Dr. Miranda has a DBA in International Business, and is an author and instructor of international business and risk management.
The modern business market is regularly affected, defined, and shaped by economic conditions. In this lesson, we'll examine government influence, international transactions, expectation and speculation, and supply and demand.
Modern Business Sectors
Ever wonder what changes the price of gas? Or why butter is a dollar more this year than last? There's more to it than you might think! Not all business markets are the same - that's especially true of the modern business markets. The modern economy is essentially made up of three distinct sectors: primary, secondary, and tertiary.
The primary sector is involved in extracting raw materials from the earth
The secondary sector is involved in transforming the raw resources into products through industrialization
The tertiary sector is involved in providing services to businesses and consumers: this includes restaurants, retail, sales, and transportation
In the developed nations, economies have been specialized in the service industries while manufacturing and the extraction of raw resources have for the most part shifted to developing nations.
Of course, it's not as simple as distribution falling exclusively to either a developed or developing nation. Each country's economic activity encompasses all three sectors and can depend on geography, resources, labor, technology, access to markets, and politics. Distinct economic, social, and political factors influence and shape the type of business markets within each country.
Neither economic conditions nor business markets exist in a vacuum. Other forces bear direct effect in regional and global economic realities. Economic forces are factors such as monetary and fiscal policies, interest rate, employment, inflation rate, demographic changes, political changes, energy, security, and natural disasters. All of these have a direct effect on how businesses produce and distribute their products or services. The effect of these economic forces in business is reflected in the economy.
The four main economic forces or trends that affect modern business markets are:
Expectation and speculation
Supply and demand for products
While not included as a major economic force in classic economic models, technology, particularly the internet, also has a major role in shaping modern business markets. Markets have also become sensitive to the corporate social responsibility (CSR), or corporate citizenship model, and the forward-thinking concept of responsible business sustainability.
Let's take a look at these major economic forces.
Government influence is a major economic force in all business markets. In the United States, the government and the Federal Reserve can raise or lower interest rates to control economic growth. This process is called monetary policy.
Through its fiscal policy, the government can decrease or increase spending as the means of stabilizing prices or easing unemployment. Also, the government can raise or lower taxes on business activities. Other business markets are highly regulated by the government such as banking, trading, manufacturing, and medicine. Other business sectors also receive government subsidies in either direct investment or tax breaks. In some instances, such as the banking financial crisis of 2008, the government intervenes aggressively to avert broader economic disasters.
International transaction is a very important financial force. The flow of financial transactions between countries affects the country's economy and its currency. For example, the direction of capital flow can either strengthen or weaken a country's economy and currency.
In the case of import and export, a trade imbalance can be positive or negative, depending on the position of each country. However, countries like China artificially keep the value of its currency low as the means of gaining trade advantages against competitors. This is where a country's trading policy has a direct impact on export/import and manufacturing markets.
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In the current global economy, countries have also developed common trading blocs as the means of gaining new markets for their products. Examples of these are the North American Free Trade Agreement (NAFTA) and the European Union.
Expectation and Speculation
Expectation and speculation are important forces in modern markets. For example, if consumer confidence is high about the state of the economy, business leaders will be more comfortable in increasing production of their products or services. Increased production and consumer spending often increase the need for labor. In turn, local state and federal governments can collect a healthy stream of tax receipts often resulting in budget surpluses. But, if consumer confidence is low about the health of the economy, economic growth can slow down or take a drastic turn towards recession or outright depression.
Supply and Demand
The classic law of supply and demand has a direct impact on modern business markets. If a commodity like petroleum is in high demand, the price will depend on how much of that petroleum is available. If the supply of petroleum is low, the higher demand for that petroleum will result in higher prices at the gasoline pump, and higher prices for all products and services that depend on petroleum either as a raw resource, transport of goods, or manufacturing component.
Not all business markets are the same. Each market functions within distinct sectors of the economy, be it within primary, which are raw materials; secondary, which are raw material into products; or tertiary, which are goods and services.
The complexity of global modern business markets demand that business leaders understand the economic forces that affect business markets, which are:
Availability of raw resources
Some of the traditional economic forces that have a direct influence on modern business markets are: government influence through taxation; monetary policy, or intervention on interest rates; fiscal policy; regulation; and subsidies. Governments can have a positive influence in the modern business markets.
Also, through international transaction governments can create new markets for its businesses or enact protective barriers against competitors. We also considered speculation and expectation, which are the psychological dynamics that can either contribute towards economic growth or a painful slowdown, as well as supply and demand, which is the creation of market pressure points which can be either positive or negative. Other factors that bear influence are the internet and emerging technology, as well as the concept of corporate social responsibility and sustainability.
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