economic factors essay

What is economic growth? And why is it so important?

The goods and services that we all need are not just there – they need to be produced – and growth means that their quality and quantity increase..

Good health, a place to live, access to education, nutrition, social connections, respect, peace, human rights, a healthy environment, and happiness. These are just some of the many aspects we care about in our lives.

At the heart of many of these aspects that we care about are needs for which we require particular goods and services . Think of those that are needed for the goals on the list above – the health services from nurses and doctors, the home you live in, or the teachers who provide education.

Poverty, prosperity, and growth are often measured in monetary terms, most commonly as people’s income. But while monetary measures have some important advantages, they have the big disadvantage that they are abstract. In the worst case, monetary measures – like GDP per capita – are so abstract that we forget what they are actually about: people’s access to goods and services.

The point of this text is to show why economic growth is important and how the abstract monetary measures tell us about the reality of people’s material living conditions around the world and throughout history:

• In the first part, I want to explain what economic growth is and why it is so difficult to measure.
• In the second part, I will discuss the advantages and disadvantages of several measures of growth, and you will find the latest data on several of these measures so that we can see what they tell us about how people’s material living conditions have changed.

What are these goods and services that I’m talking about?

Have a look around yourself right now. Many of the things you see are products that were produced by someone so that you can use them: the trousers you are wearing, the device you are reading this on, the electricity that powers it, the furniture around you, the toilet that is nearby, the sewage system it is connected to, the bus or car or bicycle you took to get where you are, the food you had this morning, the medications you will receive when you get sick, every window in your home, every shirt in your wardrobe, and every book on your shelf.

At some point in the past, many of these products were not available. The majority did not have access to the most basic goods and services they needed. A recent study on the history of global poverty estimates that just two centuries ago, roughly three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.” 1

Let’s look at the history of the last item on that list above, books.

A few centuries ago, the only way to produce a book was for a scribe to copy it word-for-word by hand. Book production was a slow process; it took a scribe about eight months of daily work to produce a single copy of the Bible. 2

It was so laborious that only very few books were produced. The chart shows the estimates of historians. 3

But then, in the 15th century, the goldsmith Johannes Gutenberg combined the idea of movable letters with the mechanism that he knew from the wine presses in his hometown. He developed the printing press. Gutenberg developed a new production technology, and it changed things dramatically. Instead of spending months to produce one book, a worker was now able to produce several books a day.

As the printing press spread across Europe, book production soared. Books, which were previously only available to a tiny elite, became available to more and more people.

This is one example of how growth is possible and what economic growth is : an increase in the production of goods and services that people produce for each other.

A list of goods and services that people produce for each other

Before we get to a more detailed definition of economic growth, it’s helpful to remind ourselves of the astonishingly wide range of goods and services that people produce. I think this is helpful because measures of economic output can easily become abstract. This abstraction means we easily lose the mental connection to the goods and services such measures actually talk about.

This list of goods and services isn’t meant as a definitive list, but it helped me to think about the relevance of poverty and growth: 4

At home: Light in your home at night; the sewage system; a shower; vacuum cleaner; fridge; heating; air conditioning; electricity; windows; a toilet – even a flush toilet; soap; a balcony or a garden; running water; warm water; cutlery and dishes; a hut – or even a warm apartment or house; an oven; sewing machine; a stove (that doesn’t poison you ); carpet; toilet paper; trash bags; music recordings or even online streaming of the world’s music and film; garbage collection; radio; television; a washing machine; 5 furniture; telephone; a comfortable bed, and a room for one’s own.

Food: The most fundamental need is to have enough food. For much of human history, a large share of people suffered from hunger , and millions still do .

But we also need to have a richer and more varied diet to get all of the nutrients we need. Unfortunately, billions still suffer from micronutrient deficiency .

Also, think of clean drinking water; reliable markets and stores with a wide range of available goods; food that rarely poisons you (pasteurized milk, for example); spices; tea and coffee; kitchen utensils and practical ingredients (from a bag of flour to canned soups or a yogurt); chocolate and sweets; fresh fruit and vegetables; bread; take-away food or the possibility to go to a restaurant; ways to protect your food from spoiling (from the cold chain that delivers the goods to the cellophane to wrap it with); wine or beer; fertilizer ( very important); and tractors to work the fields.

Knowledge: Education from primary up to university level; books; data that allows us to understand the world around us; newspapers; vocational training; kindergartens; and scientific knowledge to understand ourselves and the world around us.

Infrastructure: Public transportation with buses, subways, and trains; roads; paved roads; airplanes; bridges; financial services (including bank accounts, ATMs, and credit cards); cities; a network of competent workers that can help you to fix problems; postal services (that delivers fast); national parks; street cleaning; public swimming pools (even private pools); firefighters; parks; online shopping; weather forecasts; and a waste management system.

Tools and technologies: Pencils, ballpoint pens, and paper; lawnmowers; cars; car mechanics; bicycles; power tools like drills (even battery-powered ones); a watch; computers and laptops; smartphones (with GPS and a good camera); being able to stay in touch with distant friends or family members (or even visiting them); GPS; batteries; telephones and mobiles; video calls; WiFi; and the internet right here.

Social services: Caretakers for those who are disabled, sick, or elderly; protection from crime; non-profit organizations financed by the public, by donations or by philanthropies; insurance (against many different risks); and a legal system with judges and lawyers that implement the rule of law.

There is also a wide range of transfer payments, which in themselves are not services (they are transfers) but which become more affordable as a society becomes more prosperous: sick leave and disability benefits; unemployment benefits; and being able to help others with a regular donation of some of your income to an effective charity . 6

Life and free time : tents; travel and holidays; surfboards; skis; board games; hotels; playgrounds; children’s toys; courses to learn hobbies (from painting to musical instruments or courses on the environment around us); a football; pets; the cinema, theater or a music concert; clothes (even comfortable and good-looking ones that keep you warm and protect you from the rain); shoes (even shoes for different purposes); shoe repair; the contraceptive pill and the ability to choose if and when to have children; sports classes from rock climbing to pilates and yoga; cigarettes (not all goods that people produce for each other are good for them); 7 a musical instrument; a camera; and parties to celebrate life.

Health and staying well: Dentists; antibiotics; surgeries; anesthesia; mental health care from psychologists and psychiatrists; vaccines; public sewage; a haircut; a massage; midwives; ambulances; modern medicine; band-aids; pharmaceutical drugs; sanitary pads; toothbrushes; dental floss (some do floss); disinfectants; glasses; sunglasses; contact lenses; hearing aids; and hospitals – including very well-equipped, modern hospitals that offer CT scans, which include intensive care units and allow heart or brain surgery or organ transplants.

Specific needs and wishes: Most of the products listed above are generally helpful to people. But often, the goods and services that are most important to one individual are very specific.

As I’m writing this, I have a big cast on my left leg after I broke it. These days, I depend on products that I had no use for just three weeks ago. To move around, I need two long crutches, and to prevent thrombosis, I need to inject a blood thinner every day. After I broke my leg, I needed the service of nurses and doctors. They had to rely on a range of medical equipment, such as X-ray machines. To get back on my feet, I might need the service of physiotherapists.

We all have very specific needs or wishes for particular goods and services. Some needs arise from bad luck, like an injury. Others are due to a new phase in life – think of the specific goods and services you need when you have a baby or when you take care of an elderly person. And yet others are due to specific interests – think of the needs of a fisherman, or a pianist, or a painter.

All of these goods and services do not just magically appear. They need to be produced. At some point in the past, the production of most of them was zero, and even the most essential ones were extremely scarce. So, if you want to know what economic growth means for your life, look at the list above.

What is economic growth?

So, how can we define what economic growth is?

A definition that can be found in so many publications that I don’t know which one to quote is that economic growth is “an increase in the amount of goods and services produced per head of the population over a period of time.”

The definition in the Oxford Dictionary is almost identical: “Economic growth is the increase in the production of goods and services per head of population over a stated period of time”. And the definition in the Cambridge Dictionary is similar. It defines growth as “an increase in the economy of a country or an area, especially of the value of goods and services the country or area produces.”

In the following footnote, you find more definitions. Bringing these definitions together and taking into account the economic literature more broadly, I suggest the following definition: Economic growth is an increase in the quantity and quality of the economic goods and services that a society produces.

I prefer a definition that is slightly longer than most others. If you want a shorter definition, you can speak of ‘products’ rather than ‘goods and services’, and you can speak of ‘value’ rather than mentioning both the quantity and quality aspects separately.

The most important change in quantity is from zero to one when a new product becomes available. Many of the most important changes in history became possible when new goods and services were developed; think of antibiotics, vaccines, computers, or the telephone.

You find more thoughts on the definition of growth in the footnote. 8

What are economic goods and services?

Many definitions of economic growth simply speak of the production of ‘goods and services’ collectively. This sidesteps a key difficulty in its definition and measurement. Economic growth is not concerned with all goods and services but with a subset of them: economic goods and services.

In everything we do – even in our most mundane activities – we continuously ‘produce’ goods and services in some form. Early in the morning, once we’ve brushed our teeth and made ourselves toast, we have already produced one service and one good. Should we count the tooth-brushing and the toast-making towards the economic production of the country we live in? The question of where to draw the line isn’t easy to answer. But we have to draw the line somewhere. If we don’t, we end up with a concept of production that is so broad that it becomes meaningless; we’d produce a service with every breath we take and every time we scratch our nose.

The line that we have to draw to define the economic goods and services is called the ‘production boundary’. The sketch illustrates the idea. The production boundary defines those goods and services that we consider when we speak about economic growth.

For a huge number of goods or services, there is no question that they are of the ‘economic’ type. But for some of them, it can be complicated to decide on which side of the production boundary they fall. One example is the question of whether the production of illegal goods should be included. Another is whether production within a household should be included – should we consider it as economic production if we grow tomatoes in our backyard and make soup from them? Different authors and different measurement frameworks have given different answers to these questions. 9

There are some characteristics that are helpful in deciding on which side of the boundary a particular product falls. 10 Economic goods and services are those that can be produced and that are scarce in relation to the demand for them. They stand in contrast to free goods, like sunlight, which are abundant, or those many important aspects in our lives that cannot be produced, like friendships. 11 Our everyday language has this right: we don’t refer to the sun or our friendships as a good or service that we ‘produce’.

An economic good or service is provided by people to each other as a solution to a problem they are faced with, and this means that they are considered useful by the person who demands it.

A last characteristic that helps decide whether you are looking at an economic product is “delegability”. An activity is considered to be production in an economic sense if it can be delegated to someone else. This would include many of the goods and services on that long list we considered earlier but would exclude your breathing, for example.

Because economic goods are scarce in relation to the demand for them, human effort is required to produce them. 12 A shorter way of defining growth is, therefore, to say that it is an increase in the production of those products that people produce for each other.

The majority of goods and services on that long list above are uncontroversially of the economic type – everything from the light bulbs and furniture in your home to the roads and bridges that connect your home with the rest of the world. They are scarce in relation to the demand for them and have to be produced by someone; their production is delegable, and they are considered useful by those who want them.

