What Factors Affect The Economy In a Broad Way?



There are primarily 4 macro-economic aspects that are analysed to assess their effect on the economy. The PEST analysis or Broad Factor Analysis is the method deployed to assess the macro-environmental factors of an economy. 

The four macro-economic aspects are:
•    Economic
•    Political
•    Socio-demographic
•    Technological

These four major macro-economic factors affect the economy overall and have a major impact on the business environment, opportunities and the threats prevailing in the industry for all the players. The aforementioned aspects are used in the analysis of the effect on the economy. 

We will study the impact of each of these factors that affect the economy in a broad way.

Effect of the Macro-Economic Aspects of the Economy
We perform the PEST analysis on the basis of 4 primary economic aspects. Below are the effects that each macro-economic aspect has on the economy.

Economic: There are 4 economic factors that affect the economy in a broader fashion. These are:
•    Inflation
•    GDP growth rate
•    Interest rate
•    Foreign exchange rate

Each of these aspects has a profound impact on the macro-economic aspect of the economy. For instance, a higher interest rate may affect the company’s capital and its ability to take loans for expansion. Similarly, a high GDP growth rate signals the potential in the market and bolsters investor confidence. Furthermore, a low foreign exchange rate reduces the risks posed by foreign competitors.

Political: Political factors can go a long way in affecting the dynamics of an economy or business. A few examples of political factors are:
•    Tax policies
•    Employment laws
•    Barriers to Overseas trade
•    Government regulations
•    Political stability

Political factors constitute the national factors that affect the workings of companies. If a foreign firm is looking to enter a new market, it analyses the political landscape in the economy as it may directly affect the growth of the company. Additionally, governmental regulations also play a key role in defining the economic environment. 

Socio-demographic Factors: These factors constitute the social and demographic factors affecting the economy. These factors constitute a general outline of the physical conditions prevailing in the economy. A few examples of socio-demographic factors are:
•    Education level of the population
•    Health consciousness
•    Age-related changes
•    Population growth
•    Natural conditions

Socio-demographic factors directly affect consumer demand trends and preferences. Companies analyse these factors closely to determine the growth potential and assess the profitability of their venture. If the socio-demographic factors are not in favour of the company, it may choose not to enter the market which hinders economic development. Similarly, an educated population has a small learning curve that can prove beneficial for the company in ensuring low customer education costs.

Technological Factors: With the integration of technology in almost every aspect of people’s lives, it has now become a deciding factor that tremendously affects the economy. Some of the technological factors are:
•    Latest technologies
•    Investments in R&D
•    Scientific advances
•    Technology integration

The information age has witnessed a huge impact on economic development. Today, the technological aspect can prove to be the primary factor that affects economic development. A higher technological barrier may lead to fewer entrants entering the market that hinders economic development.

Conclusion
The PEST model is a key component in the analysis of the economic environment. These macro-economic factors can prove to be crucial for companies that are developing business strategies to enter a new market. These factors combined, convey the market potential to the investor, as well as the threats that their venture may experience in the market.




Location: India

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