Watch this video and read this article where we explore economic factors in a PESTEL analysis.
Economic factors include economic growth, percentage of unemployment, inflation, interest and exchange rates, and commodity (oil, steel, gold, etc) prices. These affect the discretionary income and purchasing power of households and organisations alike.
Boom and gloom
Economic factors may also affect the availability of credit and finance, and the capacity to purchase or access key resources. Generally, there are periods of boom, as experienced before the 2008/09 financial crisis, followed by periods of gloom, that temper the ability of organisations to produce, and consumers to buy.
A stable political climate with good governance is more likely to generate a conducive economic environment for businesses to thrive. In recent years, the failure of politics and governance in Venezuela and Zimbabwe led to an extraordinary rise in prices (known as hyperinflation). The subsequent contraction of these economies meant households and businesses were overwhelmed by additional costs, leading to mass unemployment, low creditworthiness to access financial facilities, and the unaffordability of foreign goods and currency.
Capital and labour flight
In these conditions, the flight of skilled labour and capital to more stable economies worsen the situation, and it can take decades to enter a new phase of economic recovery and growth, as evidenced in Rwanda after the conflict of 1994.
The key questions here are:
- What economic factors will affect my organisation going forward?
- How does the wider performance of the economy affect my organisation at the moment?
- How is my organisation’s pricing, revenue and costs impacted by each economic factor?
FAQs
Economic factors include economic growth, percentage of unemployment, inflation, interest and exchange rates, and commodity (oil, steel, gold, etc) prices. These affect the discretionary income and purchasing power of households and organisations alike.
What are the 3 economic questions every economy must answer? ›
Economic systems answer three basic questions: what will be produced, how will it be produced, and how will the output society produces be distributed?
What are the 5 economic questions that society must answer? ›
Economic systems are ways that countries answer the 5 fundamental questions:
- What will be produced?
- How will goods and services be produced?
- Who will get the output?
- How will the system accommodate change?
- How will the system promote progress?
Economists define four factors of production: land, labor, capital and entrepreneurship. These can be considered the building blocks of an economy. How these factors are combined determines the success or failure of the outcome.
What are the three factors of economy? ›
The 3 main sectors of the economy are the primary sector, the secondary or manufacturing sector, and the tertiary or service sector. The primary sector involves extracting raw materials for industries.
What is a factor in economics? ›
In economics, factors of production are the resources people use to produce goods and services; they are the building blocks of the economy. Economists divide the factors of production into four categories: land, labor, capital, and entrepreneurship.
What is the economic answer? ›
Economics is concerned with the creation, consumption, and transfer of wealth. The study of economics encompasses the major areas of microeconomics, which explores how people and firms produce and consume goods and services, and macroeconomics, which explores mass economic progress and inter-country trade.
What are the 3 big questions to answer in economics? ›
Students will read and take notes on the three main questions of economics. These are what to produce, how to produce it, and who to produce it for.
What are the 4 types of economic systems? ›
Each economy functions based on a unique set of conditions and assumptions. Economic systems can be categorized into four main types: traditional economies, command economies, mixed economies, and market economies.
What are the four 4 basic economic questions? ›
Although the focus of this chapter is on the market system, the four fundamental questions must be answered by all economic systems.
- What goods and services will to be produced?
- How will these goods and services be produced?
- Who will get the goods and services?
- How will the system accommodate change?
The three basic problem of economics are: What to produce. How to produce. For whom to produce.
How to solve basic economic problems? ›
Free Price Mechanism to Solve Basic Problems of an Economy
The price mechanism is a method of shaping the choices made by people in an economy by counting on prices set through the exchange of demand and supply in the market. This method works independently of government meddling.
What are the three basic economic questions that all societies must answer? ›
Because ALL economic resources are scarce, every society must answer three questions:
- What goods and services should be produced?
- How should these goods and services be produced?
- Who consumes these goods and services?
Many economic factors, such as unemployment, exchange rates, inflation, wages, and supply and demand, typically impact how businesses make a profit and increase their efficiency.
What are the 4 key economic decisions? ›
The nature and purpose of economic activity
The central purpose of economic activity is the production of goods and services to satisfy needs and wants. The key economic decisions are: what to produce, how to produce and who is to benefit from the goods and services produced.
What are economic factors in pestle? ›
ECONOMIC: Economic factors will include exchange rates, economic growth or decline, globalisation, inflation, interest rates and the cost of living, labour costs and consumer spending.
What are the social and economic factors? ›
Social and economic factors include factors such as income, education, employment, community safety and social support. The choices that are available in a community are impacted by social and economic factors. These choices include our abilities to afford medical care and housing and to manage stress.
What are the five major factors measure the economy including? ›
Economic indicators include measures of macroeconomic performance (gross domestic product [GDP], consumption, investment, and international trade) and stability (central government budgets, prices, the money supply, and the balance of payments).