It’s worth recognizing that many of the difficulties in defining the production boundary arise from the effort to make measures of economic production as comparable as possible.

To give just one concrete example of the type of considerations that make the discussion about specific definitions so difficult, let’s look at how the production boundary is drawn in the housing sector.

Imagine two countries that are identical except for one aspect: home ownership. In Country A, everyone rents their homes, and the total sum of annual rent amounts to €2 billion per year. In Country B, everyone owns their own home, and no one pays rent. To provide housing is certainly an economic service, but if we only counted monetary transactions, then we would get the false impression that the value of goods and services in Country A is €2 billion higher than in Country B. To avoid such misjudgment, the production boundary includes the housing services that are provided without any monetary transactions. In National Accounts, statisticians take into account the “imputed rental value of owner-occupied housing” – those households who own their home get assigned an imputed rental value. In the imagined scenario, these imputed rents would amount to €2 billion in Country B so that the prosperity of people in these two countries would be judged to be identical.

It is the case more broadly that National Account figures (like GDP) do include important non-market goods and services that are not included in household survey measures of people’s income. GDP does not only include the housing services by owner-occupied housing but also the provision of most goods and services that are provided by the government or nonprofit institutions.

How can we measure economic growth?

Many discussions about economic growth are extraordinarily confusing. People often talk past one another.

I believe the key reason for this is that the discussion of what economic growth is gets muddled up with how it is measured .

While it is straightforward enough to define what growth is, measuring growth is very, very difficult.

In the worst cases, measures of growth are mixed up with a definition of growth. Growth is often measured as an increase in income or inflation-adjusted GDP per capita. But these measures are not the definition of it – just like life expectancy is a measure of population health but is certainly not the definition of population health.

To see how difficult it is to measure growth, take a moment to think about how you would measure it. How would you determine whether the quantity and quality of all economic goods and services produced by a society increased or decreased over time?

Finding a measure means that you have to find a way to express a huge amount of relevant information in a single metric. As the sketch shows, you have to first measure the quantity and quality of all the many, many goods and services that get produced and then find a way to aggregate all of these measurements into one summarizing metric. No matter what measure you propose for such a difficult task, there will always be problems and shortcomings in any proposal you might make.

In the following section, I will show four possible ways of measuring growth and present some data for each of them to see how they can inform us about the history of material living conditions.

Measuring economic growth by tracking access to particular goods and services

One possible way to measure growth is to make a list of some specific products that people want and to see what share of the population has access to them.

We do this very often at Our World in Data . The chart here shows the share of the world population that has access to four basic resources. All of these statistics measure some particular aspect of economic growth.

You can switch this chart to any country in the world via the “Change country” option. You will find that, judged by this metric, some countries achieved rapid growth – like Indonesia – while others only saw very little growth, like Chad.

The advantage of measuring growth in this way is that it is concrete. It makes clear what exactly is growing, and it’s clear which particular goods and services people gain access to.

The downside is that it only captures a small part of economic growth. There are many other goods and services that people want in addition to water, electricity, sanitation, and cooking technology. 13

You could, of course, expand this approach of measuring growth to many more goods and services, but this is usually not done for both practical and ethical considerations:

One practical reason is that a list of all the products that people value would be extremely long. Keeping lists that track people’s access to all products would be a daunting task: hundreds of different toothbrushes, thousands of different dentists, hundreds of thousands of different dishes in different restaurants, and many millions of different books. 14 If you wanted to measure growth across all goods and services in this way, you’d soon employ half the country in the statistical office.

In practice, any attempt to measure growth as access to particular products, therefore, means that you look only at a relatively small number of very particular goods and services that statisticians or economists are interested in. This is problematic for ethical reasons. It should not be up to the statisticians or economists to determine which few products should be considered valuable.

You might have realized this problem already when you read my list at the beginning of this text. You might have disagreed with the things that I put on that list and thought that some other goods and services were missing. This is why it is important to track incomes and not just access to particular goods: measuring people’s income is a way of measuring the options that they have rather than the choices that they make. It respects people’s judgment to decide for themselves what they find most important for their lives.

On our site, you find many more such metrics of growth that capture whether people have access to particular goods and services:

• This chart shows the share of US households having access to specific technologies.
• This chart shows the share that has health insurance.
• This chart shows access to schools.

Measuring economic growth by tracking the ratio between people’s income and the prices of particular goods and services

To measure the options that a person’s income represents, we have to compare their income with the prices of the goods and services that they want. We have to look at the ratio between income and prices.

The chart here does this for one particular product – books – and brings us back to the history of growth in the publishing sector that we started with. 15 Shown is the ratio between the average income that a worker receives and the price of a book. It shows how long the average worker had to work to buy one book. Note that this data is plotted on a logarithmic axis.

Before the invention of the printing press in the 15th century, the price was often as high as several months of work. The fact that books were unaffordable for almost everyone should not be surprising. It corresponds to what we’ve seen earlier that it took a scribe several months to produce a single book.

The chart also shows how this changed when the printing press increased the productivity of publishing. As the labor required to produce a book declined from many months of work to less than a day, the price fell from months of wages to mere hours.

This shows us how an innovation in technology raises productivity and how an increase in production makes it more affordable. How it increases the options that people have.

Global inequality: How do incomes compare in countries around the world?

In the previous section, we measured growth as the ratio between income and the price of one particular good. But of course, we could do the same for all the many goods and services that people want. This ratio – the ratio between the nominal income that people receive and the prices that people have to pay for goods and services – is called ‘real income’ . 16

Real income = Nominal income / price of goods and services

Real income grows when people’s nominal income increases or when the prices of goods and services decrease.

In contrast to many of the other metrics on Our World in Data, a person’s real income does not matter for its own sake but because it is a means to an end. A means to many ends, in fact.

Economic growth – measured as an increase in people’s real income – means that the ratio between people’s income and the prices of what they can buy is increasing: goods and services become more affordable, and people become less poor. It is because a person has more choices as their income grows that economists care so much about these monetary measures of prosperity.

The two most prominent measures of real income are GDP per capita and people’s incomes, as determined through household surveys.

They are shown in this chart.

Before we get back to the question of economic growth, let’s see what these measures of real income tell us about the economic inequality in the world today.

Both measures show that global inequality is very large. In a rich country like Denmark, an average person can purchase goods and services for $54 a day, while the average Ethiopian can only afford goods and services that cost $3 per day.

Both measures of real incomes in this chart are measured in international dollars, which means that they take into account the level of prices in each country (using purchasing power parity conversion factors). This price adjustment is done in such a way that one international-$ is equivalent to the purchasing power of one US-$ in the US . An income of int.-$3 in Ethiopia, for example, means that it allows you to purchase goods and services in Ethiopia that would cost US-$3 in the US . All dollar values in this text are given in international dollars, even though I often shorten it to just the $-sign.

If you are living in a rich country and you want to have a sense of what it means to live in a poor country – where incomes are 20 times lower – you can imagine that the prices for everything around you suddenly increase 20-fold. 17 If all the things you buy suddenly get 20-times more expensive your real income is 20-times lower. A loaf of bread doesn’t cost $2 but $40, a pair of jeans costs $400, and an old car costs $40,000. If you ask yourself how these price increases would change your daily consumption and your day-to-day life, you can get a sense of what it means to live in a poor country.

The two shown measures of real income differ:

• The data on the vertical axis is based on surveys in which researchers go from house to house and ask people about their economic situation. In some countries, people are asked about their income, while in other countries, people are asked about their expenditure – expenditure is income minus savings. In poor countries, these two measures are close to each other since poor people do not have the chance to save much.
• On the other hand, GDP per capita starts at the aggregate level and divides the income of the entire economy by the number of people in that country. GDP per capita is higher than per capita survey income because GDP is a more comprehensive measure of income. As we’ve discussed before, it includes an imputed rental value of owner-occupied housing and other differences, such as government expenditure.

Income as a measure of economic prosperity is much more abstract than the metrics we looked at previously. The comparison of incomes of people around the world in this scatterplot measures options, not choices. It shows us that the economic options for billions of people are very low. The majority of the world lives on very low incomes of less than $20, $10, or even $5 per day. In the next section, we’ll see how poverty has changed over time.

• GDP per capita vs. Daily income of the poorest 10%
• GDP per capita vs. Daily average income

Global poverty and growth: How have incomes changed around the world?

Economic growth, as we said before, is an increase in the production of the quantity and quality of the economic goods and services that a society produces. The total income in a society corresponds to the total sum of goods and services the society produces – everyone’s spending is someone else’s income. This means that the average income corresponds to the level of average production, so that the average income in a society increases when the production of goods and services increases.

Average production = average income

In this final section, let’s see how incomes have changed over time, first as documented in survey incomes and then via GDP per capita.

Measuring economic growth by tracking incomes as reported in household surveys

The chart shows the income of people around the world over time, as reported in household surveys. It shows the share of the world population that lives below different poverty lines: from extremely low poverty lines up to $30 per day, which corresponds to notions of poverty in high-income countries .

Many of the poorest people in the world rely on subsistence farming and do not have a monetary income. To take this into account and make a fair comparison of their living standards, the statisticians who produce these figures estimate the monetary value of their home production and add it to their income.

Again, the prices of goods and services are taken into account: these are measures of real incomes. As explained before, incomes are adjusted for price differences between countries, and they are also adjusted for inflation. As a consequence of these two adjustments, incomes are expressed in international dollars in 2017 prices, which means that these income measures express what you would have been able to buy with US dollars in the US in 201 7.

Global economic growth can be seen in this chart as an increasing share of the population living on higher incomes. In 2000 two thirds of the world lived on less than $6.85 per day. In the following 19 years, this share fell by 22 percentage points.

In 2020 and 2021 — during the economic recession that followed the pandemic — the size of the world economy declined, and the share of people in poverty increased . As soon as global data for this period is available, we will update this chart.

The data shows that global poverty has declined, no matter what poverty line you choose. It also shows that the majority of the world still lives on very low incomes. As we’ve seen, we can describe the same reality from the production side: the global production of the goods and services that people want has increased, but there is still not enough production of even very basic products. Most people in the world do not have access to them.

An advantage of household survey data over GDP per capita is that it captures the inequality of incomes within a country. You can explore this inequality with this chart by switching to see the data for an individual country via the ‘Change country’ button.

Measuring economic growth by tracking GDP per capita

GDP per capita is a broader measure of real income, and in contrast to survey income, it also takes government expenditures into account. A lot of thinking has gone into the construction of this very prominent metric so that it is comparable not only over time but also across countries. This makes it especially useful as a measure to understand the economic inequality in the world, as we’ve seen above. 18

Another advantage of this measure is that historians have reconstructed estimates of GDP per capita that go back many centuries. This historical research is an extremely laborious task , and researchers have dedicated many years of work to these reconstructions. The ‘Maddison Project’ brings together these long-run reconstructions from various researchers, and thanks to these efforts, we have a good understanding of how incomes have changed over time.

