Macroeconomics and Business Environment

Macroeconomics studies the behavior of aggregate economy. It is concerned with the economy-wide phenomena like national income, total investment, aggregate consumption, aggregate saving, etc. macroeconomics examines how resources are allocated at level of economic system as a whole and how the general price is determined for the entire economy.

The study of macroeconomics is very much important in order to deal with the issues faced in the business environment. The macroeconomic trends are largely cyclical, but they are often difficult to predict accurately. So, business firms need to make an in-depth study of the macroeconomic variables, and analyze the market forces and national/international policy decisions that determine the market fluctuations.

The importance of the study and knowledge of macroeconomics for the smooth functioning of the business environment is highlighted by the following points:

Study of the business environment

Macroeconomic variables like total income, general price level, employment, total output, etc. are no consistent. Changes in these variables determine the prospects of private business firms and also affects the functioning of individual firms. Business decisions like resource allocation, size and number of plant, amount of input and output, investments, etc. are all dependent on the macroeconomic variables. Business firms must be up-to-date with the recent changes and fluctuations that occur in the economy. 

Study of the trends in international business

Macroeconomic models and tools study about the fluctuations in the international market, inflow and outflow of capital, exchange rates, balance of payment that occur in an open economy. The fluctuations in these phenomena affect how businesses make decisions. Therefore, the study of macroeconomics provides business managers and decision makers with the insight on the past and current trends occurring worldwide.

Examine the nature and extent of externalities of business environment

Macroeconomic policies formulated by the government to control and regulate the economic activities also affect the functioning of the private business firms. Besides, the undertakings of the firm’s lead to considerable social cost in terms of environmental pollution, and other hazards. Such social costs not only create conflict of interest between the firm and the society, but also impose a social responsibility on the firms. The government policies and its various regulatory measures are designed to minimize such conflicts. Study of these macroeconomic policies falls under the purview of macroeconomics.

Thus, as business managers, it is important to keep track of macroeconomic trends in order to keep the business afloat, since business decisions cannot be taken in isolation without considering the macroeconomic environment.