What are economic factors?

Answer

Economic factors comprise the information that influences the value of an investment or business. When you are calculating the present and anticipated future value of an investment portfolio or a business, the economic factors are what you bear in mind. The primary economic factors are management, taxes, government policy, interest rates and labor costs.

Labor costs are an economic factor that has led many companies to outsource many of their basic functions to sites outside the United States. In many countries, especially in South and Southeast Asia, American companies have established factories, call centers and other facilities to handle many of their operational functions because workers there are much cheaper to hire.

Interest rates are more a factor for investment portfolios than businesses. When interest rates are higher, many investors turn to more secure vehicles, such as certificates of deposit, but when rates go down, some investors are willing to take on more risk through investments that lack government protection.

Government policy and taxes make up another reason why businesses choose particular states and countries for incorporation. The corporate tax structure in Delaware, for example, causes many firms to set up headquarters in that state, even though the primary business may be far across the country.

Management is a factor specific to each company. Businesses with effective management are much more likely to prosper and, therefore, are a stronger investment idea.

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