The chart shows how average incomes in different world regions have changed over the last two centuries. Looking at the latest data, you see again the very large inequality between different parts of the world today. You now also see the history of how we got here: small increases in production in some world regions and very large increases in those regions where people have the highest incomes today.

One of the very first countries to achieve sustained economic growth was the United Kingdom. In this chart, we see the reconstructions of GDP per capita in the UK over the last centuries.

It is no accident that the shape of this chart is very similar to the chart on book production at the beginning of this text – very low and almost flat for many generations and then quickly rising. Both of these developments are driven by changes in production.

Average income corresponds to average production, and societies around the world were able to produce very few goods and services in the past. There were no major exceptions to this reality. As we see in this chart, global inequality was much lower than today: the majority of people around the world were very poor.

To get a sense of what this means, you can again take the approach we’ve used to understand the inequality in the world today. When incomes in today’s rich countries were 20 times lower, it was as if all the prices around you today would suddenly increase 20-fold. But in addition to this, you have to consider that all the goods and services that were developed since then disappeared – no bicycle, no internet, no antibiotics. All that’s left for you are the goods and services of the 17th century, but all of them are 20 times more expensive than today. The majority of people around the world, including in today’s richest countries, live in deep poverty.

Just as we’ve seen in the history of book production, this changed once new production technologies were introduced. The printing press was an exceptionally early innovation in production technology; most innovations happened in the last 250 years. The starting point of this rise out of poverty is called the Industrial Revolution.

The printing press made it possible to produce more books. The many innovations that made up the Industrial Revolution made it possible to increase the production of many goods and services. Compare the effort that it takes for a farmer to reap corn with a scythe to the possibilities of a farmer with a tractor or a combined harvester, or think of the technologies that made overland travel faster – from walking on foot to traveling in a horse buggy to taking the train or car; or think of the effort it took to build those roads that the buggies once traveled on with the modern machinery that allows us to produce the corresponding public infrastructure today .

The production of a myriad of different goods and services followed trajectories very similar to the production of books – flat and low in the past and then steeply increasing. The rise in average income that we see in this chart is the result of the aggregation of all these production increases.

In the past, before societies achieved economic growth, the only way for anyone to become richer was for someone else to become poorer; the economy was a zero-sum game. In a society that achieves economic growth, this is no longer the case. When average incomes increase, it becomes possible for people to become richer without someone else becoming poorer.

This transition from a zero-sum to a positive-sum economy is the most important change in economic history (I wrote about it here ) and made it possible for entire societies to leave the extreme poverty of the past behind.

Conclusion: The history of global poverty reduction has just begun

The chart shows the global history of extreme poverty and economic growth.

In the top left panel, you can see how global poverty has declined as incomes increased; in the other eight panels, you see the same for all world regions separately. The starting point of each trajectory shows the data for 1820 and tells us that two centuries ago, the majority of people lived in extreme poverty, no matter where in the world they were at home.

Back then, it was widely believed that widespread poverty was inevitable. But this turned out to be wrong. The trajectories show how incomes and poverty have changed in each world region. All regions achieved growth – the goods and services that people need saw their production and quality increase – and the share living in extreme poverty declined. 19

This historical research was done by Michail Moatsos and is based on the ‘cost of basic needs’-approach as suggested by Robert Allen (2017) and recommended by the late Tony Atkinson. 20 The name ‘extreme poverty’ is appropriate as this measure is based on an extremely low poverty threshold. It takes us back to what I mentioned at the very beginning; this historical research tells us – as the author puts it – that three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.”

Since then, all world regions have made progress against extreme poverty – some much earlier than others – but in particular, in Sub-Saharan Africa, the share of people living in deep poverty is still very high.

The last two centuries were the first time in human history that societies have achieved sustained economic growth, and the decline of global poverty is one of the most important achievements in history. But it is still a very long way to go.

This is what we see in this final chart. The red line shows the share of people living in extreme poverty that we just discussed. Additionally, you now also see the share living on less than $3.65, $6.85, and $30 per day. 21

The world today is very unequal, and the majority of the world still lives in poverty: 47% live on less than $6.85 per day, and 84% live on less than $30. Even after two centuries of progress, we are still in the early stages. The history of global poverty reduction has only just begun.

That the world has made substantial progress but nevertheless still has a long way to go is the case for many of the world’s very large problems. I’ve written before that all three statements are true at the same time: The world is much better, the world is awful, and the world can be much better. This is very much the case for global poverty. The world is much less poor than in the past, but it is still very poor, and it remains one of the largest problems we face.

Some writers suggest we can end poverty by simply reducing global inequality. This is not the case. I’m very much in favor of reducing global inequality, and I hope I do what I can to contribute to this. But it is important to be clear that a reduction of inequality alone would still mean that billions around the world would live in very poor conditions. Those who don’t see the importance of growth are not aware of the extent of global poverty. The production of many crucial goods and services has to increase if we want to end it. How much economic growth is needed to achieve this? This is the question I answered in this recent text .

To solve the problems we face, it is not enough to increase overall production. We also need to make good decisions about which goods and services we want to produce more of and which ones we want less of. Growth doesn’t just have a rate, it also has a direction, and the direction we choose matters – for our own happiness and for achieving a sustainable future .

I hope this text was helpful in making clear what economic growth is. It is necessary to remind ourselves of that because we mostly talk about poverty and growth in monetary terms. The monetary measures have the disadvantage that they are abstract, perhaps so abstract that we even forget what growth is actually about and why it is so important. The goods and services that we all need are not just there – they need to be produced – and economic growth means that the quality and quantity of these goods and services increase, from the food that we eat to the public infrastructure we rely on.

The history of economic growth is the history of how societies leave widespread poverty behind by finding ways to produce more of the goods and services that people need – all the very many goods and services that people produce for each other: look around you now.

Acknowledgments: I would like to thank Joe Hasell and Hannah Ritchie for very helpful comments on draft versions of this article.

Our World in Data presents the data and research to make progress against the world’s largest problems. This article draws on data and research discussed in our topic pages on Economic Inequality , Global Poverty , and Economic Growth .

Version history: In October 2023, I copy-edited this article; it was a minor update, and nothing substantial was changed.

Michail Moatsos (2021) – Global extreme poverty: Present and past since 1820. Published in OECD (2021), How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

At the time when material prosperity was so poor, living conditions were extremely poor in general; close to half of all children died .

Historian Gregory Clark reports the estimate that scribes were able to copy about 3,000 words of plain text per day.

See Clark (2007) – A Farewell to Alms: A Brief Economic History of the World. Clark (2007). In it, Clark quotes his earlier working paper with Patricia Levin as the source of these estimates. Gregory Clark and Patricia Levin (2001) – “How Different Was the Industrial Revolution? The Revolution in Printing, 1350–1869.”

There are about 760,000 words in the bible (it differs between various translations and languages; here is an overview of some translations).

This implies that the production of one copy of the Bible meant 253.3 days (8.3 months) of daily work.

Copying the text was not the only step in the production process for which productivity was low. The ink had to be made, parchment had to be produced and cut, and many other steps involved laborious work.

Wikipedia’s article about scribes reports sources that estimate that the production time per bible was even longer than 8 months.

Clark himself states in the same publication that “Prior to that innovation, books had to be copied by hand, with copyists on works with just plain text still only able to copy 3,000 words per day. Producing one copy of the Bible at this rate would take 136 man-days.” Since the product of 136 and 3000 is only 408,000, it is unclear to me how Clark has arrived at this estimate – 408,000 words are fewer words than in the Tanakh and other versions of the bible.

The data is taken from Eltjo Buringh and Jan Luiten Van Zanden (2009) – Charting the “Rise of the West”: Manuscripts and Printed Books in Europe, a Long-Term Perspective from the Sixth through Eighteenth Centuries. In The Journal of Economic History Vol. 69, No. 2 (June 2009), pp. 409-445. Online here .

Western Europe in this study is the area of today’s Great Britain, Ireland, France, Belgium, Netherlands, Germany, Switzerland, Italy, Spain, Sweden, and Poland.

On the history and economics of book production, see also the historical work of Jeremiah Dittmar.

I’ve relied on several sources to produce this list. One source was the simple descriptions of the consumption bundles that are relied upon for CPI measurement – like this one from Germany’s statistical office . And I have also relied on the national accounts themselves.

This list is also inspired partly by this list of Gwern and I’m also grateful for the feedback that I got via Twitter to earlier versions of this list. [ Here I shared the list on Twitter ]

This is Hans Rosling’s talk on the magic of the washing machine – worth watching if you haven’t seen it.

Of course all of these transfer payments have a service component to them, someone is managing the payment of the disability benefits etc.

Because smoking causes a large amount of suffering and death I do not find cigarettes valuable, but my opinion is not what matters for a list of goods and services that people produce for each other. Whether some good is considered to be part of the domestic product depends on whether it is a good that some people want, not whether you or I want it. More on this below.

Very similar to the definitions given above is the definition that Kimberly Amadeo gives: “Economic growth is an increase in the production of goods and services over a specific period.”

“Economic growth is an increase in the production of economic goods and services, compared from one period of time to another” is the definition at Investopedia .

Alternatively, to my definition, I think it can be useful to think of economic growth as not directly concerned with the output as such but with the capacity to produce this output. The NASDAQ’s glossary defines growth in that way: “An increase in the nation's capacity to produce goods and services.”

Wikipedia defines economic growth as follows: “Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.” Definitions that are based on how growth is measured strike me as wrong – just like life expectancy is a measure of population health and hardly the definition of population health. I will get back to this mistake further below in this text.

An aspect that I emphasize more explicitly than others is the quality of the goods and services. People obviously do just care about the number of goods, and in the literature on growth, the measurement of changes in quality is a central question. Many definitions speak more broadly about the ‘value’ of the goods and services that are produced, but I think it is worth emphasizing that growth is also concerned with a rise in the quality of goods and services.

OECD – Measuring the Non-Observed Economy: A Handbook .

The relevant numbers are not small. For the US alone, “illegal drugs add $108 billion to measured nominal GDP in 2017, illegal prostitution adds $10 billion, illegal gambling adds $4 billion, and theft from businesses adds $109 billion” if they were to be included in the US National Accounts. This is according to the report by Rachel Soloveichik (2019) – Including Illegal Activity in the U.S. National Economic Accounts . Published by the BEA.

Ironmonger (2001) – Household Production. In International Encyclopedia of the Social & Behavioral Sciences. Pages 6934-6939. https://doi.org/10.1016/B0-08-043076-7/03964-4

Or for some longer run data on the US: Danit Kanal and Joseph Ted Kornegay (2019) – Accounting for Household Production in the National Accounts: An Update, 1965–2017 . In the Survey of Current Business.

Helpful references that discuss how the production boundary is drawn (and how it changed over time) are: Lequiller and Blades – Understanding National Accounts (available in various editions) Diane Coyle (2016) – GDP: A Brief but Affectionate History https://press.princeton.edu/books/paperback/9780691169859/gdp

The definition of the production boundary by Statistics Finland

Itsuo Sakuma (2013) – The Production Boundary Reconsidered. In The Review of Income and Wealth. Volume 59, Issue 3; Pages 556-567.

