Markets and economies: the world a case lives in

Lesson 1 of 3 Math checked Facts checked against sources on 1 October 2026 20 min

Macro forces that move cases

Inflation, interest rates, exchange rates, commodity cycles, tariffs and trade, demographics and government policy: how each reaches revenue, cost, demand and valuation, with small worked examples.

Firm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.

Key takeaways

Every company lives inside an economy.
Common mistakes: Listing all seven forces as a checklist: the interviewer wants the one or two that matter for this client, with a size.
A temporary 10 percent surcharge on most imports, under a different law (Section 122 of the Trade Act of 1974), took effect on 24 February 2026 for 150 days.

Key idea

Every company lives inside an economy. Seven outside forces (inflation, interest rates, exchange rates, commodity prices, tariffs and trade, demographics, and government policy) reach a business through four doors: revenue, cost, demand and valuation. In a case, find the one or two forces that moved this client's numbers and show how big the effect is.

"Macro" means the whole economy: prices, interest rates, currencies and rules that affect every company at once. "Micro" means one company or one market. Case interviews are mostly micro, but a macro change is often the reason a client's profit moved. A coffee chain's margin falls because milk and rent cost more (inflation). A car dealer's sales drop because loans got dearer (interest rates). An importer's profit halves because the local currency weakened (exchange rates). When you can name the force and put a number on it, you sound like someone who understands the business.

Seven forces, four doors

An outside force changes a client's results
- InflationCost (inputs, wages, rent); revenue (can prices rise too?); demand (real incomes squeezed)
- Interest ratesCost (interest on debt); demand (purchases paid with loans); valuation (future cash is worth less)
- Exchange ratesCost (imported inputs); revenue (exports, and foreign profits turned back into home currency)
- Commodity cyclesCost (fuel, metals, food, fertiliser); revenue for producers
- Tariffs and trade dealsCost (landed cost of imports); demand (prices customers see); supply chain choices
- DemographicsDemand (how many buyers, of what age, where); cost (supply of workers and wages)
- Government policy and subsidiesRevenue and demand (taxes, subsidies, price rules); cost (taxes on labour or inputs); who may enter (licences)

Each force reaches the profit and loss through one or more doors. Revenue is price times volume; cost is what the company pays; demand is how much customers want to buy; valuation is what the business is worth today.

Inflation

Inflation is the rise in the general level of prices, usually measured by a consumer price index (CPI): the cost of a fixed basket of things households buy, compared with a year earlier. For a company, inflation raises the cost of inputs, wages and rent. Whether profit suffers depends on pricing power: can the company raise its own prices as fast as its costs rise without losing too many customers? Strong brands and businesses with few rivals often can. Firms in crowded markets often cannot, so their margins get squeezed. Inflation also squeezes customers: if wages rise more slowly than prices, people can buy less, and they switch to cheaper brands. In its July 2026 update, the IMF expected global consumer price inflation to rise from 4.1 percent in 2025 to 4.7 percent in 2026, driven mainly by higher energy and food prices after the war in the Middle East.

Timed math drill

A restaurant's food costs are 30 percent of its menu prices (illustrative). Food prices rise by 10 percent and the restaurant keeps its menu prices the same. By how many percentage points does its margin fall?

Interest rates

A central bank sets a short-term policy rate, the rate at which banks borrow from it or keep money with it. Other rates (loans, mortgages, deposits) usually follow. Higher rates do three things in a case. First, companies with debt pay more interest. Second, customers buy fewer things they pay for with loans: homes, cars, machines. Third, valuations fall, because money expected in the future is worth less today when you can earn more by saving. Central banks raise rates to cool inflation and cut them to support growth. After the 2026 energy shock several of them moved up. The US Federal Reserve raised its target range by 0.25 points to 3.75 to 4.00 percent on 16 September 2026, after cutting it three times in late 2025. The European Central Bank raised its deposit rate from 2.00 percent to 2.25 percent in June 2026 and to 2.50 percent in September 2026. The Bank of Japan raised its policy rate to around 1.25 percent from 24 September 2026.

Timed math drill

A company has debt of 500 million (in any currency) at a floating rate that moves from 6 percent to 8 percent. How much more interest does it pay each year, in millions?

Timed math drill

A business is expected to earn 10 million a year, growing 2 percent a year forever. With a discount rate of 10 percent, its value is 10 divided by (0.10 minus 0.02), which is 125 million. If higher interest rates push the discount rate up to 11 percent, by what percent does its value change?

