Understanding How World Economics can Affect your Business Finances

Economics are difficult to understand: the profession relies heavy on theoretical models, calculus, and a thorough understanding of elasticity, isoquants, isocosts, production functions — can you say “Cobb-Douglas”? — and much more difficult-to-understand metrics. Business managers can predict the future state of their business based on market trends around the world.

Interest Rates

Interest rates are an ideal indicator of the state of the lending market in a given country, across groups of countries, or globally. When interest rates are high, fewer businesses and people borrow, vice-versa. If interest rates are low, a business owner can usually expect more business, especially if customers rely heavily on taking out bank notes. Merchandisers often purchase inventory on accounts payable, and sometimes must extend their lending periods and treat their debts as long-term.

Exchange Rates

Some businesses deal entirely with international trade, which may be heavily affected by currency fluctuations. The effects of higher exchange rates are felt by businesses who don’t deal directly with vendors in other countries, as well. Dealing with vendors in other countries is so crucial, many seek economic diplomacy degrees online and in person. Subsidiaries of importers dealing with more favorable exchange rates will experience more business than those dealing with countries with less favorable exchange rates.

Foreign Government Regulation

Governments must tax those conducting business within its boundaries to support its infrastructure and government. Often times, governments appropriate their tax rates to allow all its citizens to be able to pay it within reason. Sometimes, governments overregulate business activities within its boundaries, which results in fewer transactions legally facilitated by the government. When they do take place, they are typically much less profitable than those carried out in a country with lower tax rates.

Business Partner Relocation

In dealing with corporations, subsidiaries and branches can easily get relocated to other countries. This is usually not a problem, but some businesses can feel the effects of dealing with relocated businesses significantly. Some countries lack proper infrastructure and may have trouble reasonably exporting goods. Other countries have placed embargos on trade with some locations, barring some transactions from occurring in the first place.

Many factors can affect a business’ performance, even those that may seem trivial — the price of tea in China truly may affect a business on the other side of the world. Understanding economics can be directly beneficial to the success of any manager’s business.

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