Macro Environment Definition
The macro-environment refers to the economic condition which is largely derived from the Country’s Gross Domestic Product, Spending patterns, inflation, and the monetary policy framework laid down by the federal reserve and is generally consist of the economic factors as a whole rather than measuring the individual performance of the sectors.
- It plays a vital role since the performances of the businesses are totally influenced by the underlying macro environment.
- It largely affects consumer behavior with regard to spending and investing.
- Any country’s macro environment reflects the behavior of the economy and also projects where it could reach in the future considering the macro factors like political gains, financial literacyFinancial LiteracyFinancial literacy refers to an investor's knowledge and understanding of various financial products that help him with money management, personal finances, investment, and tax planning. It examines how prudently an individual manages his finances, therefore building the necessary requirements such as an emergency fund, a retirement fund, and how they plan to handle insurance, estate planning, paying for education, etc., social impact, and economic balance.
- It is not only important for one particular country but globally the macro environment plays a vital role in framing out policies that will benefit all the nations as a whole and there would be harmony among the people with positive environmental conditions.
Types of Macro Environment
Below mentioned are some of the types/components of the macro environment.
- Economic growth: It refers to economic expansion, recession, and depression in the country due to the macro factors.
- Inflation and Deflation: Is the increase or decrease in the prices of the goods and services or wages which has an impact on the lifestyle of the consumers.
- Interest rates: As the baseline interest rates have a significant impact on the borrowing cost of the business and the ability to raise funds from the market.
- Financial markets: The uncertainty in the financial marketsFinancial MarketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces. often make fundraising difficult in the form of equity or debt.
- Business cycles: It refers to the changes in the price levels of commodities.
- Political stability: The periods of the changes in the government at the center will drive the entire environment in favor of or against it.
- Trade barriers: Tariffs on import and export of goods and or services.
- Employment: In the case of low employment, it would be difficult for the unskilled people to get jobs
- Spending habits: The habit of the people spending their money also is essential since the same is counted for calculating the GDP of the country. A country with heavy spending habits may see a gradual rise in the GDP as compared to the country where the same is on a lower scale.
- Savings & Investments: The systematic savings and investment habits of the consumers also largely affect the macro environment which may go in favor of the economy as high savings leads to high investments which is beneficial.
Examples of Macro Environment
Below mentioned are some of the examples of the macro environment.
- In the US, although the population is low as compared to other countries, the spending patterns of the people are quite high due to increases wages and better facilities by the government. In this case, it is possible only because the population is under control. Thus for the Economic growth of America, population plays a macro role in steering the economy ahead.
- Alternatively, in China, it’s the reverse case, though their economy is one of the top economies of the world in spite of the population. Since the Chinese are all Asian with a very minor population of other countries, it is a big factor to play.
- Political Scenario : Eg: In the US before the presidential elections of Donald Trump, there were many policies with regards to the trade barriers, Entry in US etc which were liberal and was pretty easy for people to execute, but after Donald Trump became the president of the united states, there were macro-level changes in the country since he started securing the borders by not allowing specific people to enter the country from specific countries. This had a significant impact on the country’s economy since there was a complete change in the processes with regards to the entry and exit into or from the united states to any other country
- Other examples: GDP, Inflation, social impact, political stability, financial soundness, interdependence in the economic system
Advantages of the Macro Environment
Below are some of the Advantages :
- Identification of threats: Macro environment analysis helps the economy to identify the potential threats and also suggest measures to control it.
- Forecasting the future: It helps in budgeting the financial and economic needs of the future years keeping in mind the macro-environmental factors that will play a larger role.
- Helps in achieving objectives: It helps in achieving the desired objectives by keeping a close eye on the factors that affect the macro environment.
- Strength and weakness: It highlights the strengths and weaknesses of the economy as a whole as the impact of the macro factors can be high.
Disadvantages of Macro environment
- High Risk of handling sensitive information: There is a risk as to the handling of the sensitive information which relates to the macro-environmental factors.
- Difficult to collect data: Data on the macro-environmental factors is not readily available and needs to be collected from various sources.
- Regulations may differ from country to country: There might be differences in the rules and regulations of two countries. Hence what is impacting for one country may not be that impacting for the other.
- Political instability: Political stability is one of the most important criteria to have a healthy economy since all the top-level decisions are been taken by the political leaders. In the absence of political stability, would be difficult for any country to prosper and grow in the future since the political will is not there to steer the economy ahead.
Macro environment is one of the most complex topics to talk about and research since many things need to be taken into consideration while forming an opinion on the macro environment and its impact on the economy as well.
This has been a guide to what is Macro Environment and its definition. Here we discuss the various types of macro environment with the examples. We also discuss the advantages and disadvantages. You can learn more from the following articles –