Diane Coyle (2017) – Do-it-Yourself Digital: The Production Boundary and the Productivity Puzzle. ESCoE Discussion Paper 2017-01, Available at SSRN: http://dx.doi.org/10.2139/ssrn.2986725

A more general way of thinking about free goods and services is to consider them as those for which the supply is hugely greater than the demand.

Their production, therefore, has an opportunity cost, which means that if someone obtains an economic good, someone is giving up on something for it – this can either be the person themselves or society more broadly. Free goods, in contrast, are provided with zero opportunity cost to society.

It is also the case that the international statistics on these measures often have very low cutoffs for what it means ‘to have access’; this is, for example, the case for what it means to have access to energy.

10 years ago, Google counted there were 129,864,880 different books, and since then, the number has increased further by many thousands of new books every day.

This chart is from Jeremiah Dittmar and Skipper Seabold (2019) – New Media New Knowledge – How the printing press led to a transformation of European thought . I was unfortunately not able to find the raw data anywhere and could not redraw this chart; if someone knows where this (or comparable) data can be found, please let me know.

In the language of economists, the nominal value is measured in terms of money, whereas the real value is measured against goods or services. This means that the real income is the income adjusted for inflation (it is adjusted for the changes in prices of goods and services). Thereby, it allows comparisons that tell us the quantity and quality of the goods and services that people were able to purchase at different points in time.

I learned this way of thinking about it from Twitter user @Kirsten3531, who responded with this idea to a tweet of mine here https://twitter.com/Kirsten3531/status/1389553625308045317

We’ve discussed one such consideration that is crucial for comparability when we consider how to take into account the value of owner-occupied housing.

Whether economic growth translates into the reduction of poverty depends not only on the growth itself but also on how the distribution of income changes. The poverty metrics shown in this chart and in previous charts take both of these aspects – the average level of production/income and its distribution – into account.

Jutta Bolt and Jan Luiten van Zanden (2021) – The GDP data in the chart is taken from The Long View on Economic Growth: New Estimates of GDP, How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

The latest data point for the poverty data refers to 2018, while the latest data point for GDP per capita refers to 2016. In the chart, I have chosen the middle year (2017) as the reference year.

The ‘cost of basic needs’-approach was recommended by the ‘World Bank Commission on Global Poverty’, headed by Tony Atkinson, as a complementary method in measuring poverty.

The report for the ‘World Bank Commission on Global Poverty’ can be found here .

Tony Atkinson – and, after his death, his colleagues – turned this report into a book that was published as Anthony B. Atkinson (2019) – Measuring Poverty Around the World. You find more information on Atkinson’s website .

The CBN-approach Moatsos’ work is based on what was suggested by Allen in Robert Allen (2017) – Absolute poverty: When necessity displaces desire. In American Economic Review, Vol. 107/12, pp. 3690-3721, https://doi.org/10.1257/aer.20161080 .

Moatsos describes the methodology as follows: “In this approach, poverty lines are calculated for every year and country separately, rather than using a single global line. The second step is to gather the necessary data to operationalize this approach alongside imputation methods in cases where not all the necessary data are available. The third step is to devise a method for aggregating countries’ poverty estimates on a global scale to account for countries that lack some of the relevant data.” In his publication – linked above – you find much more detail on all of the shown poverty data. The speed at which extreme poverty declined increased over time, as the chart shows. Moatsos writes, “It took 136 years from 1820 for our global poverty rate to fall under 50%, then another 45 years to cut this rate in half again by 2001. In the early 21st century, global poverty reduction accelerated, and in 13 years, our global measure of extreme poverty was halved again by 2014.”

These are the same global poverty estimates – based on household surveys – we discussed above.

Cite this work

Our articles and data visualizations rely on work from many different people and organizations. When citing this article, please also cite the underlying data sources. This article can be cited as:

BibTeX citation

Reuse this work freely

All visualizations, data, and code produced by Our World in Data are completely open access under the Creative Commons BY license . You have the permission to use, distribute, and reproduce these in any medium, provided the source and authors are credited.

The data produced by third parties and made available by Our World in Data is subject to the license terms from the original third-party authors. We will always indicate the original source of the data in our documentation, so you should always check the license of any such third-party data before use and redistribution.

All of our charts can be embedded in any site.

Our World in Data is free and accessible for everyone.

Help us do this work by making a donation.

1.1 What Is Economics, and Why Is It Important?

Learning objectives.

By the end of this section, you will be able to:

• Discuss the importance of studying economics
• Explain the relationship between production and division of labor
• Evaluate the significance of scarcity

Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 expendable hours in the day to earn income to acquire goods and services, for leisure time, or for sleep. At any point in time, there is only a finite amount of resources available.

Think about it this way: In 2015 the labor force in the United States contained over 158 million workers, according to the U.S. Bureau of Labor Statistics. The total land area was 3,794,101 square miles. While these are certainly large numbers, they are not infinite. Because these resources are limited, so are the numbers of goods and services we produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

Introduction to FRED

Data is very important in economics because it describes and measures the issues and problems that economics seek to understand. A variety of government agencies publish economic and social data. For this course, we will generally use data from the St. Louis Federal Reserve Bank's FRED database. FRED is very user friendly. It allows you to display data in tables or charts, and you can easily download it into spreadsheet form if you want to use the data for other purposes. The FRED website includes data on nearly 400,000 domestic and international variables over time, in the following broad categories:

• Money, Banking & Finance
• Population, Employment, & Labor Markets (including Income Distribution)
• National Accounts (Gross Domestic Product & its components), Flow of Funds, and International Accounts
• Production & Business Activity (including Business Cycles)
• Prices & Inflation (including the Consumer Price Index, the Producer Price Index, and the Employment Cost Index)
• International Data from other nations
• U.S. Regional Data
• Academic Data (including Penn World Tables & NBER Macrohistory database)

For more information about how to use FRED, see the variety of videos on YouTube starting with this introduction.

If you still do not believe that scarcity is a problem, consider the following: Does everyone require food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In every country in the world, there are people who are hungry, homeless (for example, those who call park benches their beds, as Figure 1.2 shows), and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Let’s delve into the concept of scarcity a little deeper, because it is crucial to understanding economics.

The Problem of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for pay. If you do not, someone else does on your behalf. Yet most of us never have enough income to buy all the things we want. This is because of scarcity. So how do we solve it?

Visit this website to read about how the United States is dealing with scarcity in resources.

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything. How do we use our limited resources the best way possible, that is, to obtain the most goods and services we can? There are a couple of options. First, we could each produce everything we each consume. Alternatively, we could each produce some of what we want to consume, and “trade” for the rest of what we want. Let’s explore these options. Why do we not each just produce all of the things we consume? Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment. Most of us do not know how to do all—or any—of those things, but it is not because we could not learn. Rather, we do not have to. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith ( Figure 1.3 ) in his book, The Wealth of Nations .

The Division of and Specialization of Labor

The formal study of economics began when Adam Smith (1723–1790) published his famous book The Wealth of Nations in 1776. Many authors had written on economics in the centuries before Smith, but he was the first to address the subject in a comprehensive way. In the first chapter, Smith introduces the concept of division of labor , which means that the way one produces a good or service is divided into a number of tasks that different workers perform, instead of all the tasks being done by the same person.

To illustrate division of labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few. Smith counted 18 distinct tasks that different people performed—all for a pin, believe it or not!

Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located. A complex business like a large manufacturing factory, such as the shoe factory ( Figure 1.4 ), or a hospital can have hundreds of job classifications.

Why the Division of Labor Increases Production

When we divide and subdivide the tasks involved with producing a good or service, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith noticed that one worker alone might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to complete two or three of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons.

First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. (In later chapters, we will develop this idea by discussing comparative advantage .) People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, geography affects specialization. For example, it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota. If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more effective than if they produce a combination of things, some of which they are good at and some of which they are not.

Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better.

A similar pattern often operates within businesses. In many cases, a business that focuses on one or a few products (sometimes called its “ core competency ”) is more successful than firms that try to make a wide range of products.

Third, specialization allows businesses to take advantage of economies of scale , which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines. For example, if a factory produces only 100 cars per year, each car will be quite expensive to make on average. However, if a factory produces 50,000 cars each year, then it can set up an assembly line with huge machines and workers performing specialized tasks, and the average cost of production per car will be lower. The ultimate result of workers who can focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations is that society as a whole can produce and consume far more than if each person tried to produce all of their own goods and services. The division and specialization of labor has been a force against the problem of scarcity.

Trade and Markets

Specialization only makes sense, though, if workers can use the pay they receive for doing their jobs to purchase the other goods and services that they need. In short, specialization requires trade.

You do not have to know anything about electronics or sound systems to play music—you just buy an iPod or MP3 player, download the music, and listen. You do not have to know anything about artificial fibers or the construction of sewing machines if you need a jacket—you just buy the jacket and wear it. You do not need to know anything about internal combustion engines to operate a car—you just get in and drive. Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want. This is how our modern society has evolved into a strong economy.

Why Study Economics?

Now that you have an overview on what economics studies, let’s quickly discuss why you are right to study it. Economics is not primarily a collection of facts to memorize, although there are plenty of important concepts to learn. Instead, think of economics as a collection of questions to answer or puzzles to work. Most importantly, economics provides the tools to solve those puzzles.

Consider the complex and critical issue of education barriers on national and regional levels, which affect millions of people and result in widespread poverty and inequality. Governments, aid organizations, and wealthy individuals spend billions of dollars each year trying to address these issues. Nations announce the revitalization of their education programs; tech companies donate devices and infrastructure, and celebrities and charities build schools and sponsor students. Yet the problems remain, sometimes almost as pronounced as they were before the intervention. Why is that the case? In 2019, three economists—Esther Duflo, Abhijit Banerjee, and Michael Kremer—were awarded the Nobel Prize for their work to answer those questions. They worked diligently to break the widespread problems into smaller pieces, and experimented with small interventions to test success. The award citation credited their work with giving the world better tools and information to address poverty and improve education. Esther Duflo, who is the youngest person and second woman to win the Nobel Prize in Economics, said, "We believed that like the war on cancer, the war on poverty was not going to be won in one major battle, but in a series of small triumphs. . . . This work and the culture of learning that it fostered in governments has led to real improvement in the lives of hundreds of millions of poor people.”

As you can see, economics affects far more than business. For example:

• Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.
• It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in general. When the U.S. government came close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues? Did you know?
• A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument. When you hear classmates, co-workers, or political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

The study of economics does not dictate the answers, but it can illuminate the different choices.

As an Amazon Associate we earn from qualifying purchases.

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Access for free at https://openstax.org/books/principles-economics-3e/pages/1-introduction

• Authors: Steven A. Greenlaw, David Shapiro, Daniel MacDonald
• Publisher/website: OpenStax
• Book title: Principles of Economics 3e
• Publication date: Dec 14, 2022
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-economics-3e/pages/1-introduction
• Section URL: https://openstax.org/books/principles-economics-3e/pages/1-1-what-is-economics-and-why-is-it-important

© Jan 23, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.

