Economic Change

Economic Change Business Definition

Factors Influencing Economic Changes in Business

All businesses operate in an economic environment - they do not have a choice or control over this. Economic change is important for businesses to keep in mind because it can be directly related to the demand for goods and services in a market (ie consumer spending). Economic change in business can come from various different factors such as:

• Changes in GDP

• Exchange rates

• Interest rates

• Taxation

• Government spending

• inflation

• Policy changes

Economic growth

Economic growth is one of the most important factors of the external environment as it can impact consumer spending, investment and government expenditure. The size and attractiveness of the economy are constantly changing. One of the ways to measure this change is by looking at the gross domestic product (GDP).

You can calculate GDP with the following formula:

GDP = C + I + G + (X - M)

C: Consumer spending

I: investment

G: Government expenditure

X: exports

M: imports

Consumer spending or consumption in general, measures the amount of money consumers have spent on goods and services. Investment measures how much was invested in businesses within a country's economy. Government expenditure measures how much the government has spent on public services and infrastructure.

Net exports (XM) measures how many goods and services we exported abroad (X), and from this value, we subtract the number of goods or services we imported into the country from abroad (M).

With this formula, we can measure the actual growth of an economy. We can look at the yearly percentage increase of a country's GDP to measure economic growth. Economic growth is important because, in general, it means we are better off in our environment.

Advantages and Disadvantages of Economic Growth

Some of the advantages of economic growth include:

• Higher living standards

• The creation of jobs and lower unemployment

• Increased investment

• Increased tax revenue

Some of the disadvantages of economic growth include:

• Risk of inflation

• Increase in the income gap

• Negative externalities

Economic Changes and the Business Cycle

Changes to the business cycle have a significant impact on business decision-making. When the economy is experiencing an upswing, existing companies are more likely to invest in new product development and operate at maximum capacity. New businesses are also more likely to be founded during an upswing.

During a recession, unprofitable businesses are likely to stop their operations altogether and unemployment may start increasing. Firms are also more likely to try and enter international markets where demand for their goods and services is higher.

Impact of Changes in Economic Policy on the Business

Economic policy has a huge impact on how an economy functions. Changes in economic policy will have a significant impact on business decision-making. We will look at protectionism and fiscal policy to explore this further:

Protectionism

Protectionism impacts the open trade of goods and services. Protectionism can be in the form of trade barriers. Some common forms of trade barriers include:

• Tariffs: a tax or duty that has to be paid on certain imports of exports (ex. Country X imposing a 5% tax on all imports of oranges)

• Quotas: a limit to the number of goods and services allowed to be imported or exported (ex. Country X only allows a maximum amount of 100,000 units of a certain good to be imported into the country)

• Subsidies: an amount of money granted by the Government to help local businesses (ex. Country X grants orange farmers money to keep the price of oranges low and competitive)

Fiscal Policy

Fiscal policy is a direct factor influencing economic growth, as it is made up of taxation and government spending.