What is Macro-environment?
Macro-environment refers to the overall operating conditions for an industry or country.
Macroeconomists use different statistics and measures to evaluate factors that might affect performance of an economy or company, including all relevant economic, political, and technological factors.
Macro-environment is different from micro-environment, which refers to the supply and demand fundamentals of a single industry, product, or region.
Businesses can’t affect the macro-environment, but the macro-environment can greatly affect businesses.
This is why business people and company owners use statistics from macro-environments to make investment decisions.
For example, consider John F Kennedy’s quote, “a rising tide lifts all boats.”
If the U.S. is experiencing consistent growth for its Gross Domestic Product, unemployment rates are low, and consumers appear to have excess cash, a retail chain may make an investment to be a part of the rising tide.
If the opposite is true, the macro-environment may deter the retail chain from making the investment.
Broadly, macro-environments can be an interplay of several factors. Some of them are:
- Economic factors: An example is central bank policy towards interest rates and inflation.
- If the Federal Reserve lowers interest rates, the cost to borrow money becomes cheaper and there is a greater incentive to invest.
- Political factors: An example is the relative stability of governments and legal systems in a country.
- Investors are weary to invest in countries with political unrest since it could result in severe economic loss.
- Technological factors: An example is the possibility of a technology-induced “disruption” in an industry.
- New technologies can create new markets while making previous markets outdated, such as the rise of streaming services discontinuing purchases and rentals of physical DVDs.
Other external factors, such as the COVID-19 pandemic, can also greatly affect the macro-environment.
Several metrics relating to a country’s economic health are used to study macro-environments. Some of the more common ones are:
- Gross Domestic Product (GDP):
- The total market value of all the goods and services produced within a country’s borders.
- A higher GDP signals a growing economy.
- Change in purchasing power of a currency.
- High inflation means a currency is lowing purchasing power and low inflation can indicate a flat economy.
- Unemployment rate:
- A growing economy has low unemployment rates because businesses tend to add more staff to meet demand for their product.