• Search Search Please fill out this field.

What Is a Macroeconomic Factor?

Understanding macroeconomic factors, negative macroeconomic factors, neutral macroeconomic factors, positive macroeconomic factors, macroeconomic factor cycle, what are some examples of macroeconomic factors, what is the difference between macroeconomics and microeconomics, how do macroeconomic factors affect a business.

• Macroeconomics

Macroeconomic Factor: Definition, Types, Examples, and Impact

Investopedia / Jiaqi Zhou

A macroeconomic factor is an influential fiscal, natural, or geopolitical event that broadly affects a regional or national economy . Macroeconomic factors tend to impact wide swaths of populations, rather than just a few select individuals. Examples of macroeconomic factors include economic outputs, unemployment rates, and inflation . These indicators of economic performance are closely monitored by governments, businesses, and consumers alike.

Key Takeaways

• A macroeconomic factor is an influential fiscal, natural, or geopolitical event that broadly affects a regional or national economy.
• The relationships between various macroeconomic factors are extensively studied in the field of macroeconomics.
• Examples of macroeconomic factors include economic outputs, unemployment rates, and inflation.
• Macroeconomic factors can be positive, negative, or neutral.

The relationships between various macroeconomic factors are extensively studied in the field of macroeconomics . While macroeconomics concerns the broad economy as a whole, microeconomics narrows its realm of study to individual agents, such as consumers and businesses, and their respective economic behaviors and decision-making patterns.

A macroeconomic factor may include anything that influences the direction of a particular large-scale market. For example, fiscal policy and various regulations can impact state and national economies, while potentially triggering broader international implications. 

Negative macroeconomic factors include events that may jeopardize national or international economies. Fears of political instability caused by a nation’s involvement in a civil or international war are likely to heighten economic turbulence, due to the reallocation of resources, or damage to property, assets , and livelihoods.

Unanticipated catastrophic events, such as the 2008 United States economic crisis, subsequently created a far-reaching ripple effect, resulting in tighter capital preservation requirements for banking institutions on a global scale. Other negative macroeconomic factors include natural disasters, such as earthquakes, tornadoes, flooding, and brushfires.

The COVID-19 pandemic is another example of a negative macroeconomic factor. Lockdowns triggered mass unemployment, hefty government spending, and supply shutdowns and later contributed to rapid inflation.

Diseases, such as COVID-19 and the 2014 Ebola virus, can also be defined as macroeconomic factors.

Certain economic shifts are neither positive nor negative. Rather, the precise implications are determined by the intent of the action, such as trade regulation across state or national borders. The nature of the action in question, such as enacting or rescinding a trade embargo , will trigger myriad effects, depending on the economy being influenced.

Positive macroeconomic factors include events that subsequently foster prosperity and economic growth within a single nation or a group of nations.

For example, a decrease in fuel prices within the U.S. might drive consumers to purchase more retail goods and services. Moreover, as the demand for goods and services increases, national and international suppliers of those items will invariably enjoy increased revenues from the heightened consumer activity. In turn, increased profits may drive up stock prices.

Economies are often cyclic at the macroeconomic level. As positive influences promote prosperity, increased demand may trigger higher prices, which may, in turn, suppress the economy, as households restrict their spending. As supply begins to outweigh demand, prices may again dip, leading to further prosperity, until the next shift in economic supply and demand .

Macroeconomic factors include inflation, fiscal policy, employment levels, national income, and international trade.

Macroeconomics concerns the broad economy as a whole, whereas microeconomics narrows down its focus to the study of individual agents, such as consumers and businesses, and the impact of their behavior and decision-making. Microeconomics seeks to explain things such as how and why different goods have different values, and how individuals can best maximize efficiency.

Macroeconomic factors impact the whole population, including businesses. Cyclical companies , in particular, are likely to be more affected by macroeconomic factors as their fate is more closely tied to the state of the economy.

The Bottom Line

Macroeconomic factors are important and hard to ignore, impacting economies and the state of our personal finances.

Governments try to manage these factors and maintain stability. However, the economy still moves through boom and bust cycles and it generally pays to keep on top of this and be aware of what is going on to best protect and enhance your finances.

Congressional Research Service. “ Bank Capital Requirements: A Primer and Policy Issues ,” Page 6.

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

Economic Factors Essays

Era of fashion: social and economic factors influencing fashion during 1950–1959, final social-educational history paper, navigating downsizing in indonesian police agencies: causes, implications, and adaptive strategies, innocent drinks uk, mediviron group clinics; philippines, knowquest: navigating the dynamic landscape, correlation analysis between car prices and economic factors, drug abuse and addiction, its effect on women in society, and how they become homeless due to the habit, pest analysis and foreign direct investment: the attractiveness of the united states of america, analysis of hdfc bank’s performance in the current economic climate, popular essay topics.

• American Dream
• Artificial Intelligence
• Black Lives Matter
• Bullying Essay
• Career Goals Essay
• Causes of the Civil War
• Child Abusing
• Civil Rights Movement
• Community Service
• Cultural Identity
• Cyber Bullying
• Death Penalty
• Depression Essay
• Domestic Violence
• Freedom of Speech
• Global Warming
• Gun Control
• Human Trafficking
• I Believe Essay
• Immigration
• Importance of Education
• Israel and Palestine Conflict
• Leadership Essay
• Legalizing Marijuanas
• Mental Health
• National Honor Society
• Police Brutality
• Pollution Essay
• Racism Essay
• Romeo and Juliet
• Same Sex Marriages
• Social Media
• The Great Gatsby
• The Yellow Wallpaper
• Time Management
• To Kill a Mockingbird
• Violent Video Games
• What Makes You Unique
• Why I Want to Be a Nurse
• Send us an e-mail

Home — Essay Samples — War — American Civil War — What Caused the Civil War: Political, Economic and Social Factors

What Caused The Civil War: Political, Economic and Social Factors

• Categories: American Civil War Civil War

About this sample

Words: 766 |

Published: Sep 7, 2023

Words: 766 | Pages: 2 | 4 min read

Table of contents

The role of slavery, states' rights and sectional differences, the role of the federal government, economic and social factors.

Cite this Essay

Let us write you an essay from scratch

• 450+ experts on 30 subjects ready to help
• Custom essay delivered in as few as 3 hours

Get high-quality help

Verified writer

• Expert in: War History

+ 120 experts online

By clicking “Check Writers’ Offers”, you agree to our terms of service and privacy policy . We’ll occasionally send you promo and account related email

No need to pay just yet!

Related Essays

3 pages / 1348 words

1 pages / 1006 words

8 pages / 3679 words

5 pages / 2483 words

Remember! This is just a sample.

You can get your custom paper by one of our expert writers.

121 writers online

Still can’t find what you need?

Browse our vast selection of original essay samples, each expertly formatted and styled

Related Essays on American Civil War

The Cornerstone Speech, delivered by Alexander H. Stephens in 1861, is a significant historical document that sheds light on the beliefs and motivations of the Confederacy during the American Civil War. This speech has been the [...]

Ante Bellum sermons, or sermons delivered before the American Civil War, hold a significant place in the history of American religious discourse. These sermons were delivered during a time of great social and political upheaval, [...]

The Civil War was a pivotal moment in American history, pitting the North against the South in a bloody conflict that ultimately led to the abolition of slavery in the United States. While the outcome of the war favored the [...]

The American Civil War was a transformative event in the nation's history, with slavery and its economic and political implications at its core. The war exposed the deep divisions between the North and the South and ultimately [...]

In his book, "Apostles of Disunion: Southern Secession Commissioners and the Causes of the Civil War," Charles B. Dew seeks to unravel the complex motivations and ideologies behind the secession of the Southern states leading up [...]

Antebellum is a Latin idiom that means ‘before the war.’ It was employed in the background of the history of the United States to offer clarification regarding the time that led to the Civil War . Many consider the [...]

Related Topics

By clicking “Send”, you agree to our Terms of service and Privacy statement . We will occasionally send you account related emails.

Where do you want us to send this sample?

By clicking “Continue”, you agree to our terms of service and privacy policy.

Be careful. This essay is not unique

This essay was donated by a student and is likely to have been used and submitted before

Download this Sample

Free samples may contain mistakes and not unique parts

Sorry, we could not paraphrase this essay. Our professional writers can rewrite it and get you a unique paper.

Please check your inbox.

We can write you a custom essay that will follow your exact instructions and meet the deadlines. Let's fix your grades together!

Get Your Personalized Essay in 3 Hours or Less!

We use cookies to personalyze your web-site experience. By continuing we’ll assume you board with our cookie policy .

• Instructions Followed To The Letter
• Deadlines Met At Every Stage
• Unique And Plagiarism Free

We use cookies to enhance our website for you. Proceed if you agree to this policy or learn more about it.

• Essay Database >
• Essay Examples >
• Essays Topics >
• Essay on Business

Economic Factors And Business Environment Essay

Type of paper: Essay

Topic: Business , Food , Economics , Environment , Environmental Issues , Workplace , Marketing , Company

