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External environment - Economic indicatorsExplanationBusinesses need to keep a careful eye on the external environment they operate in. However, what do all the different economic indicators mean and how are they measured? On this page we give a brief explanation of each of the key economic indicators. For more detail on each of them and how they are measured, why not have a look at the theory section? UnemploymentUnemployment is obviously the number of people without a job, but willing to work. This is an important indicator for business because it shows how 'tight' the labour market is. If unemployment is very low, then the labour market can be described as 'tight' as there are few people to fill any vacant jobs. This means that businesses may find it increasingly difficult to fill vacancies and may even have to offer higher wages to attract people to come to work for them. There may be particular shortages of skilled labour. High unemployment will mean the opposite and may mean that there is a pool of labour available and this will help keep wages down. However, demand for the goods and services produced may also be low and so this may not help. InflationInflation is a sustained increase in the general price level. In other words prices are consistently rising. This is important for business to keep an eye on, as they need to assess what to do with their own prices. Their costs are likely to be rising and so their margins will be squeezed. However, they need to watch carefully what their competitors are doing as well as if they put prices up too much they may become uncompetitive. Inflation is also likely to lead to higher wage demands as workers want to ensure they can keep up with the cost of living. Economic growthThis is critical for a business to keep an eye on. The demand for their good or service is likely to depend on the income levels of consumers. Economic growth means that the income level in the economy is rising. However, how long will this last? Is growth too fast, in which case is higher inflation likely? Businesses also need to think carefully how sensitive their product is to changes in income. If their good is more of a luxury good, then demand may rise significantly as growth rises and they need to ensure they have the capacity to meet demand. However, they must also watch carefully in case the economy heads for a recession as this will in turn mean a large fall in demand and they may need to keep their capacity and therefore costs under control. Balance of paymentsThe balance of payments is a measure of the trade performance of an economy. It measures the money flowing in from selling goods and services and from investment (credits on the balance of payments account) and the money flowing overseas from the buying of goods and services from overseas (imports) and investment overseas. The economy may have a surplus or deficit on the current account of the balance of payments (goods and services). A deficit means that imports of goods and services are greater than exports, whereas a surplus means that exports are greater than imports. |
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