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Economic Factors
Economic factors refer to the nature and health of the economic system within which the firm operates. Economic factors include the state of the business cycle, the distribution of income within the population, interest rates, savings, debt and credit availability and governmental monetary and fiscal policies. The impact of these economic factors will differ between industries.
1. Business cycle
The business cycle directly influences consumer spending. Purchases of many durable goods (appliances, furniture and automobiles) can be postponed during periods of recession and depression, as can purchases of new equipment and plant expansions. Economic downturns result in lower profits, reductions in hiring, increased borrowing and decreased productivity for firms adversely affected by the recession. Positive consequences of recessions may include reductions in waste, more realistic perceptions of working conditions, exit of marginally efficient firms and a more efficient system.
2. Income growth and distribution
The distribution of income may differ between countries. Two countries with the same mean (per capita) income levels may have dramatically different distributions of income. Many developing countries have citizens who are either extremely poor; only a few persons would qualify as middle class. The presence of a very strong and growing number of middle class consumers makes for attractive markets. 250 million middle class consumers in India, equal to the entire population of the United States, and the fact that it is growing, is what makes India an attractive market for many multinationals today. On the other markets are not growing in many countries, due to saturation of markets, leveling off of incomes and shifting of jobs to lower cost economies.
3. Savings, debt and credit availability
Consumer expenditures are affected by the savings debt and credit availability. The housing, automobile and consumer durables boom in India over the past decade has been fueled largely by the availability of credit at attractive rates of interest. The saving as a proportion of income impacts the interest rates at which banks will lend money to its customers. A liquidity crunch will lead to spiraling interest which is ultimately passed on to the customers. Lower interest rates also help to corporate expand faster.
The impact of interest rates and credit availability is direct in the financial services industry. However for manufacturing or consumer goods, the impact is more on the cost of goods sold.
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1. Business cycle
The business cycle directly influences consumer spending. Purchases of many durable goods (appliances, furniture and automobiles) can be postponed during periods of recession and depression, as can purchases of new equipment and plant expansions. Economic downturns result in lower profits, reductions in hiring, increased borrowing and decreased productivity for firms adversely affected by the recession. Positive consequences of recessions may include reductions in waste, more realistic perceptions of working conditions, exit of marginally efficient firms and a more efficient system.
2. Income growth and distribution
The distribution of income may differ between countries. Two countries with the same mean (per capita) income levels may have dramatically different distributions of income. Many developing countries have citizens who are either extremely poor; only a few persons would qualify as middle class. The presence of a very strong and growing number of middle class consumers makes for attractive markets. 250 million middle class consumers in India, equal to the entire population of the United States, and the fact that it is growing, is what makes India an attractive market for many multinationals today. On the other markets are not growing in many countries, due to saturation of markets, leveling off of incomes and shifting of jobs to lower cost economies.
3. Savings, debt and credit availability
Consumer expenditures are affected by the savings debt and credit availability. The housing, automobile and consumer durables boom in India over the past decade has been fueled largely by the availability of credit at attractive rates of interest. The saving as a proportion of income impacts the interest rates at which banks will lend money to its customers. A liquidity crunch will lead to spiraling interest which is ultimately passed on to the customers. Lower interest rates also help to corporate expand faster.
The impact of interest rates and credit availability is direct in the financial services industry. However for manufacturing or consumer goods, the impact is more on the cost of goods sold.
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