Words: 1700

Published: 11/13/2019

ORDER PAPER LIKE THIS

Economic factors and Business Environment

In most cases, business environment in which companies operate is influenced by a number of factors. In this context, the term “business environment” is used to imply the various factors that influence the operations of a company; it includes stakeholders, competitors, customers, industry, suppliers, regulations, economic factors, as well as technological factors. Economic factors refer to the aspects that influence the distribution, utilization, and consumption of materials and services within the economy, (Paul 2006). Arguably, some of these factors cannot be controlled by the company. The main objective of this essay is to analyze ‘what’ and ‘how’ economic factors influence the operations of companies in Saudi Arabia within a given business environment. To begin with, one of the economic factors in the business environment that has significant impact on the operations of a company is income. Income determines the demand of goods and services that should be supplied in the market. From the economic point of view, most scholars assert that the amount of demand of goods and services is positively related with the amount of income of the consumers. As such, when income increases the demand of goods and services also increases, (Andreas 2007). This implies as demand in the market increases, companies will be forced to increase the supply of goods and services so as to take advantage of the increasing demand. As an illustration, Mid-East Food Company manufactures and markets frozen dinners and potato products in Saudi Arabia. Generally, in the recent times incomes of majority of households have increased in most Middle East countries due to an increase in employment rates. The demand for the products of this company has significantly improved as most people can now afford its products. Therefore, the Company has been foods to increase its supplies so as to meet the increasing demand; hence, the growth of the company. The second economic factor in the business environment is the state of employment rates in the economy. To some degree, employment rates are positively related with income level of an individual. With employment, most individuals can afford to buy certain goods which could not have been the case if they were unemployed. It has also been observed that when people get jobs their lifestyle changes greatly, (Andreas 2007). Tastes and preferences also changes as people have more income which means that they have many options on what to consume or rather purchase. As mentioned above, due to an increase rate among the women in Saudi Arabia, in most households now both the husband and wife have access to white color jobs. Preparation of food at home has become a challenge in most families as they do not have enough time. Therefore, many people prefer readymade food which they only need to warm. Mid-East Food Company has benefited a lot from the increase in employment rates for women. Previously, when the number of women in the workforce was a bit lower, the sales of the company was considerable low. However, its sales have improved recently thanks to the increase in employment rates for women. The third factor that plays a considerable role in business environment is economic growth and development. In general terms, economic growth determines the amount of funds that the society is getting while development signifies the quantity of money that is being invested in the economy, (Paul 2006). Development greatly impact business environment due to the fact that businesses have to accommodate the demand of society that is economically dynamic. Saudi Arabia is considered as one of the countries in the world that enjoys economic growth and development, mainly due to availability of natural resources such as oil. Mostly, the growth of most companies depends on the growth and development of an economy. Investment activities of companies also contribute to economic growth as well. A good number of companies in Saudi Arabia have expanded due to economic growth and development. For instance, Abdullah Al Othaim Markets Co is one of the companies that has benefited from economic development. The company started by trading in food products and supplies and other agricultural products. However, due to economic development and growth the company has started venturing into other markets such as construction, operating, and managing supermarkets, as well as computer services and maintaining and operating mechanical and electrical equipments. Demand and supply are other interconnected factors that impacts operations of companies in any business environment. Demand refers to the ability and will of consumers to buy a given commodity, while supply is capacity of business to offer the demanded commodities. Undeniably, in the Middle East and Saudi Arabia in specific, the demand for fast food has increased in the recent times, (Shaikh 2006). This is attributed to the fact that, in households in Saudi Arabia both the wife and husband hold a formal employment. Therefore, there is minimal time for preparing meals at home; hence, they have to rely on ready meals. Due to increase in demand, companies operating in fast food business such as Mid-East Food Company had to increase their supplies so as to satisfy the increasing demand. Thus, profitability of that the company enjoys today can be attributed to the increasing demand for its products. The other economic factor that plays incredible role in business environment is total and marginal utility. By definition, utility refers to the quantity of satisfaction that the consumers obtain by consuming certain. Arguably, continuous and successive utilization of units similar goods will lead to a decrease in the satisfaction that is derived from those goods by the consumer. To some degree, this may lead to a long term or short term decline in sales of a company, (Lorna 2000). In order to avoid a decline of sales due to decreasing utility, companies introduce a new brand before the effect of decreasing sales is felt. This is the main reason why Mid-East Company introduced a variety of foods such as Mid-East Curly Oven Chips, marinated roast, and Home Fries. This has been very helpful for the company has it has been able to maintain its clients and attracting more clients using this strategy. If utility of one product declines leading to a reduction of sales of the product, the company can always recover the reduction of sales of the product by an increase in sales of another brand. General Price level is also affects business. In this context, general price level implies the cost that a consumer is supposed to pay for a good or service. In most cases, costs of raw materials, production costs, labor costs, as well as transportation costs are added together and then passed on to the consumer of those goods, (Hulleman & Marijis 2008). Cost of goods determines the amount of sales that a company will achieve. From the economic point of view, it is assumed that when prices goes up the demand decreases leading to reduction of sales. Precisely, from this assumption prices are inversely related to demand. Price determines the success of a company and it is one of the factors that a company has to take into consideration before they start producing commodities for sale, (Lorna 2000). This is one of the chief factors that propelled Abdullah Al Othaim Markets Co to the position it is today. When the company started diversifying its activities, it chose price a strategy to outdo its competitors. In order to achieve this goal, they priced their goods a little bit lower as compared to their competitors. Therefore, they were able to attract many customers securing a large market share. Additionally, due to the large market share, they started producing in large scale; enjoying the benefits of economies of scale. Availability and circulation of money within the economy is very crucial for business. Thus, money and banking has a role to play in the business environment. In most cases, the government uses banks in regulating economic activities with an intention of achieving a desired goal, for instance a given rate of economic growth. To be more specific, banking smoothens the progress of fiscal and monetary policies that have an impact on business as well as customers of the business, (Hulleman & Marijis 2008). Most importantly, money that is in circulation influences the customers’ demand or rather the paying power. Additionally, banking facilities have an impact or rather determines the borrowing capacity of business as well as individuals. Availability of credit to the general public implies that people have enough money to spend. From the economic point of view, high spending rate facilitates investments rates within the economy; hence, chances of business growth. Lastly, is the issue of trade cycles. Trade cycles refer to the fluctuating costs of commodities as well as goods within the economy. Some of the important cycles that influences business activities are, rise, fall, stability as well as continuity. Trade cycles affect business in different ways the most crucial one being through prices. Undeniably, different prices are experienced during the various trade cycles, (Shaikh 2006). For instance, during the high trade cycle prices are high; hence, the spending rates are low. This implies that businesses will be realizing low sales due to the fact consumers have less to spend. Finally, there are a number of factors that influence business activities or rather business environment. The most influential factor is emergences from economic activities. Economic factors refer to the aspects that influence the distribution, utilization, and consumption of materials and services within the economy. Examples of economic activities that have an impact on business environment include: general prices, employment rates, the level of income, trade cycles, money and banking, demand and supply, as well as total and marginal utility. Notably, these activities determine the operations of most companies.

Bibliography

Andreas, B. 2007., Business Analysis of Web. De AG. Boston: GRIN Verlag. Hulleman, W. & Marijis, A. J. 2008., Economics and Business Environment. New York: Routledge. Lorna, M. D. 2000., Business Information Sources., California: University of California Press. Paul., 2006. Business Environment. Illinois: Tata McGraw-Hill. Shaikh., 2006., Business Environment. New Jersey: Pearson Education.

Cite this page

Share with friends using:

Removal Request

Finished papers: 1498

This paper is created by writer with

ID 267229861

If you want your paper to be:

Well-researched, fact-checked, and accurate

Original, fresh, based on current data

Eloquently written and immaculately formatted

275 words = 1 page double-spaced

Get your papers done by pros!

Other Pages

A power struggle essays, hinduism and buddhism essays, natural evolution essays, people living essays, last summer essays, physical strength essays, roger taney essays, missouri essays, free state essays, the us constitution essays, classifying essays, national education essays, us constitution essays, goss essays, magistrates essays, ian smith essays, the colony essays, malawi essays, mosley essays, limpopo essays, receipts essays, exchange rates essays, example of research paper on memorandum, good example of essay on working class, good essay about global combat support system army, article review on chris rock, free personnel management in global health asia limited essay example, example of essay on my msn program achievements in leadership, good case study about canadian blood service, dissecting the gdp equation essays examples, the tell tale heart essay 2, example of essay on lgbt trend impacts in hospitality industry, example of changing the culture at target essay, spa and resort long term profit versus short term risks loss essay examples, billie college essays, bottoms up college essays, blas college essays, bler college essays, breeders college essays, bill bailey college essays, breau college essays, bogardus college essays, brainyquote college essays.

Password recovery email has been sent to [email protected]

Use your new password to log in

You are not register!

By clicking Register, you agree to our Terms of Service and that you have read our Privacy Policy .

Now you can download documents directly to your device!

Check your email! An email with your password has already been sent to you! Now you can download documents directly to your device.

or Use the QR code to Save this Paper to Your Phone

The sample is NOT original!

Short on a deadline?

Don't waste time. Get help with 11% off using code - GETWOWED

No, thanks! I'm fine with missing my deadline

Economic Factors Affecting Decision Making In A Business

Checked : Karen F. , Eddy L.

Latest Update 20 Jan, 2024

12 min read

Table of content

The Environment And Business Decisions

Environmental performance and competitive advantage, customer and investor demand, supply chain and production and networks, business decision making and government policies, micro and macro factor in business decisions making, customer, suppliers, and resellers, competitors and the general public.

Today, technology has become the driving force for economic development. This means countries and businesses are relying more and more on innovation. Many countries across the globe have relied on the old, traditional linear models of “closed” innovation, which does not include any or minimal external stakeholder engagement in value created. However, there is a need for all stakeholders to be involved in the well being of a society. Whether internal or external, a business must consider all factors involved in making a decision.

Hence, federal agencies need to increase support in studies that seek to understand the environment of business decisions. This article focuses on issues that drive specific decisions in a varying   business environment . We shall also be looking at decisions at micro and macro levels to understand how each situation should be handled.

Economic students need to relate business decisions to the economy of a nation and the world at large. After all, it is entrepreneurs who boost the economy of a society. As such, every decision they make will have a direct effect on individuals, firms, and the overall economy. Across the world, business decisions feature in the dominant factors that influence the shaping of environmental conditions. It is all about what materials, energy, and organisms will be taken from the environment. It is also critical to look at the quantities to be removed, transportation and distribution, and the effects they leave on the landscape and ecosystems.

In other words, the business decision does not only affect the specific company but the general ecosystem. They can either create or destroy the environment. Above all, business decisions influence consumer choices, direct environmental research, and determine how much development and technological innovations should be provided. This does not go without saying that the decisions made by businesses, in general, create commitments that may be hard or even impossible to reverse in the short term; they can and will cause long term impacts both on individuals and the environment.

But we must also remember that consumer preferences influence these decisions, but only to where the company does not seem to generate profit. There are also government policies that have everything to do with the direction a business takes. They impose regulatory mandates, property rights and liability laws, disclosures, tax and subsidies, procurement procedures, and many other policies that initiate business models.

Today, there are so many researches on the environment. Many human activities have been the cause of significant environmental issues. And it all begins with making business decisions. Hence, a company needs to look at vital environmental problems that compel a specific direction or operation. Consider the following aspects concerning the subject of business and the environment.

The world is more concerned about the planet today more than ever. Hence, everyone seems to want a part in saving the environment and saving it for future generations. Issues like air and soil pollution that are causing global warming have not been left to chance. The world has become one in restoring the former glory of the planet.

And for these reasons, a company will have to answer the question, “when does it pay to go green?” This is a vital question that concerns the conditions under which a specific business decision enhances the environment while acquiring a competitive advantage above achieving other business goals. Finding the right answer to this question is vital to environment-related decisions by the business and the government, where regulatory principles offer market-related incentives.

Traditionally, businesses only considered environmental performance when compelled by regulatory mandate and liability risks. Or at best, they would do so when an opportunity to cost minimization through the application of material and energy was evident (Royton, 1980; Andrews, 1999).

In recent times, however, studies have shown a different trend where environmental protection offers a competitive advantage under some conditions (Hart and Ahuja, 1996; Klassen and Whybark, 1999). Ecological modernization has brought out the most promising environmental improvements in the development of business when investments in new facilities are realized (Hart and Milstein, 1999). This is why new factories seem more efficient than the old ones. They offer greater efficiency in material application, and in energy, pollution control/waste reduction and the use of many other approaches that eliminate the need for toxic materials.

