Introduction
The economy influences most business operations in different ways. Bad economic environment affects some businesses negatively while others are affected positively. Generally, the economy always experience both recession and growth. Recession is the pronounced and persistent decline in the key elements that measure the level of aggregate economy (Rostow 76).
These elements include output, employment, income, sales among others. On the other hand, expansion (growth) means pervasive and persistent increase in the core elements that asses the level of the aggregate economy. This paper examines the impact of economic forces on businesses.
Discussion
The decline and subsequent rise in the level of economic activities is short term in nature. The series of upturns and downturns experienced in the economy is referred to as business cycles. Business cycles affect businesses in different ways. For instance, during recession the GDP growth is below average, the disposable income is low while the unemployment rate is very high.
These factors lead to decreased consumer spending in the economy those results to decreased demand of goods and services in the economy with most companies being forced to freeze their production capacity. The disposable income for the consumers is reduced by high inflation rates in the economy that result to high pricing of Commodities.
People will therefore tend to buy less of some commodities especially the durable ones hence leading to a drop of sales. This would in turn lead to a fall in profits (Bateman and Snell 21). Conversely, commodities like staple food and bread are protected from recession because they have inelastic demand. Presumably, they are even likely to gain from the recession because consumers would avoid luxurious foods. Therefore, such businesses are better off during such periods in the economy.
When an economy is experiencing expansion, most companies do have high chances of increasing their profit. In this period, the GDP growth is always above average. The level of unemployment is minimal while the level of disposable income is high. At this point, consumption in the economy increases.
A surge in demand enables firms to realize profits that enable them to expand the productive capacity in the long run. Companies that benefit more in this period are manufacturing companies such as the Ford Company. People have high disposable income to spend on secondary wants such as luxurious vehicles
Businesses that benefit more during expansion include those operating in transportation, construction, investment services and real estate among other industries. Those that are insulated from recession include those having investments in food manufacturing sector, addictive commodities such as bhang, in the medical field and utilities such as sewage and water among others. Companies that are affected by recession negatively deal in commodities that have elastic demand while firms insulated from the recession trade in goods and services that have inelastic demand.
Spotting the turn in the economy is not always easy for managers. Mostly, leading economic indicators are used to predict economic trends although it is not always accurate. Among the economic indicators used, include Consumer Price Index, Producer Price Index, Productivity Report and Whole Trade Report among others.
For instance, the Money Supply report given by Central Bank indicates that if a lot of money is circulating in the economy, then the economy is likely to suffer from inflation. On the other hand, Jobs Claims Survey shows that if many unemployment cases were recorded, the economy would probably be entering a recession period. Past and current record of these indicators will help to come up with a moving average trend that will in turn help predict the future economy (World Bank 26).
Conclusion
Excellent planning of the future requires an accurate prediction of the future trend of the economy. For instance, if a firm trades internationally it would be very keen on the trend of the exchange rate.
If domestic currency were expected to depreciate, the manager of a firm would consider selling products domestically or selling across the border while ensuring the currency is hedged against future depreciation. Future change in consumers demand because of increased disposable income helps managers to understand how much to produce for the future market.
Works Cited
Bateman, Thomas and Snell, Scott. Management: The New Competitive Landscape. Ed. New York: McGraw Hill, 2004.
Rostow, Walter. The Strategies of Economic Growth. 2 Edn, London: Cambridge University Press, 1971.
World Bank. World Development Report 1991: The Challenge of Development. London: Oxford University Press, 1991