An analysis of many companies’ financial results will often indicate that business people attribute their current financial success or failure to the state of the economy. For example, in 2002 the house builder Taylor Woodrow reported increased profits, which it attributed to a buoyant housing market, based on a high level of consumer confidence within the economy. Ten years earlier, a weak economy and falling house prices had led to big losses for many house builders, and some went out of business.
Economic growth and the distribution of income
Few business people can afford to ignore the state of the economy, because it affects the willingness and ability of customers to buy their products. Marketers therefore keep their eyes on numerous aggregate indicators of the economy, such as Gross Domestic Product (GDP), inflation rates, and savings ratios. However, while aggregate changes in spending power may indicate a likely increase for goods and services in general, the actual distribution of spending power among the population will influence the pattern of demand for specific products. In addition to measurable economic prosperity, the level of perceived wealth and confidence in the future can be an important determinant of demand for some high-value services. If consumers’ confidence is low, a high pro- portion of income tends to be saved. If confidence is high, consumers are more likely to borrow, so that their expenditure is greater than their income .
The effects of government policy objectives on the distribution of income can have profound implications for marketers. During most of the post-war years, the tendency has been for income to be redistributed from richer to less well-off groups. Higher rate taxation and the payment of welfare benefits have been instrumental in achieving this.
Multiplier and accelerator effects
Through models of national economies, firms try to understand how increases in expenditure (whether by government, households, or firms) will affect their specific sector. The multiplier effect of increases in government spending (or cuts in taxation) can be compared to the effects of throwing a stone into a pond of water. The initial spending boost will have an initial impact on households and businesses directly affected by the additional spending, but through a ripple effect will also be indirectly felt by households and firms throughout the economy.
A small increase in consumer demand can lead, through an accelerator effect, to a sudden large increase in demand for plant and machinery as manufacturers seek to in- crease their capacity with which to meet this demand. Demand for industrial capital goods therefore tends to be more cyclical than for consumer goods, so when consumer demand falls by a small amount, demand for plant and machinery falls by a correspondingly larger amount, and vice versa.