in the price of goods and services over time and occurs when interest rates fall below 0%. This increases the real value of money and allows consumers to buy more goods and services per unit of currency. While it sounds like an ideal situation, deflation is usually an indication that an economy is in recession. Recessions, in turn, can spell bad news for business.
Consumer confidence is the degree to which consumers feel positive or optimistic about the economy and their personal finances. When an economy is performing well, consumer confidence is higher, which means consumers are more likely to make more purchases.
Conversely, when economies are performing poorly, consumer confidence drops, indicating that consumers are more likely to make fewer purchases. In most countries, consumer confidence is measured by the Consumer Confidence Index.