THE ECONOMIC AND OTHER FACTORS AFFECTING THE RATE OF INTEREST, WAGE AND PROFIT.

A rate which is charged or paid for the use of money is referred to as Rate of Interest. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve policies. For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000 *100% = 9%. An interest rate is the amount received in relation to an amount loaned, generally expressed as a ratio of currency received per hundred currency lent. However, a distinction should be made between specific interest rates and interest rates in general. Specific interest rates on a particular financial instrument (for example, a mortgage or bank certificate of deposit) reflect the time for which the money is on loan, the risk that the money may not be repaid, and the current supply and demand in the marketplace for funds available for lending. Interest rates are a key component in many market prices and an important economic barometer. They are comprised of the real rate plus a component for expected inflation, since inflation reduces the purchasing power of a lenders assets. The greater the term to maturity, the greater the uncertainty. Interest rates are also reflective of supply and demand for funds and credit risk. Interest rates are particularly important to companies and governments because they are the key ingredient in the cost of capital. Most companies and governments require debt financing for expansion and capital projects. When interest rates increase, the impact can be significant on borrowers. Interest rates also affect prices in other financial markets, so their impact is far-reaching. ECONOMIC AND OTHER FACTORS THAT INFLUENCE THE LEVEL OF MARKET INTEREST RATES INCLUDE: 1. EXPECTED LEVELS OF INFLATION: This will affect interest rates, because the rates paid on most loans are fixed in the loan contract. A lender may be reluctant to lend money for any period of time if the purchasing power of that money will be less when its repaid; the lender will, therefore, demand a higher rate (known as an inflationary premium). Thus, inflation pushes interest rates higher; deflation causes rates to decline. GENERAL ECONOMIC CONDITIONS: When the economy is growing, consumers have jobs and savings to lend through banks, but they must also borrow for large items, such as homes or cars, or to finance other purchases through credit cards. As the demand for funds increases, interest rates rise and act as a ration for the funds available. Of course, the opposite is also true; when the demand for funds is low, interest rates fall.

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MONETARY POLICY AND THE STANCE OF THE CENTRAL BANK: Its likely that the most important force to watch for evaluating future interest rate trends is the Federal Reserve. The Fed, as it is known, controls credit availability (in other words, the amount of funds available to lend) and the level of interest rates at which the funds are made available. FOREIGN EXCHANGE MARKET ACTIVITY: The dollar is the main currency in international trade and is used extensively in world markets. Orderly fluctuations of the dollar in foreign exchange markets are essential for domestic and international stability. Major or very volatile exchange rate movements could force the Federal Reserve to act, as well as affect interest rates and the countrys monetary policy. FINANCIAL AND POLITICAL STABILITY: All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive/negative interest in a neighbouring country and, in the process, affect its currency. A KEY INDICATOR IS THE CONSUMER PRICE INDEX (CPI): This measures the change in prices of a fixed basket of goods and services that a typical consumer would purchase. The CPI is considered the benchmark for changes in inflation, and is typically quoted as a monthly percentage. If the CPI rises rapidly, an interest rate rise may be needed. LOAN AMOUNT: Sometimes the amount of money you borrow makes a difference in your interest rate. Just as buying in bulk might reduce the price paid per unit, borrowing larger sums of money might result in discounted interest rates.

A wage is compensation, usually financial, received by workers in exchange for their labour. Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees. Compensation is a monetary benefit given to employees in return for the services provided by them. Wages can be determined through the following: 1. THE FORCES OF DEMAND AND SUPPLY IN A MARKET ECONOMY: The wages of labor in a market economy can be determined through the forces of demand and supply. In a competitive labour market, there are so many employers and unorganized employees resulting in a situation where a single employer or employee cannot influence the wage rate either by refusing to be employed or to employ. Wage rate in a competitive labor market can be determined in the following manner:

 When the supply of labor exceeds the demand, wage rate will fall. When the demand for labor exceeds the supply, wage rate will rise. When the demand, for labor equals the supply, wage rate will be favourable to both employer and the employee. 2. GOVERNMENT ACTIVITIES AND POLICIES: Government institutions and wage commissions set up by government help in determining wages, especially in the public services. In fixing wages, the government agency or wage commission takes the following factors into consideration. Cost of living: Level of productivity: Type of occupation 3. THE ACTIVITIES OF TRADE UNIONS: A trade union is an association of workers formed to enable the members to take collective, rather than individual, action against their employers in matters relating to their welfare and conditions of work. They are formed by workers who seek protection and promotion of their interests such as the Academic Staff Union of Universities (ASUU).

Objectives of trade Unions: To secure good wages for members; to participate in policy formulation of their respective organizations; to secure employment for those members who have no jobs; Trade unions also make it their responsibility to safeguard the interests of members and they also regulate the entry qualifications into the various professions. Trade union can insist on achieving their objectives during trade dispute by using the following weapons or methods: 4. Collective bargaining Work to rule Picket lines Threat to strike Strike EMPLOYERS' ASSOCIATION: Employers' association is formed to enable members adopt a common policy in labour negotiations. A good example of employers association in the United Kingdom is Confederation of British Industry (CBI) and Federation of Small Businesses. While trade Unions are usually interested in negotiations about wages increases and improving the working conditions of workers, employers' associations are normally interested in discussing ways of increasing productivity. Through collective bargaining on

