Every nation or country has a group of attributes such as natural resources and experienced workforce that can affect their ability to build their economy. These group are known as the economic factors. These factors have an impact on their capacity to further evolve their economy.
Economic factors are related with goods, services, and money. In spite of straightly affecting enterprises, these variables invoke to local or global financial state of economy. The reason for this is that the state of the economy may determine many of the important specifics that arise in an operating company, among others points such as consumer demand, taxes and asset value. Economic factors are included in one of the basic methods of all business analysis — PEST analysis. This is because economic factors play an important role in deciding how a business makes its financial decisions (R. Perera, 2017; D.E. Koumparoulis, 2013, p. 32-33.).
Economic factors in PEST analysis
PEST analysis is a common instrument used in a business to analyze competitive environments and then create strategies based on this examination. It is a business measurement tool. The aim of PEST analysis is to regularly analyze the environment as regards different changes. These are political, economic, social and technological changes that can influence the company in the short or a long term (P. Boger, 2013, p. 145.).
Examples of economic factors (R.J. Chapman, 2011; R. Perera, 2017, p. 10-11.):
- interest rates
- exchange rates
- demand and supply
- tax rates
- educational level
- income levels
- employment and unemployment rates
- customer attitudes
- population growth
Economic factors will include the effects of economic cycles, changes in capital market, patterns of word trade, commodity prices, labour markets and rates and some groups of customers (A. Gupta, 2013, p. 35.).
Economic Factors in Economic Development
There are three the most popular and traditionally recognized economic factors in economic growth: land, labor and capital. Land is any natural resources used in production of goods and services. Labor refers to the effort expended by an individual to bring a product or service to the market. Capital refers to having money, investing it, and converting money into products. However, in today's world there are more economic factors affecting the growth of the economy
The strictly economic factors governing economic development were classified in three groups:
- the main physical agents of production: labour, natural resources, and also technology;
- economic mechanisms and management factors: price system, extent of market, price system, demand creating, division of labor etc.;
- the environment of economic decision and the major economic decision-makers(F. Boldeanu, L. Constantinescu 2015, p. 330-331).
In addition to economic factors, there are also non-economic factors that also affect the domestic economy. Non-economic factors are as important as economic for influencing the business activity of the country. All non-economic issues related to business are included in non-economic environment of a country. In the non-economic environment there are following areas of factors: politico-legal, demographic, socio-cultural, technological and natural.
Examples of the main non-economic factors affecting the economy: education of society, religion, culture, politics and authorities, tradition family.
Which factors (economic or non-economic) are more important in the country depends on the level of its development and economic awareness of society(S. Morteza Afghah 1998, p. 48-49).
Examples of Economic factor
- Natural Resources: Natural resources refer to the land, minerals, forests, and water that a country has access to. These resources can be used to create a variety of products and services that generate wealth for the country. For example, Canada has an abundance of timber, oil, and hydroelectric power that can be used to create a variety of products and services.
- Human Resources: This refers to the people living in a country. The availability of skilled labor, such as scientists, engineers, and IT professionals, can help a country to develop and grow its economy. For example, the United States has an abundance of skilled labor, which has helped it become one of the world’s leading economies.
- Capital: This refers to the money, investments, and assets that a country has access to. This can be invested in infrastructure, research and development, and other activities that can help create economic growth. For example, China has a large amount of capital which it has used to build roads, railways, airports, and other infrastructure throughout the country.
- Infrastructure: This refers to the physical structures and networks that are in place to facilitate economic activities. This can include roads, bridges, railways, airports, and other transportation networks. For example, India has invested heavily in infrastructure over the past few decades, which has helped to create jobs and spur economic growth.
- Technology: This refers to the use of technology to create new products and services. Technology can play a key role in a country’s economic growth, by helping to create and distribute products and services more efficiently. For example, South Korea has invested heavily in technology and become one of the world’s most technologically advanced countries.
