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Relating The Macro Economy to Your Small Business

Aug 17, 2007
Unfortunately, there is a common notion that persists amongst members of the small business community that their business cycles depend more on local influences than the larger macroeconomic picture. As a small business owner you may sometimes have noticed some unexpected forces influencing your business, sometimes inexplicably for long periods of time.

Let's take a look at how some of the key macroeconomic indicators affect small businesses.

Macroeconomic Indicators And Your Life

The key macroeconomic indicators are:

1. GDP, i.e; Gross Domestic Product
2. Per Capita Income
3. Purchasing Power Parity
4. Inflation Rates
5. Unemployment Rates
6. Balance of Payment
7. Foreign Exchange Reserve
8. Current Account Balance
9. Fiscal Balance

The GDP And Small Business

GDP is the gross output of the entire nation across all sectors. GDP is expressed in trillions or billions of dollars, as the case may be, and the higher value reflects the overall growth over the previous accounting year. So how does it relate to your business? First, the GDP grows because of contributions made by everyone, small and big firms alike, across all sectors. As a result, the individual income grows leading to a higher rate of consumption, which is an all-around win-win situation. Today, over 76% of $12.6 trillion of the United State's GDP is by service sectors which include countless small businesses. Interestingly, when GDP was growing negatively, you will recall how small businesses went through the ordeal.

Per Capita Income

Simplistically, Per Capita Income is the mathematical average income of individuals in a nation. This figure gives you a fair idea of your prospects. Let's say that a used car seller can expect higher sales if the per capita income shoots up. An increase in per capita income can be partly thought of as spare income in the hands of middle class families that they want to spend on travel, homes, cars, etc. This means that travel agents, real estate brokers/agents can expect brisk business.

Inflation And Unemployment Rates

Both these indicators are expressed in percentage terms over a corresponding previous term. An inflation rate of 2% represents that the cost of living has increased by 2%. Inflation triggers a tightening of the purse strings. Most people will put on hold, most unnecessary expenses like vacations, car loans, etc. If you are wondering why retailers increase discounts even during Christmas, this could be one of the reasons.

Unemployment, on the other hand, reduces the per capita income and purchase power of society as a whole. A change in fate of retail customers' income and employment directly reflects on the fate of retail businesses.

Let's see what Balance of Payment (BOP), Current Account Balance and Fiscal Balance mean to small businesses. BOP is the difference in the country's external trade payments. A negative BOP tells that the country is importing more products or at higher cost which ultimately burdens consumers in the domestic market in terms of shrinking trade volumes and margins. A negative fiscal balance increases the inflation rate and cost of living, and encourages erosion of capital.

No small business is insulated from economic factors or international events. Reading the indicators right is crucial for survival.
About the Author
Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solution's Six Sigma Online offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts.
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