these matters, mutual agreements are reached by both the trade union and employers' association. Employers' association can insist on achieving their objectives in trade dispute by using the following weapons or methods: Collective bargaining: In this case both the employers' association and the trade union representatives will meet to discuss the workers' demand. Strike breakers: In this method, the employer will use some workers to operate the plant during the period of strike. Blacklist: All workers who participate in strike action will be dismissed. Lock-out: This involves the closing down of the factory by the employer until the dispute is resolved. 5. THE ORGANIZATIONS ABILITY TO PAY: Wage increases should be given by those organizations which can afford them. Companies that have good sales and, therefore, high profits tend to pay higher than those running at a loss or earning low profits because of higher cost of production or low sales. In the short run, the economic influence on the ability to pay is practically nilled. All employers, irrespective of their profits or losses, must pay no less than their competitors and need to pay no more if they wish to attract and keep workers. In the long run, the ability to pay is important. During the time of prosperity, pay high wages to carry on profitable operations and because of their increased ability to pay. But during the period of depression, wages are cut because the funds are not available. Marginal firms and non profit organization (like hospitals and educational institutions) pay relatively wages because of low or non profits. 6. PREVAILING MARKET RATE: This is known as the comparable wage or going wage rate, and is the widely used criterion. An organization compensation policy generally tends to conform to the wage rate payable by the industry and the community. This is done for several reasons. First, competition demand that competitors adhere to the same relative wage level. Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. Third, trade union encourages this practice so that their members can have equal pay, equal work and geographical differences may be eliminated. Fourth, a functionally related firm in the same industry requires essentially the same quality of employees, with same skill and experience. This results in a considerable uniformity in wage and salary rates. Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organizations competitors, it will not be able to attract and maintain the sufficient quantity and quality of manpower. Some companies pay on a high side of the market in order to obtain goodwill or to insure an adequate supply of labour, while other organizations pay lower wages

because economically they have to or because by lowering hiring requirements they can keep jobs adequately manned. 7. THE COST OF LIVING: The cost of living pay criterion is usually regarded as an automatic minimum equity pay criterion. This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. In recognition of the influence of the cost of living. escalator clauses are written into labour contracts. When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages. However, when living costs are stable or decline, the management does not resort to this argument as a reason for wage reductions. 8. THE LIVING WAGE: Criterion means that wages paid should be adequate to enable an employee to maintain himself and his family at a reasonable level of existence. However, employers do not generally favour using the concepts of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need. Also, they feel that the level of living prescribed in a workers budge is open to argument since it is based on subjective opinion. 9. PSYCHOLOGICAL AND SOCIAL FACTORS: These determine in a significant measure how hard a person will work for the compensation received or what pressures he will exert to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life; people may feel secure; have an inferiority complex, seem inadequate or feel the reverse of all these. They may not take pride in their work, or in the wages they get. Therefore, these things should not be overlooked by the management in establishing wage rate. Sociologically and ethically, people feel that equal work should carry equal that wages should be commensurate with their efforts, that they are not exploited, and that no distinction is made on the basis of caste, colour, sex or religion. To satisfy the conditions of equity, fairness and justice, a management should take these factors into consideration. 10.SKILL LEVELS AVAILABLE IN THE MARKET: With the rapid growth of industries business trade, there is shortage of skilled resources. The technological development, automation has been affecting the skill levels at faster rates. Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level up to suit the market needs. Any business organization has one goal, to maximize profit. The process of maximizing profit is simple. Analyze demand of consumers, and provide appropriate supply, in good quality and quantity. There are however many factors that affect this simple operation. These factors are often classified as macro and micro, internal and external, technical and non-technical. All the same, the sales, production and procurement of the business organizations, directly or indirectly depends on these factors. Hence, you

will find that businessmen closely analyze and ponder upon the economic factors affecting business firms. ECONOMIC FACTORS AFFECTING BUSINESS: 1. Demand and Supply: The demand and supply are two principal factors that affect the working of any business model. The demand is the will and ability of consumers to purchase a particular commodity and the supply is the ability of the business to provide for the demand of consumers. It must be noted that all the factors that are included in this list are inter-connected. Marginal and Total Utility: Utility is the amount of satisfaction that is derived by consumers from consumption of goods. It so happens that after continuous and successive consumption of units of the same goods, the satisfaction that is experienced by consumer starts decreasing. This often results into short term or long term fall of sales. Some organizations prepare for the launch of another brand before the fall in utility and sales are experienced. The launch of new brand ensures that the revenue trend of the business does not fall. Diminishing utility is among the external factors affecting business. Money and Banking: Banking facilitates monetary and fiscal policies that affect business and also the customers of the business. Money in circulation dictates the paying power or rather the demand of the consumers and the banking facility dictates the borrowing capacity of individuals as well as the business. Economic Growth and Development: Economic growth dictates the amount of finances that the society at large is earning and development indicates the volume of money that is being invested into channels of long term up-gradation. Among all the economic factors affecting business environment, development is the most important one, as the business has to cater to the demand of an economically dynamic society. Income and Employment: Another very important aspect of the economy that affects the working of the business is the level of employment and rate of income. The per capita income and density of employment dictates the rate of demand, density of demand and also the purchasing power of the people. General Price Level: Another very important aspect of the economy that affects the business is the general price levels of the commodities that also affect the sales of the business. Costs of raw materials, paying power of people, cost of production and finally, cost of transport are some of the important components that determine the general price level and also, the sales of the firm. Trade Cycles: Trade cycles are the fluctuating costs of goods and commodities in an economy. Rise, stability, continuity and fall are some of the important cycles that affect the prices of all goods such as raw material, credit, final goods, etc. Trade cycles also many a times affect the general price level.

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