Macroeconomic and Company Success

free essayThe world of economics has two main layers: macroeconomics and microeconomics. As everything in the economics, macro and micro levels are closely interrelated. Macroeconomic level examines the whole economy as the aggregation of all firms and households and studies indicators like output, consumption, level of prices, etc., while microeconomic studies each individual, every firm, and the way they manage the resources. The overall welfare depends on the welfare of each individual of the household. The main aspects of the macroeconomic theory are supply and demand, interest rate, inflation, unemployment, currency exchange rate, etc.

Demand and Supply

A company focuses on the most important issue, which is the data of demand and supply relating to a particular market. The demand defines the size of the market and the possibilities to earn the money, operate, and expand. On the other hand, supply is the restriction, which indicates the level of competition: the high number of suppliers and the rising trends regarding it warns investors to either diversify and improve the product or reconsider the investing plan. The management of the company studies the scope of the market, however, the dynamics as, for example, funds spending on the market that has not revealed a size of demand increase along with the rising competition is a losing business strategy. The examination of market demand and supply gives a wider perspective on an investing plan of the company efficiency.

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The demand elasticity dictates the pricing policy of the company. The revenue as one of the key indicators of success relies on the pricing policy, and the demand elasticity of the market allows to assess whether there is an opportunity to benefit from the lower price by taking the larger market share. On the contrary, demand with non-elastic prices allows to raise the prices and not to lose the clients or customers. The study of demand elasticity is essential in determining pricing policy.

Unemployment Rate

Each company’s operations and success rely on employees, therefore, the labor market is of a high importance. Unemployment suggests a mismatch between supply and demand. Unemployed people search for a job when the market offer of vacancies makes the competition intense and the job search difficult. According to the law of economics, employees create the supply that cannot be met, as the firm does not create sufficient demand for their labor (Cooper & John 2012).

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The problem of high unemployment rate in a long-run perspective signifies the low purchase power of consumers and usually the majority of low-skilled employees in the market, which makes the recruiting process time-consuming. On the other hand, in the short-run a company may benefit from this situation as far as employees become more loyal to the company, and, moreover, preserving the working places may provide the company with the team of trustworthy and devoted workers. Regarding the main law of demand and supply in the economy, the price falls if the supply largely exceeds the demand. Employees agree to work for lower wages and salary levels, however, the workflow rate maintains low. Therefore, the productivity of the company directly relies on the productivity of its employees. A company under the conditions of the unstable labor market usually should focus on preserving the team and take efforts to improve their motivation.

Interest Rate

The role of financial markets is massive in today’s world as far as the product traded on that market is “money”. The stable financial market provides the access to capital, funds for investment and expansion. The price of money is considered to be the interest rate, that is, the rate which a company may borrow money at. The management must carefully choose the borrowing policy of the company in order to avoid a possible risk from sudden interest rate changes. The leverage of the company may restrain the pricing policy, whereby, the higher price adoption is risky for a company which is anticipating the rise in interest rates, since losing the risk of revenue loss along with rising interest expenses may lead to bankruptcy (Miles, Scott, & Breedon, 2012).

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Interest rate risk can be defined as the risk from fluctuating interest rates that the income or capital arising is exposed to. In case the company has assets, a debt, or interest relating earnings, the company value is exposed to interest rates fluctuations due to changes in interest whether it is earned or paid. The commonly used way of a company value appreciation is discounting of cash flows model so the interest rate determines the present value of all the future cash flows. As well as the company evaluation the interest rates projections, expectations play a significant role. Senior management aims to provide an agile and effective structure of company’s assets and liabilities and ensure the control over the used financing resources to minimize the interest rate risk (“Management of interest rate risk,” 2013). The most effective way of interest risk minimization is the constant control of a company’s assets and liabilities structure along with monitoring the banking sector. The company’s structure is very crucial as it has an optimal leverage in case that the change in monetary policy may change the company’s value within a day.

Exchange Rate

Companies leading foreign trade operations consider the risks of exchange rate fluctuations. The devaluations (currency value drop for more than 20%) put exporting companies in a favorable position making their goods cheaper and increasing the demand. Therefore, a company decides whether to receive greater revenue from increasing demand or to get higher profit margin by maintaining the price level corresponding to the level of a country export and the same market share. The importers consider the risk of currency appreciation because it increases the allocation of imported raw materials costs reducing the profit margin.

Company’s sources of exchange risk can be of three main types: translation exposure (currency “buy” and “sell” operations), transaction exposure (changes in value of assets payable and receivable in foreign currency), and economic exposure (effects on company’s market value, competitive position, etc.). Management requires some instruments of reducing economic exposure and the strategic choices concerning not only the financial management. The most common way of risk elimination is future currency exchange contracts. They are the contracts in which two or more parties agree on the future price of a good purchase; the currency future contracts are agreements to buy a certain amount of currency at a set price in the future. Such financial instrument allows controlling and limiting the risk (Berisha, Asllanaj, & Shala, 2014). However, the most effective way to reduce the economic exposure is to diversify the assets by the location characteristic, though it is suitable only for big companies with the ability to produce goods on a multination scale.

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The success of any company relies to a great extent on the macroeconomic situation as the management should consider the risks that the overall economy may bring. Therefore, the awareness of the situation and fast adaptation are the key ways to success. Management’s review of the macroeconomic situation allows not only considering the possible risks that business may encounter but also to define the place of the company on the market and reasonably develop a strategy. The economic environment analysis includes the overview of demand and supply, competition, central bank policy in relation to currency and prices (inflation), tax system, and labor market. Correct understanding of the economy trends ensures risk avoidance and elimination as well as devising of a proper business strategy under particular macroeconomic conditions.