Macroeconomics is the overall discussion of the country’s financial system rather than individual or a particular institution. The main goal of macroeconomics is the overall analysis of the economic system. Macroeconomics discusses how the general price level is determined by aggregate demand and aggregate supply in a monetary system.
Total production of the country, total national income, total investment, total employment, total demand, total supply, general price level, capital market, interest rate, fiscal policy and monetary policy, financial institutions etc. are the topics discussed in macroeconomics.
A country’s economy consists of two parties, 1) Deficit unit (producers or business firms) and 2) Surplus unit (consumers whose income exceeds expenditure).
Consumers buy goods and sell production factors. On the other hand, businesses use the income they earn from selling goods to purchase raw items. If the cost of production increases, then the price of the product increases in the market. An increase in price will decrease the aggregate demand for the product and decrease production. A fall in production will lead to a fall in the demand for inputs and a fall in investment as well. As a result, unemployment will increase, and this will have an adverse effect on the macroeconomy.
Every firm has to earn profit by producing products at low cost in order to survive in competition. In this case, if there is knowledge about financing, every firm is able to earn profit by collecting the right amount of money at the right time and investing properly by producing products at low cost through proper financial planning.
When it comes to raising capital, large companies can raise capital by issuing shares, bonds, debentures in the stock market. Those organizations that are not able to raise capital through the stock market raise funds by taking loans from financial institutions. Some businesses take loans from alternative sources at higher interest rates due to financial institution’s fund constraints. The cost of borrowing is also higher due to higher interest on loans from these alternative sources. As a result, the cost of production increases and the price of the product increases. As a result, demand in the market decreases and investment decreases. Unemployment rises in the macroeconomy, and business and trade come to a standstill.
A healthy environment is essential for running a business. And this environment is created by the Macroeconomy. Macroeconomics is the institutional environment within which a business organization carries out all its activities. The financial manager must be aware of the broader economic environment. Otherwise, it will not perform its functions properly.
Financial managers need to know the following:
a) How monetary policy affects the cost of funds.
b) How fiscal policy affects the economy.
c) Know about various financial institutions and their working methods to evaluate financing and potential investment projects.
d) In the case of raising capital, joint venture companies raise capital by issuing shares, bonds, debentures in the stock market. Again, those companies that fail to raise capital through the stock market raise funds by taking loans from financial institutions. Due to fund constraints of financial institutions, some business enterprises take loans from informal sources at higher interest rates. High interest rates also increase the cost of borrowing.
In this case, if you have a proper understanding of financing, that is
i) Prepare financial plan
ii) Capital or funds will be raised from any source
iii) How much money will be invested in what manner and in which projects
iv) Interest of capital etc.
Interest rates fall and production costs fall. Due to lower cost of production, the price of the commodity will be lower and the demand for the commodity will increase and production will increase. As a result, employment increases and plays an important role in the overall economy.
Deficit budget unit or business organization in the above figure can take short-term loans for investment in current assets and long-term loans for investment in fixed assets from financial institutions by applying the correct concept of financing and can raise long-term capital by issuing shares, bonds etc. On the other hand, if the surplus budget unit or savers or lenders have a proper understanding of financing, the sourced money can be deposited as savings account or permanent account or both as required. Thus, financial institutions (banks, leasing companies etc.) play a supporting role in managing the funds of deficit units and surplus units in the macro economy.
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