are variables that influence a company’s capacity to successfully do business. They may be beneficial or detrimental, and the same factor can have either a positive or negative impact depending on its current status or the type of business it is affecting. Although economic factors create the climate in which a business operates, the success or failure of any company also strongly depends on its own resourcefulness and ability to adapt to these external economic factors.
Taxes are an economic factor that affects the financial well being of a business by cutting into its profit or by providing incentives in the form of tax breaks for certain types of business activities. State and local governments with high taxes discourage business activity by raising operating costs and making business less profitable. High employment taxes can discourage businesses from hiring new employees, and tax breaks for activities such as investment in business infrastructure can make a business more likely to purchase equipment.
Interest rates determine the cost of borrowing money. It costs more to borrow at a high interest rate than at a lower one. Because most businesses borrow money in order to expand, and even to finance day-to-day business activities, high interest rates can slow the growth of business activity. But low interest rates can increase the risk of inflation by making capital so easily available that it isn’t worth as much. Shrewd monetary policy involves keeping interest rates low when it is more important to stimulate economic growth, and raising them when there is danger of inflation.
Unemployment is an economic factor that affects business activity by influencing the amount of disposable income that consumers have available, and also by affecting wage scales. Because unemployed people subsist on less than a full income, they spend less money than if they were fully employed. A high unemployment rate slows business activity by cutting into consumer spending. In addition, a high unemployment rate creates market conditions where the supply of labor is greater than the demand of businesses for labor, enabling businesses to pay lower wages.