Exchange rates

An exchange rate is the price of one currency in another, for example 85 Indian rupees for one US dollar. If it moves to 93.50 rupees per dollar, the rupee has weakened (depreciated): each dollar now costs more rupees. A weaker home currency hurts importers, because what they buy abroad costs more at home, and helps exporters, because what they sell abroad brings back more home currency. It also changes reported results for companies with foreign businesses: profits earned in a weakening currency shrink when turned into the home currency. That is why companies quote constant currency growth, which removes the currency effect.

Worked case

A weaker rupee and an importer's margin

The prompt

A fictional Indian company imports wireless speakers and sells them in India. Each speaker costs USD 100 to buy. The exchange rate has been 85 rupees per dollar, and the rupee then weakens so that a dollar costs 10 percent more rupees. Each speaker sells for INR 12,000 and carries INR 1,500 of local costs (duty, freight, store and staff). All numbers are illustrative. What happens to profit per speaker, and what price would keep the rupee profit the same?

Open this case to practice it with a partner

The structure

Profit per unit = price minus import cost minus local costs
- Price in rupees (unchanged so far)
- Key: Import cost = USD cost x rupees per dollar
- Local costs in rupees (unchanged)
- Options: raise price, hedge, or source locally

The exhibit

Profit per speaker before and after the rupee weakens (illustrative, INR)(INR per speaker)

Working it through

1. Import cost before
USD 100 times 85 rupees per dollar.
Import cost before (INR):100 × 85 = 8,500
2. Profit before
Price minus import cost minus local costs.
Profit per speaker before (INR):12,000 - 8,500 - 1,500 = 2,000
3. Margin before
Profit divided by price.
Margin before (percent):2,000 ÷ 12,000 × 100 = 16.67
4. New exchange rate
A dollar now costs 10 percent more rupees.
Rupees per dollar after:85 × 1.1 = 93.5
5. Import cost after
USD 100 times 93.50.
Import cost after (INR):100 × 85 × 1.1 = 9,350
6. Profit after
Same price and local costs, higher import cost.
Profit per speaker after (INR):12,000 - 9,350 - 1,500 = 1,150
7. Margin after
Profit divided by price.
Margin after (percent):1,150 ÷ 12,000 × 100 = 9.58
8. Change in profit
From 2,000 to 1,150 rupees.
Change in profit per speaker (percent):(1,150 - 2,000) ÷ 2,000 × 100 = -42.5
9. Price that keeps the same rupee profit
New import cost plus local costs plus the old profit.
Price needed (INR):9,350 + 1,500 + 2,000 = 12,850
10. Price rise needed
From 12,000 to 12,850 rupees.
Price rise needed (percent):(12,850 - 12,000) ÷ 12,000 × 100 = 7.08

What the exhibit shows

A 10 percent currency move removes about 42 percent of the importer's profit per unit, because the import cost is large and the margin is thin.

The recommendation

A 10 percent weaker rupee cuts profit per speaker by about 42 percent, from INR 2,000 to INR 1,150, and the margin from about 16.7 percent to about 9.6 percent. To keep the same rupee profit the company would need a price rise of about 7.1 percent, to INR 12,850. Whether that works depends on rivals: if they import too, they face the same cost and prices across the market may rise; if a rival makes speakers in India, it does not, and customers may switch. So test a partial price rise now, and for the longer term look at buying dollars in advance at a fixed rate (hedging) and at local assembly.

Risks: All figures are illustrative; check the client's real cost split before quoting a number.; A hedge only delays the hit; if the rupee stays weak, the higher cost arrives when the hedge ends..

Commodity cycles

Commodities are raw materials sold in bulk at world prices: oil, gas, metals, grains, fertiliser. Their prices swing in long cycles, because new supply takes years to build (a new mine or oil field) while demand can change in months. A price rise is a cost shock for users (airlines, chemicals, farms, power plants) and a windfall for producers who can still sell. The 2026 war in the Middle East is a live example. The IMF's July 2026 update assumed crude oil prices about 32 percent higher in 2026 than in 2025, natural gas about 22 percent higher, fertiliser about 26 percent higher and food about 8 percent higher. Gulf producers that could not ship through the Strait of Hormuz lost output, while energy exporters outside the conflict gained from higher prices.

Timed math drill

Fuel is 30 percent of an airline's total costs (illustrative). The fuel price rises by 32 percent and the airline has not fixed its fuel price in advance. If its other costs stay the same, by what percent do its total costs rise?