Also, the application techniques that call for less energy and material consumption thought high human consumption needs continue to rise. According to Van Heel, Elkington, Fennell, and Francesca (20010, there are ten different methods of business value that can be used to compare environmental performance. They include shareholder value, revenue, operation efficiency, access to capital, customer attraction, brand value and reputation, human and intellectual capital, risk evaluation, innovation, and operational licenses.

Business   must research on the factors that affect customer and investor demand for environmental functionality. Such research would focus on the conditions under which key customers and other stakeholders care about the environment, how the choices influence or fail to impact business decisions that touch directly to the environment. It should also dig into what brings about change in the power of these demand factors.

In other words, customer and investor needs are vital aspects of business decisions. Recent research literature has created a consumer demand for green products at and individual level. Some of the related topics include the effectiveness and importance of green labeling and product certification. There is chance the environmental performance of a business is likely to be affected by future the same factor in global and emerging markets in terms of environmental needs. So far, there are still important unanswered questions such as why there seems to be greater demand for environmental performance among consumers? And will the consumer’s and investors’ future demands affect environmental success, and how will these demands impact business demands and the overall economic growth?

In summary, some businesses find major customers or other stakeholders more influential than consumers’ demand. A business must observe what would bring in more profit in terms of serving the green and as well as their customers.

The question of whose business decisions influence environmental outcomes can never be overlooked. Proper research on this issue may include environmental decisions that directly affect the supply or commodity chain. And this, of the essence, means multiple businesses and their production sequences touching material extraction to retails sales, consumption, and post-consumer waste management have to be considered. Note that many environmental decisions are taken based, nor on individual companies, but the decision regulations in the larger scale chains or networks and how they relate.

Many traditional types of research focused only on the dominant positions of specific firms of industrial sectors as a unit of study. Today, we are compelled to look at the larger institutional networks of decisions, incentives, and principles. A recent survey by Gereffy, Humphrey, and Sturgeon (2002) presents a greater theoretical precision that characterizes effective relationships in the supply chain. In short, we can say, the business decisions are influenced by a standard set of rules that touches a full string of a business and their products.

How do government regulations and policies on the environment affect business decisions? There are already many pieces of research the swell on this issue, which all indicated how crucial government policies are important in business decisions. Regulations and economic incentives, including taxes, charges, and tradable permits (Stavins, 2003, and direct information disclosure requirements (Tietenberg, 1998), greatly affect the direction business has to take. Other aspects of government influence include government-supported voluntary initiatives, where the government presents technical information support, certification guidelines, great conditions for public recognition, and flexible regulations on the environmental aspect of a business.

Government regulations have a lot to do with how companies conduct their businesses. But some laws have far-reaching consequences on business incentives. For instance, in the US, both guidelines and tax benefits favor end-of-pipe pollution-control technology over technologies that deal with production processes. In this case, technology regulations often fail to recognize explicit environmental criteria.

Where a policy incentive is applied to promote green innovation, they may have an effect of privileging a specific technology. It is only a matter of knowing the conditions under which such conditions appear. This means both government policies and procurement standards, and business set standards, strategic risk behavior by firms to lock in incentives that favor them more. Hence, a channel is created for competitors to innovate processes that may seem to keep them higher. Also, a change in standard-setting may create critical changes in business expectations. It may also impact the competitive advantages among businesses in a particular operating market, as well as the global decisions on the environment by companies.

The micro-business environment is defined as the conditions that have a direct impact on a business. They are related to a specific area of operation in your company and can all business processes. These factors can change the daily proceedings and general performance of a firm. Micro-environment factors include customers, suppliers, resellers, competitors, and the general public.

The macro-environment is a more general situation that touches the whole economy. It impacts the operations of business groups, how they perform, make decisions, and build strategies. It is very dynamic in that businesses must continuously track how it changes and in carries external factors that the company has no control over, but specifically affects it. Such factors include economic factors, demographic forces, technological changes, natural and physical factors, political and legal environments, and social and cultural aspects.

Companies make their marketing decisions based on their target customers. And once they have a customer base, they will make decisions based on how the customers react to the product. Be it B2B, B2C, international or local, a business’ marketing campaign constantly shifts to meet the demands of their customers. Businesses rely on the stability of demand, prospects of sale growth, relative profitability, and intensity of competition to make these decisions.

The supplier of a particular product is the largest and maybe most significant influence on the success of the business. They form a key link between the business and retailer, making the delivery process possible, insurance for necessary resources in your business, and essential determinant for pricing changes and decisions.

The reseller is a direct link to the customers. They include middlemen such as wholesalers and retailers. They, too, have a critical part to play in the success of a business. If, for instance, a particular retailer has an excellent reputation, it will be easy for them to pass your product to the consumer. They are crucial for promotion, sale, distribution, marketing, and financial mediation.

We Will Write an Essay for You Quickly

Every business that sells a product/service similar to what you are offering is your competition. Hence, their tactics, and sales matter to you. It is therefore vital to look at how their product and prices affect your and make changes appropriately. The main factors to consider in this case include desire competition, a product from the competition, and brand competition.

Again, every business model seeks to impress the general public. Every step they take must be seen for this perspective too. It is very vital to make decisions that consider others because their reactions may be the only thing that pushes you up or drags your brand through mad. Hence, business decisions take note of public opinion, the Media, and environmental pollution.

Apart from the factors, the macro-environment factors mentioned above drive a business’s decision-making process. Economic factors like interest rates, exchange, rate, recession, inflation, taxes, and demand/supply, for instance, affect everything from marketing to pricing. Demographic factors, on the other hand, include how income variables influence businesses, age variables that affect business, geographic region variables, and education levels. Also, the modern world is running on technological innovations. Hence businesses must look at skills and ability implemented into production. Such factors include automation, internet connectivity, 3D technology, speed/computer power, engine performance and efficiency, security, and many others.

Looking for a Skilled Essay Writer?

• Florida State University Bachelor of Arts (BA)

No reviews yet, be the first to write your comment

Write your review

Thanks for review.

It will be published after moderation

Latest News

What happens in the brain when learning?

10 min read

20 Jan, 2024

How Relativism Promotes Pluralism and Tolerance

Everything you need to know about short-term memory

Economic Factors on the Stock Market Essay

Introduction, reference list.

Different nations have different economic policies that guide investments in stock markets. Consequently, decisions to invest in the international equities will mean subjection into differing sets of polices opposed to the prevailing domestic conditions.

The dilemma on the differences between the impacts of the factors affecting domestic equity returns and international equity returns has prompted several empirical studies to be done to unveil the differences. The findings of these studies indicate that, among the factors affecting equity returns, domestic factors were more influential than international factors.

From this dimension, the writer gives opinion on why this is so. On the other hand, an immense body of literature presented herein investigates the reasons why there are low returns on equity investments in cross-countries. The focus of the studies is to give insights on the existing correlations on cross-country investment in equities and the low returns on equity investments.

In this light, according to Serra (2000), “some studies claim that the low correlation of returns between countries results from the diverse industrial structures in each country that are mirrored by different industrial compositions of their stock market indices” (p.127).

This means that the correlation between industries is imperfect. Hence, for industries with differing compositions, the correlation for equity markets is also imperfect. From this line of thought, the paper also focuses on giving the writer’s opinion on why industrial membership of a firm is of little importance in forecasting the international correlation structure of a set of international stocks.

Domestic factors and international factors affecting equity returns

Integration is a key factor that makes domestic factors that affect equity returns more salient than international factors. In this regard, there has been an incredible achievement in the integration of markets since the onset of endeavors for economic globalization.

Nevertheless, amid this effort, there is still a room for magnificent levels of segmentation, which truncate into leaping the benefits that accrue from the diversification of international financial assets. Different market policies and varying economic circumstances in different nations often lead to the existence of different fiscal and monetary policies (Eun & Resnick, 2000, p.89).

Therefore, the prevailing economic policies within a country have a direct impact on securities that are traded within the territories of that country. On the other hand, trading of similar securities in differing states would be anticipated to have differing behaviors due to differences in the economic policies adopted by the two countries.

Surprisingly, in the international trade treaties, the existing domestic policies are compared and merged to make regionally acceptable polices for regulating business. This domestic polices are impacted by domestic factors that determine the manner of operation of businesses within a nations’ boundaries.

It is without surprise then that domestic factors have been found to impact security returns more than international factors. To amplify this argument, it is critical to note that, when a firm fails internationally, perhaps the last place for it to fail before it winds up is within its places of establishment.

Therefore, more attentions are paid on the domestically prevailing factors that may lead to its failure. Consequently, the levels of security returns in the domestic market are likely indicators of the performance of securities in the foreign nations when similar success strategies are deployed in the foreign markets.

The performance of stocks domestically constitutes essential mechanisms deployed by firms to assess the impacts of economic conditions on stocks’ performance while placed in other markets whose anticipated performance is widely unknown.

Engaging in investment decisions in markets whose dynamics are unknown by a firm subjects it into more risks in its attempts to foster the generation of capital coupled with the development of decisions on its growth capabilities through issuing of securities.

Equity investments may act as subtle ways through which organizations are capable of ensuring that they experience a reduced risk in investments due to the easiness of trading in equities.

However, foreign market dynamics and factors that may affect the returns of equities may also slow the impacts of firms on the equity returns partly because a firm will need to be double sure about the anticipated performance levels when its trades its stocks in the foreign markets (Abugri, 2008, p.396).

However, even though many empirical studies reveal that domestic factors affecting returns of firms’ equities produce more effects than international/global factors, these findings have attracted mixed reactions from people inclined to the market integration school of thought, as well as those ingrained in the thought of total market segmentation.

The central point of concern is the determination of which of the two factors leads to more impacts on performance of stocks and equities in the markets. Nevertheless, empirical studies on the influence of domestic factors and international factors on the returns in equities document the evidence that domestic factors are more prominent in producing market volatilities.

The proponents of the integration approach peg their arguments on the capacity of international factors to be crucial in influencing returns on equities on the aspects of the equality of risk of premiums across all spectra of markets in case of full integration of markets. This means that, from this paradigm, both integration and diversification are in reverse conditions.

However, a free flow of fund barriers in the international markets exists due to the existence of differing monetary and fiscal policies in different nations.

Arguably, the need to meet all the necessities for each country’s laid out fiscal policies and other economic regulations makes domestic factors that influence the returns on equities more weighty than the international factors especially bearing in mind that practical markets are impartially integrated.

Some empirical studies have also documented immense findings that macroeconomic variables constitute elements that result in differing volatilities of firms’ stocks. Some of these macroeconomic variables include “inflation, real interest rates, industrial production, industrial production index, and terms structure risks” (Abugri, 2008, p.405). This entire sphere of variables has impacts on the performance of stocks.

Since markets are not perfectly integrated, such variables are different in differing countries. Hence, the returns on equities would behave differently in different nations.

In this dimension, it is arguable that standardized models for pricing global assets that are inspired by the perceptions of total integration do not consider cross-country differences in average returns particularly on the emerging markets in their assumptions that international factors are more decisive in determining the performance of stocks than the domestic factors.

