Question

Describe how each of the following below affect business decision making.

i. macroeconomics trends
ii. international trade
iii. Government policy

Answer 1

The ultimate aim for any producer in the economy remains to maximize his profits as much as possible. Over the years, this translates into critical decision making on items such as where to invest and how much capital must a company invest so as to derive the maximum possible benefit.

Economics and its interconnected variables such as Macro economic trends, international trade as well as government policies play a critical role in deciding these decisions. The following are the ways in which the impact takes place.

1) Macro Economic Trends: -

Macro Economics refers to the numbers which are reported for the entire economy as a whole and represent the stability of a country and its future outlook. This is critical for any company which is to invest in the country or currently is existing and wants to expand or contract operations on the basis of this very outlook.

There are numerous indicators for macroeconomics such as Gross Domestic Product growth rate, inflation in the economy, recession if any, unemployment rates, retail sales index etc.

For example, if a country such as China or India are seen to be growing at a healthy rate of 5-10% per annuum it can be said to deliver good returns over capital investments to a country. Similarly, as recession is glooming today due to the Corona Virus Crisis and unemployment is rising across the globe, the macroeconomic indicators point out to the fact that investments across countries could prove to be dangerous.

Thus, we can conclude by saying that macroeconomic indicators such as inflation, recession or unemployment all help in business owners to assess the conditions of an economy and accordingly compare and take rational decisions towards their business. For example, an indicator such as Aggregate demand during times of recession indicates that a company should think twice before investing more money as the demand is not capable of absorbing the same.  

2) International Trade: -

The total amount of trade that takes place in any country and the restrictions which such trade has plays an important role in deciding if a company should be investing in such circumstances or not. For example, the countries of India and China promoted protectionism wherein, the trade taxes imposed on the countries were extremely high till the 1990's. This indicated that companies would face a lot of taxes if they entered these economies accordingly the decision making did not favour to invest in such conditions.

On the contrary, when we look at the United States, it has always been a pioneer, in terms of trade and has always had measures which have kept trade relations with other countries positive and at the same time tariffs in the country have been lower. Thus, this makes it easier to invest in the country and decision making in those countries which promote international trade and have fewer taxes and restrictions is relatively much faster and easier for companies and business owners to take.

3) Government Policy: -

Now, when we take a look at government policy, we realize that there are countries such as United States which follow liberal government policies and their intervention in trade and commerce is minimum. The government creates regular initiatives to ensure that quality education and health care services are provided for one and for all which helps in keeping productivity of the labour force extremely high. It also does not leave business houses in ambiguity and there are well defined laws in place which makes decision making very easy.

On the contrary, in countries such as North Korea, decision making becomes difficult because the government is not flexible at all and does not allow for business activities to run without state control.

Conclusion: -

Thus, we can conclude by saying that positive international trade, government policies as well as macro-economic trends help guiding decision making and help generate profits for companies. On the contrary strict ones make it difficult to manage business.

Please feel free to ask your doubts in the comments section if any.