What are economic factors? (Importance and examples)

By Indeed Editorial Team

Published 12 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Economic factors can have a direct impact on the economy and include considerations such as interest rates, legislation, wages and tax rates. These kinds of factors influence the investment value of a business. Paying attention to these outside influences can influence crucial business decisions. In this article, we review what are economic factors, the effect they have on the economy and explore the factors affecting economic development.

Related: How to become an economist: a step-by-step guide (with tips)

What are economic factors?

Economic factors are various influences on an economy, which can include individuals and businesses alike. These can also affect the investment value of a company. To learn the answer to, 'What are economic factors?', here are some of the top factors to consider:

Interest rate

The interest rate is the amount of money a lender charges a borrower to get money from the organisation. It's a percentage of the amount loaned. Interest rates help businesses determine the full costs and advantages of specific business ventures. If they are notably low, this may influence your decision to proceed with a project.

They can be high in terms of investment. When they are at their peak, investors opt for more reliable ways to guarantee returns. These can include bonds and certificates of deposits. When rates drop, a lot of investors take risks as lower interest rates make this more affordable and less insecure.

Exchange rate

Exchange rates measure the value of a currency when you convert it from one denomination to another. For example, you may wish to convert your British pounds to euros when you visit a European country. Exchange rates usually give an indication of a country's economic state. They can be a quantitative analysis factor in terms of the level of trade, a staple of all free-market economies. They can also have a large effect on an investor's portfolio. Exchange rates are most important during import and export deals, as this can affect the price of goods, which affects the economy.

Labour cost

Labour costs simply refer to the amount a business pays to keep its employees working for a company. It is one of the most spoken about economic factors because it's essential for running any business with personnel. Many companies use outsourcing to other countries for simple business functions. These activities include customer service and the production of goods.

Outsourcing can provide economic relief to the companies if people in other parts of the world agree to do the same jobs for lower pay. Sometimes, companies may run an internal analysis to determine if the quality of work is worth the reduction of labour costs.

Related: How to calculate fixed cost quickly and conveniently

Government intervention

Government activity in business might include the promotion of a specific industry, such as insurance or technology. This attention can boost the economy of the sector, leading to more investment and favourable changes in policy. In theory, in a free market, it is the consumers who decide which direction the economy is travelling, but government intervention can make a vast difference. Governments may also interfere in industries to redistribute wealth and help the environment.

Management

While management is not strictly an outside influence, you can still consider it as an important economic factor. Businesses with a stronger management structure may be more likely to succeed and attract investment and new talent. Activities such as monitoring job performance, setting targets and offering performance-based incentives all help to motivate employees and increase revenue. Some studies even show that improving management practices may raise a business' productivity rates. They may achieve this by decentralising decision-making and increasing the reliance on technology by promoting computer use.

Related: Different types of project management methodologies

Tax rate

Taxes are adjustable financial charges from the government on individuals and businesses. Types of taxes in the UK include:

  • income tax

  • corporation tax

  • national insurance contributions (NICs)

  • value-added tax

Government organisations often prefer higher tax rates because they increase the money channelled into the economy when people have less disposable income to invest in businesses or purchase goods. Individuals and businesses may also prefer tax cuts because they allow those groups to keep more of the money earned from employment and other ventures. This often puts the groups on opposing sides of bills and legislation relating to increasing and decreasing tax rates.

Wage rate

Wages represent the cash outflow a business pays at an hourly rate to employees. The minimum wage is the lowest amount of money an employer can pay its staff or contractors for completing their assigned duties. Increasing wages might cause consumer spending and enormous growth in the economy because people have more disposable income to spend.

Governments often raise minimum wage standards to account for inflation or to stimulate the economy by increased spending. Wages can link directly to productivity, so people who businesses view as contributing more to the overall productivity and wealth of the company may have a higher wage.

Recession

A recession is a period of economic decline where businesses on a whole may be less in-demand and therefore have less money. You can measure the extent of a recession by looking at a country's GDP. When there isn't an economic recession, businesses may be free to hire more employees and take on more costs. In a recession, the opposite is often true.

There is usually no simple cause of a recession, and this is often a topic debated by economists. They usually result from a combination of business and investment situations. Causes may also come from outside the company. For example, public health issues can cause a recession as a circumstance unforeseen by anyone that affects the economy and forces businesses to adapt.

Legislation

Changes to the law around trading or providing a service can change a business' economic decisions. For example, when the UK left the European Union (EU) in 2016, the country no longer had to comply with European law and effectively became a sovereign state. Although, during this shift, many EU laws remained and businesses worked to keep up to date with the changing regulations. The laws set by the EU covered industries, ranging from agriculture, financial services and the environment, shifts to these have changed how businesses operate considerably.

Supply and demand

Supply and demand are one principle of the basic elements of all businesses. If businesses have high demand, then they can thrive. Experts base this economic factor on trends. For example, loom bands were once a popular selling toy but plummeted in sales in just one year because of a loss of popularity.

Lifestyles can also affect the demand for goods. For example, with the rise of vegan diets and organic foods, more companies focus on providing meals that include those products and can often sell these for a higher price. The more confident consumers feel about the goods they are buying, the more demand there is.

Related: 12 current in-demand jobs (with national average salaries)

Factors affecting economic development

Governments often undertake economic development programmes to raise the standard of living in the country. This can relate to areas such as healthcare, education and transportation. Some of the more common areas the government may choose to direct their efforts to are:

  • Healthcare: Establishing or improving a healthcare system can be a step towards improving the quality of life for residents. Providing sanitary conditions and training professional healthcare professionals may lead to a better standard of care and a healthier population.

  • Education: This factor can improve the social conditions of a country and deepen the population's understanding of society. Trade training programmes are also an effective way to ensure people enter the workforce and contribute to the economy.

  • Transportation: Creating an effective infrastructure may mean countries can better transport goods across the country and services are more accessible. Effective public transport systems also allow people from remote areas to travel to work.

  • Power and energy: These resources help the running of the industry of a country. Developing countries may choose to rely on fossil fuels, while the focus in more developed countries may be more towards renewable energy sources.

  • Communication: Establishing sound methods of communication helps companies expand. The Internet has become one of the most effective tools for communication between businesses and customers.

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