Indeed, firms considering exploring new international markets face incredible challenges while endeavoring to penetrate and or offer their equities in the emerging markets due to uncertainties and market volatilities in the new ventures.

Therefore, the decisions on whether to offer the equities in the new markets or not are likely to be based on domestic factors since they form the pivot for evaluation of the effectiveness of such strategies in increasing the returns on investments anticipated by an organization in the international fronts. The argument here is that macroeconomic variables influence returns on stock in different countries differently.

Thus, it is inaccurate to anticipate international factors to prove more imperative in affecting the returns on equities than domestic factors, which are harmonious with all domestic markets. Consequently, industrial production, anticipated, and the unanticipated inflations will have systematic impacts on equity returns in different countries.

These two variables produce harmonious impacts on the returns within the domestic markets. Hence, I agree with the approximation of the various empirical studies on factors that affect returns on equities’ capacity to be more beneficial than international factors.

Industrial membership of a firm and forecasting the global correlation structure of a set of international stocks

Industrial activities adopted by different industries are impacted differently by varying economic policies that regulate the operation of industries in a country. The implication of this argument is that a firm, which has any membership in a particular industry will be subjected to rules and regulations guiding economic policies in its domestic country of operation that is different in other countries.

Consequently, it is impossible to anticipate a firm established in a specific industry to have similar behaviors while operating in a different country. Therefore, it is also impossible for the securities that are issued by such a firm to operate in a similar manner in different countries. Hence, industrial membership of a firm possesses a minimal significance in helping to forecast its correlation structures in a set of international stocks.

Within cross-country markets, the market indices of a particular firm are constructed in different ways to suit the existing economic policies and regulations. Selection of various market indices rests on various criteria among them being market capitalization and or the value traded.

Hence, it is inevitable that particular indices end up being concentrated in a few firms consistent with subjection to evident differences in the operation environment policies advocated for in any country. Since a firm would operate to facilitate optimal returns in its security investments, it is likely that the indices would be widely concentrated in large stocks in nations where conditions are favorable for the operations of a company.

Therefore, regardless of the terms of membership of a firm in any industry, the membership may not be a substantive means of helping to forecast international correlation structures for various sets of international stocks.

In the international fronts, firms face valid return shocks depending on the prevailing economic situation in different nations. This implies that economic variables enormously influence the returns of stocks to a firm at the local and international levels.

In case the economic policies underlying the investment decisions of a firm in stocks are homogeneous internationally, the forces would then influence the equities of the firm in a similar manner in all the nations in which the organization has established industrial membership since all economic shocks would be global.

However, in the event that economic forces are either regional or domestic, the levels of returns in the stocks invested in differing regions would be harmonious if “ business cycles move in tandem” (Serra, 2000, p.135).

International correlation structures of a set of international stocks would then be well forecasted based on the industrial membership of a firm in case any two regions where the firm has established operation are in similar states of the economic cycle. Unfortunately, this is not always the case. In some situations, some regions are in recessions while others are in the recovery phase.

Therefore, a firm would invest in varying magnitudes of stocks in different nations depending on the levels of prohibitive or optimality of returns on the invested stock, its industrial membership notwithstanding. For the last two decades, there has been immense focus on making many economies of the world both regionally integrated and open via monetary unions and through provisions of common economic policies.

Considering this economy, it is anticipated that such firms would face similar international shock across all nations (global shocks).

Therefore, economic shocks would affect all nations’ business cycles. Unfortunately, this is not the case, as evidenced by the weakness of the evidence supporting the importance of the membership of a firm in forecasting the international correlation structures of a set of international stocks especially in the nations, which are experiencing similar economic cycles.

The returns in investments for any firm are arguably not dependent on the industrial membership of the firm but by stipulated levels of returns. These returns are impacted by factors such as the amount required to execute the initial investment, anticipated periodical sales, and periodical costs, among other factors.

As demonstrated by Emery, Finnerty, and Stowe (2007), these factors that affect the value of the investment will determine the investment decisions (p.237). All these factors are functions of the economic policies adopted by a nation in which a firm seeks to establish stock investments amid the industrial membership of an organization. This argument implies that markets are essentially segmented.

The question of stock pricing is also answered in different ways, and this has an impact on the demand for the offered stocks and hence the returns. “Markets can be segmented because of formal or informal barriers that preclude free investment worldwide” (Serra, 2000, p.135).

Consequently, even though the economics underlying the necessity to forecast international correlation structures for various sets of international stocks based on industrial membership of a firm may be valid theoretically, it is somewhat tricky for the stocks to move similarly in different nations apparently because the prices are arrived at differently in various countries.

The policies guiding the pricing strategies are also different in different nations. This aspect makes it impossible for industrial membership of a firm to influence its ability to forecast the correlation structures in a set of international stocks.

Firms anticipate facing different economic policies akin to the differences in the existing monetary and fiscal policies regulating its operations in different countries. Coupled with the fact that markets possess differing levels of integration, this paper has argued that it is impossible to expect returns on equities of firms in different countries to behave in similar ways.

Consequently, domestic factors that determine the returns on equities tend to be more powerful than international factors. Similarly, firms are exposed to different economic shocks often prompting a different construction of market indices in differing countries.

Therefore, amid the membership in a particular industry, a firm that operates in the same industry besides having any operations in different countries cannot be anticipated to behave in the same manner across all countries.

Therefore, the paper holds that it is improbable that securities offered by such firms will also behave in similar ways in all countries where the firm has established operations, its industry membership notwithstanding.

Abugri, B. (2008).Empirical relationship between macroeconomic volatility and stock returns: Evidence from Latin American markets. International Review of Financial Analysis, 17 (2), 396–410.

Emery, D., Finnerty, J., & Stowe, J. (2007). Corporate financial management . New Jersey: Pearson-Prentice Hall.

Eun, C., & Resnick, B. (2007). International financial management . New York: McGraw-Hill.

Serra, A. (2000). Country and industry factors in returns: evidence from emerging markets’ stocks. Emerging Markets Review, 1 (1), 127-151.

• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2023, December 28). Economic Factors on the Stock Market. https://ivypanda.com/essays/economic-factors-on-the-stock-market/

"Economic Factors on the Stock Market." IvyPanda , 28 Dec. 2023, ivypanda.com/essays/economic-factors-on-the-stock-market/.

IvyPanda . (2023) 'Economic Factors on the Stock Market'. 28 December.

IvyPanda . 2023. "Economic Factors on the Stock Market." December 28, 2023. https://ivypanda.com/essays/economic-factors-on-the-stock-market/.

1. IvyPanda . "Economic Factors on the Stock Market." December 28, 2023. https://ivypanda.com/essays/economic-factors-on-the-stock-market/.

Bibliography

IvyPanda . "Economic Factors on the Stock Market." December 28, 2023. https://ivypanda.com/essays/economic-factors-on-the-stock-market/.

• Stocks for the Long Run: Is It a Risky Business?
• Market Securities Selection Process
• Islamic Indexing and Index Related Investments
• Deciphering the Best Start-Up Fundraising Ways
• Investments: Aspects of the Hedge Funds
• Industrial and Commercial Bank of China
• Wall Street Impacts - Macroeconomics
• Bank Mergers and Cost of Capital
• The Stock-Bond Correlation and Its Impact on Portfolio
• Australian Capital Market and Hybrid Mutual Funds
• Business as an Agent of World Benefit
• Microfinance in developing economies
• Small Business Environment in Kenya
• Demand and Supply of Apple iPod
• The Costs and Benefits of Anti-Dumping Duty

Social and Economic Factors essay

SOCIAL AND ECONOMIC FACTORS 5

Socialand Economic Factors

Anindividual can be regarded as homeless in case he or she does nothave an appropriate accommodation alternative, as well as the presentliving arrangement. Also, such a person resides in a dwelling that isinsufficient, has no residence, or the initial occupancy is short andnot extendable. Homelessness may result from a complex set ofcircumstances that require people to choose between shelter and foodamong other basic needs (Mary, 2014). This paper will discuss socialand economic factors that contribute to homelessness whileidentifying the subpopulations affected.

Related essays:

• Homeless Mentally Ill Individuals Share How They See Their Future in essay
• Homelessness Among The Ageing Population essay
• Lived Experiences of Homeless Individuals: Factors Leading to Homelessness essay
• Homelessness And Housing essay

SocialFactors

Homelessnessand poverty are highly correlated (Mary, 2014). The poor arefrequently incapable of paying for housing, health care, food, andeducation. The poor are often faced with difficulties of makingchoices on how to use the limited resources that they have since, thelittle resources they have can cover only a portion of thesenecessities. In most cases, housing absorbs a high proportion ofincome. Therefore, poor people have to make a rational choice onwhich needs to satisfy first. Food comes first on their prioritylist, and since they have limited resources, they can be forced tolive on the streets or in dwellings that are insufficient so thatthey are left with resources to cater for food and other necessities.The segments of populations that are affected by this factor ofpoverty are mostly the unemployed and the low-income earners.

DomesticViolence

Domesticviolence is also highly linked with homelessness (McNamara, 2008). Anabusive relationship in homes can lead to homelessness since victimsof domestic violence who are living in poverty are often faced withthe difficulty of choosing either to continue with the abusiverelationship or run away from it running away from the relationshipmakes people homeless. A large number of homeless women haveexperienced abusive relationships in their adult lives. Thesub-population that is rendered homeless by domestic violence ismostly the battered wives and their children.

Lackof Affordable Health Care

Familiesthat are struggling to pay rent can be rendered homeless by seriousillness or disability. This begins with job loss, then, savings areused to pay for the health care which leads to depletion of savings.This eventually leads to eviction from rented homes. Thesub-population that can be rendered homeless by the lack ofaffordable health care is the uninsured that do not have work-basedhealth insurance.

EconomicFactors

ErodingWork Opportunities

Oneof the main reasons why homelessness persists is because of thedormant or declining incomes and increase in less secure jobopportunities which have fewer benefits. This has led to thedisparity between the rich and the poor. The diminishing incomes havepositioned housing to be out of reach for many workers since morethan the minimum wage is needed to pay for decent housing (McNamara,2008). The sub-populations that are affected by eroding workopportunities are the wage earners and part-time workers.

Lackof Affordable Housing

Lackof affordable housing and the partial scale of housing assistanceprograms have led to the current situation of homelessness. Lack ofaffordable housing has contributed to rents, which take a highproportion of income, poor quality housing, and congestion. This is aphenomenon that has compelled many people to become homeless while atthe same time putting a large number of individuals at a threat ofbecoming homeless (Mary, 2014). The sub-populations that are affectedare the low-income earners and the unemployed.

Inconclusion, since homelessness is an issue that results from variousfactors that range from social to economic factors, it is only anintensive effort to guarantee that jobs paying better wages,reduction in domestic violence, reasonably priced housing, and accessto better health care will bring an end to the issue of homelessness.

Mary,E. H. (2014). SupportingFamilies Experiencing Homelessness: Current Practices and FutureDirections .New York: Springer.

McNamara,R. H. (2008). Homelessnessin America .Westport, Conn: Praeger.