How Do Economic Forces Affect E-Commerce Organizations?

Global trade liberalization and technological advancements have opened up the domestic and international markets. Trade liberalization is elimination of trade barriers that previously hindered free trade in international markets. These transformations of the business environment, coupled with the widespread use of e-commerce, have enabled small businesses to access local, regional and global markets. The success of e-commerce organizations depends on prevailing economic conditions in target markets.

Economic Forces Versus E-Commerce

Economic forces are factors such as inflation, interest rates, labor and government monetary policies that influence levels of production and demand for goods and services. These factors dictate the availability and affordability of production resources, as well as the abilities of consumers to afford your end products. E-commerce involves transacting business through the use of automated information technology applications. The outcomes of e-commerce activities are affected by economic forces, as was evidenced by the 2007-2009 global economic crisis. According to the Census Bureau of the U.S. Department of Commerce, e-commerce declined by 5.5 percent in the fourth quarter of 2008 compared to the same period in 2007. This clearly shows that economic factors affect e-commerce.

Levels of Inflation

Inflation is the sustained rise in the prices of products. Rising inflation affects the demand for e-commerce goods or services because it reduces the number of items consumers can afford. This affects your e-commerce business, particularly if you deal in nonessential or luxurious items. Consumers actually restrict their spending to essential items during periods of high inflation. Inflation also increases the costs of your inputs, such as electricity, Internet, online advertising and computer maintenance. The adverse effects of high costs of operations, coupled with falling demand for e-commerce products, reduce profits.

Rates of Interest

Low interest rates encourage borrowing, while high interest rates discourage borrowing. Prevalence of low interest rates boosts e-commerce business because it increases the amount of money in circulation as a result of heightened lending and borrowing activities in the financial sector. Consumers can spend more on your e-commerce products when they have more money at their disposal. In contrast, high interest rates stifle money circulation and suppress demand for e-commerce products. They also increase the financing costs of your business, especially if you borrow loans with variable interest rates.

Trends of Employment

Trends of employment are important indicators of economic progress. Low unemployment rates translate to growing demand for e-commerce products because more people earn income. High unemployment rates signal worsening economic conditions, as no new jobs are created and many people lose jobs. As a result, the demand for e-commerce products declines with increased rates of unemployment and vice versa.