Tariffs and trade deals

A tariff is a tax on imported goods, charged at the border as a percentage of the goods' customs value and paid by the importer. Who finally bears it depends on bargaining power: the importer may absorb it (lower margin), pass it to customers (higher price, maybe fewer sales), or push the foreign supplier to cut its price. A trade deal is an agreement between countries to cut tariffs and other barriers between them. To get the lower rate, goods usually have to show that enough of the product was made inside the deal area (rules of origin). The sourcing and trade module in this library covers rules of origin and supply chain choices in detail. Other barriers matter as much as tariffs: quotas (a cap on how much can be imported), product standards and import licences.

How fast the rules can change: the United States in 2026

On 20 February 2026 the US Supreme Court held that the International Emergency Economic Powers Act (IEEPA) does not allow the President to impose tariffs, which ended the broad tariffs set under that law in 2025.
A temporary 10 percent surcharge on most imports, under a different law (Section 122 of the Trade Act of 1974), took effect on 24 February 2026 for 150 days.
On 23 July 2026 the US Trade Representative put tariffs of 10 or 12.5 percent on most imports from 60 economies, which together supply 99.4 percent of US imports, after investigations into whether those economies ban goods made with forced labour.
On 1 July 2026 the United States did not agree to renew the United States, Mexico and Canada Agreement (USMCA) in its current form; the agreement stays in force while the issues are discussed.
Elsewhere, deals keep cutting barriers: trading under the African Continental Free Trade Area began on 1 January 2021.

Timed math drill

An importer brings in goods with a customs value of USD 200 per unit. A new tariff of 12.5 percent applies. How much tariff does it pay per unit, in dollars?

Demographics

Demographics means the size and make-up of a population: how many people, their ages, where they live, how many children are born. These change slowly, but they decide what a market will want in ten years. A young, fast-growing population needs schools, first jobs, first phones and first homes. An old population needs healthcare, pensions and care, and has fewer workers, which pushes wages up. The next lesson shows the numbers for real countries and how to use them.

Government policy and subsidies

Governments change the economics of a case through taxes (a sales tax such as VAT or GST raises the price customers pay), subsidies (money that lowers a price, for example for electric cars or fuel), price controls, licences that decide who may enter a market, and state-owned companies that compete with private ones. Two recent examples: Malaysia widened its sales and service tax from 1 July 2025, adding services such as rental, construction, financial services, private healthcare and education; and the United Kingdom raised the rate employers pay in National Insurance (a tax on wages) from 13.8 percent to 15 percent for the 2025 to 2026 tax year.

Timed math drill

A UK employer pays National Insurance on the part of each salary above a threshold. The rate rises from 13.8 percent to 15 percent. For every GBP 1,000 of salary above the threshold, by what percent does the employer's National Insurance bill rise?

Where each force shows up first

Where each force shows up first
Force	Revenue	Cost	Demand	Valuation
Inflation	Prices can rise if the firm has pricing power	Inputs, wages and rent rise	Real incomes fall; customers trade down	Higher rates often follow, so values fall
Interest rates	Lenders earn more on loans	Interest on debt rises	Loan-financed purchases fall	Future cash is worth less
Exchange rates	Exporters gain when the home currency weakens	Importers pay more	Imported goods get dearer for customers	Foreign profits shrink or grow when converted
Commodity cycles	Producers gain	Users pay more	Customers cut back on fuel-heavy goods	Producer values swing with prices
Tariffs and trade deals	Local producers may gain share	Landed cost of imports rises	Higher shelf prices cut volume	Supply chain moves need new investment
Demographics	Sets the size of future markets	Fewer workers push wages up	Changes what people buy	Shapes long-run growth
Government policy	Subsidies and price rules	Taxes on labour and inputs	Sales taxes change shelf prices	Rule changes add risk

So-what

Most forces hit more than one door. In a case, follow the force to the door that moves this client's profit most.

Common mistakes

Listing all seven forces as a checklist: the interviewer wants the one or two that matter for this client, with a size. Saying "the currency fell" without saying who gains: a weaker currency helps exporters and hurts importers. Forgetting that rivals face the same force: if every importer pays the same tariff, prices across the market may rise and share may not move; the danger is a rival who does not face it.

Check your understanding

The local currency weakens by 10 percent. Which client is most likely to gain?

Check your understanding

Why does a higher interest rate lower the value of a business even if its profits do not change?

Check your understanding

A tariff of 12.5 percent is put on a client's imports. All its rivals import the same goods from the same countries. What is the most likely effect on the client's market share?

Terms in this lesson

Landed cost Price elasticity of demand Discount rate and hurdle rate Cost of capital (WACC)Basis points (bps)Percent versus percentage points VAT and GST Constant currency growth PESTEL analysis

Sources for this lesson (13)

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