GDP is a widely accepted and reliable indicator of economic growth

Oct 13, 2025 by talynt.org 2 views

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Effect of Economic Growth on Company Profitability: Case Study in Indonesia

The economic development of a country can be reflected in its capital market performance. One indicator that is often used to measure economic growth is the Gross Domestic Product (GDP). The use of GDP as a measuring instrument is considered adequate because it has several advantages compared to other alternative indicators. GDP is a widely accepted and reliable indicator of economic growth, as it takes into account the production of goods and services within a country's borders. It is also a comprehensive measure that includes all sectors of the economy, making it a suitable indicator for assessing economic growth.

This study aims to empirically test the effect of economic growth on company profitability. Multiple regression methods are used to analyze the relationship between independent variables (economic growth) and dependent variables (profitability). Economic growth in this study is proxied by GDP growth, while profitability is measured using two metrics, namely Return on Assets (ROA) and Return on Equity (ROE). The use of multiple regression analysis allows for the examination of the relationship between economic growth and company profitability, while controlling for other factors that may influence profitability.

Methodology

This study used data from 30 LQ 45 companies listed on the Indonesia Stock Exchange (IDX) during the period 2003 to 2008. The company sample was selected using the Purposive Sampling method. Purposive sampling is a non-probability sampling method that involves selecting a sample based on specific criteria, in this case, the selection of companies listed on the IDX.

Results

The results showed that economic growth had a significant influence on ROE and ROA. This indicates that economic growth is one of the determinants of company profitability. The significant influence of economic growth on ROE and ROA suggests that companies that operate in a growing economy are more likely to experience increased profitability.

Additional Analysis and Explanation

This finding is in line with economic theory which states that economic growth will encourage increased demand and investment, which in turn has a positive impact on company profitability. The positive impact of economic growth on company profitability is a well-established concept in economics, and this study provides empirical evidence to support this theory.

The following are some further explanations regarding the effect of economic growth on company profitability:

Increased Demand

*** Positive economic growth is generally accompanied by increased purchasing power of the people. This will increase demand for products and services produced by the company, thereby encouraging increased sales and profits. Increased demand is a key driver of company profitability, as it leads to increased sales and revenue.

Increased Investment

*** Economic growth also encourages investors to be more optimistic and invest in various sectors, including the real sector. Increased investment will strengthen the company's balance sheet, increase production capacity, and ultimately encourage increased profitability. Increased investment is a key factor in company profitability, as it leads to increased production capacity and improved financial performance.

Increased Access to Capital

*** Stable economic growth can encourage financial institutions to more easily provide access to capital for the company. Access to easier capital will encourage companies to expand, increase efficiency, and increase profitability. Increased access to capital is a key factor in company profitability, as it allows companies to invest in new projects and expand their operations.

Increasing Investor Confidence

*** Positive economic growth will increase investor confidence in markets and companies. High investor confidence will encourage investment, increase company value, and ultimately increase profitability. Increasing investor confidence is a key factor in company profitability, as it leads to increased investment and improved financial performance.

Conclusion and Implications

This study concluded that economic growth has a significant influence on company profitability, which is measured through ROE and ROA. These findings have important implications for companies, investors, and policy makers.

For companies, it is important to understand that economic growth is an important factor that can affect the company's financial performance. Companies need to carry out the right strategies to take advantage of opportunities offered by economic growth and minimize the risks that may arise. Companies that fail to adapt to changing economic conditions may experience decreased profitability and financial performance.

For investors, it is important to consider economic growth factors in assessing investment in a company. Investment in companies that operate in high potential sectors to grow will have a greater opportunity to obtain high profits. Investors who fail to consider economic growth factors may experience decreased returns on investment.

For policy makers, it is important to create policies that encourage sustainable and inclusive economic growth. The right policy will encourage investment, increase the competitiveness of the company, and ultimately improve the welfare of the community. Policies that promote economic growth and development are essential for improving the welfare of the community and promoting economic stability.

Limitations and Future Research Directions

This study has several limitations that should be addressed in future research. Firstly, the study only examined the effect of economic growth on company profitability in Indonesia. Future research should examine the effect of economic growth on company profitability in other countries and regions. Secondly, the study only used two metrics to measure profitability, namely ROA and ROE. Future research should examine the effect of economic growth on other metrics of profitability, such as return on sales and return on investment. Finally, the study only examined the effect of economic growth on company profitability in the short-term. Future research should examine the effect of economic growth on company profitability in the long-term.

In conclusion, this study provides empirical evidence to support the positive impact of economic growth on company profitability. The study has important implications for companies, investors, and policy makers, and highlights the need for policies that promote sustainable and inclusive economic growth. Future research should build on the findings of this study and examine the effect of economic growth on company profitability in other contexts and using other metrics.

Q: What is the relationship between economic growth and company profitability?

A: Economic growth has a significant influence on company profitability. As economic growth increases, companies are more likely to experience increased profitability due to increased demand, investment, and access to capital.

Q: How does economic growth affect company profitability?

A: Economic growth affects company profitability in several ways:

Increased demand: Positive economic growth leads to increased purchasing power, which increases demand for products and services produced by the company.
Increased investment: Economic growth encourages investors to invest in various sectors, including the real sector, which strengthens the company's balance sheet and increases production capacity.
Increased access to capital: Stable economic growth makes it easier for financial institutions to provide access to capital for the company, allowing it to expand and increase efficiency.
Increasing investor confidence: Positive economic growth increases investor confidence, leading to increased investment and improved financial performance.

Q: What are the implications of economic growth on company profitability?

A: The implications of economic growth on company profitability are significant:

Companies that operate in a growing economy are more likely to experience increased profitability.
Investors who consider economic growth factors in assessing investment in a company are more likely to obtain high returns.
Policy makers who create policies that promote sustainable and inclusive economic growth can improve the welfare of the community and promote economic stability.

Q: What are the limitations of this study?

A: This study has several limitations:

The study only examined the effect of economic growth on company profitability in Indonesia.
The study only used two metrics to measure profitability, namely ROA and ROE.
The study only examined the effect of economic growth on company profitability in the short-term.

Q: What are the future research directions?

A: Future research directions include:

Examining the effect of economic growth on company profitability in other countries and regions.
Examining the effect of economic growth on other metrics of profitability, such as return on sales and return on investment.
Examining the effect of economic growth on company profitability in the long-term.

Q: What are the policy implications of this study?

A: The policy implications of this study are significant:

Policy makers should create policies that promote sustainable and inclusive economic growth.
Policy makers should encourage investment, increase the competitiveness of the company, and ultimately improve the welfare of the community.

Q: What are the practical implications of this study for companies and investors?

A: The practical implications of this study for companies and investors are significant:

Companies should understand that economic growth is an important factor that can affect the company's financial performance.
Companies should carry out the right strategies to take advantage of opportunities offered by economic growth and minimize the risks that may arise.
Investors should consider economic growth factors in assessing investment in a company.

Q: What are the implications of this study for the broader economy?

A: The implications of this study for the broader economy are significant:

Economic growth can lead to increased investment, improved financial performance, and ultimately improved welfare of the community.
Policy makers should create policies that promote sustainable and inclusive economic growth to improve the welfare of the community and promote economic stability.

Q: What are the future research directions for this study?

A: Future research directions include:

Examining the effect of economic growth on company profitability in other contexts and using other metrics.
Examining the effect of economic growth on company profitability in the long-term.
Examining the effect of economic growth on other aspects of the economy, such as employment and income inequality.