Advantages of Economic factor
Economic factors can play a major role in the development of a nation or country. These factors include the availability of natural resources, the level of economic diversification, the quality of the workforce, the level of government regulation, access to capital, and the overall level of investment. Below are some of the advantages of economic factors:
- Natural resources can provide a country with the necessary inputs to produce goods and services, and can also be used to generate profits through exports.
- Economic diversification can reduce the risk and uncertainty associated with relying on one or two sectors for economic growth.
- Quality of the workforce can determine the level of productivity of the country, and can be improved through education and training.
- Government regulations can be used to protect the interests of citizens and businesses by leveling the playing field and ensuring fair competition.
- Access to capital can help businesses expand their operations, allowing them to create new jobs and increase economic activity.
- Investment can fuel economic growth by providing businesses with the resources they need to innovate, create new products, and increase their market share.
Limitations of Economic factor
Despite the importance of economic factors in building a nation’s economy, there are some limitations that must be considered.
- Firstly, the availability of resources, including natural resources, is not always a guarantee for economic growth. Natural resources may be scarce in certain countries, resulting in limited opportunities for economic growth.
- Secondly, the quality and quantity of the workforce can also affect the nation’s ability to build an economy. A lack of skilled labor, for example, can limit a nation’s potential for economic growth.
- Thirdly, access to capital can be a limitation for many nations. A lack of access to financing, such as loans and grants, can limit a nation’s ability to build its economy.
- Fourthly, the infrastructure of a nation can also be a limitation. Poor infrastructure, such as inadequate roads and ports, can limit a nation’s ability to transport goods and services, which can limit economic growth.
- Lastly, the political and economic policies of a nation can also affect the nation’s ability to build its economy. A lack of stable and effective policies can limit economic development.
In order to build a successful economy, there are several economic factors that need to be taken into consideration. These include:
- Natural resources - The availability of natural resources is an essential factor in economic growth. Natural resources can provide raw materials for production and energy sources to power economic growth. Examples of natural resources are minerals, oil, water, timber, and land.
- Skilled labor - Skilled labor is an important factor in economic growth. It is necessary to have an educated and experienced workforce to meet the demands of the growing economy. This includes engineers, technicians, scientists, and entrepreneurs who can create and manage new businesses.
- Capital - Capital is necessary to grow an economy. This includes investments in infrastructure, technology, and research and development. Funds are also necessary to finance new businesses.
- Technology - Technology plays an important role in economic growth. It can increase productivity, reduce costs, and create new products and services.
- Trade and Investment - Trade and investment can help a nation to increase its economic growth. Trade provides access to new markets, resources, and technology. Investment can bring capital, technology, and other resources to a nation.
In summary, economic growth is determined by a number of factors. Natural resources, skilled labor, capital, technology and trade and investment are all essential for a nation to build a successful economy.
|Economic factor — recommended articles
|Factors affecting business — Examples of opportunities — Basic industry — Industry environment — Importance of international business — Economic infrastructure — Political factors affecting business — Domestic market — Environmental factors affecting business
- Boger P., (2013) Research in the Decision Sciences for Global Business: Best Papers from the 2013 Annual Conference, European Decision Science Institute, p. 145.
- Boldeanu F., Constantinescu L., (2015) The main determinants affecting economic growth, Bulletin of the Transilvania University of Braşov p. 329-335.
- Chapman R.J., (2011), Simple Tools and Techniques foe Enterprise Risk Management, John Wiley & Sons.
- Gupta A., (2013), Environment & PEST Analysis: An Approach to External Business Environment, International Journal of Modern Social Sciences, p. 35.
- Koumparoulis D.N., (2013), PEST Analysis: The case of E-Shop, TI Journals, p. 32-33.
- Morteza Afghah S., (1998), Economic and non-economic factors in economic development: the concepts and their differences, p. 44-49.
- Perera R., (2017), The Pestle Analysis, Nerdynaut, p. 10-11.
Author: Sylwia Mierzwa