economic environment intro 1

8/12/2019 Economic Environment Intro 1

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Introduction Various environmental factors such as economic

environment, socio-cultural environment,political, technological, demographic and

international, affect the business and its working.Out of these factors economic environment is themost important factor.

Economic Environment refers to all thoseeconomic factors which have a bearing on thefunctioning of a business.


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Meaning of Economic Environment

Those Economic factors which have their affecton the working of the business is known aseconomic environment.

It includes system, policies and nature of aneconomy, trade cycles, economic resources, levelof income, distribution of income and wealth etc.

Economic environment is very dynamic andcomplex in nature. It does not remain the same.It keeps on changing from time to time with thechanges in an economy like change in Govt.policies, political situations.


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Elements of Economic Environment

Economic Systems

Economic Conditions Economic Planning Economic Parameters

Economic Policies


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Economic System An Economic System of a nation or a country

may be defined as a framework of rules, goalsand incentives that controls economic

relations among people in a society. It also helps in providing framework for

answering the basic economic questions. Different countries of a world have different

economic systems and the prevailingeconomic system in a country affect thebusiness units to a large extent.


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Economic System

It is also the structure of production, allocation ofeconomic inputs, distribution of economic outputs,and consumption of goods and services in business.

Basic Units of an Economic Systems Household Firm Industry Government


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Types of Economic System1. Capitalism :

The economic system in which business units orfactors of production are privately owned andgoverned is called Capitalism.

The profit earning is the sole aim of the businessunits. Government of that country does notinterfere in the economic activities of thecountry.

It is also known as free market economy. All thedecisions relating to the economic activities areprivately taken.

Examples of Capitalistic Economy:- England,

Japan, America etc.


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Types of Economic System2. Socialism : Under socialism economic system, all

the economic activities of the country arecontrolled and regulated by the Government inthe interest of the public. The first country toadopt this concept was Soviet Russia. The two

main forms of Socialism are: -(a) Democratic Socialism:- All the economicactivities are controlled and regulated by thegovernment but the people have the freedom of

choice of occupation and consumption.(b) Totalitarian Socialism:- This form is alsoknown as Communism. Under this, people areobliged to work under the directions of

Government.


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Types of Economic System3. Mixed Economy : The economic system in which both public

and private sectors co-exist is known asMixed Economy.

Some factors of production are privatelyowned and some are owned by Government.There exists freedom of choice of occupation

and consumption. Both private and public sectors play key roles

in the development of the country.


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Difference between capitalism and socialism

Capitalism is an economic system whereresources whether monetary or otherwise are privately owned, whereas socialism is a

system where goods are owned by the state orthe public.

Capitalism is founded on the belief that

competition brings out the best in people.Socialism, on the other hand, believes thatcooperation is the best way for people to coexist.
http://www.wisegeek.com/what-is-capitalism.htmhttp://www.wisegeek.com/what-is-socialism.htmhttp://www.wisegeek.com/what-is-socialism.htmhttp://www.wisegeek.com/what-is-capitalism.htm


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The main difference between these two

economic systems is the distribution andearning of wealth. In capitalism, everyoneworks for his own wealth, while in socialismeveryone works for wealth which isdistributed equally to everyone.


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Economic Planning

Economic planning, the process by which keyeconomic decisions are made or influenced bycentral governments. When India gainedindependence, the 5 years plan formulated todevelop the Indian economy.

The five years plan in India is framed, executed andmonitored by the Planning Commission of India.Currently, India is in its 12th five year plan.

The overall aim of the economic planning in Indiahas been (1) Growth with social justice (2)Increasing national income (3) Increasing industrialoutput (4) Full employment (5) Reduction ininequalities of income & wealth


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Failures of Economic Planning In India

Problem of Poverty Unemployment Problem Economic Inequalities Black Money


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Economic Conditions

Economic Policies of a business unit are largelyaffected by the economic conditions of aneconomy. Any improvement in the economicconditions such as standard of living, purchasing

power of public, demand and supply, distributionof income etc. largely affects the size of themarket.

Business cycle is another economic condition that

is very important for a business unit. BusinessCycle has 5 different stages viz. (i) Prosperity, (ii)Boom, (iii) Decline, (iv) Depression, (v) Recovery.


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Economic Conditions

Following are mainly included in Economic Conditions of acountry:-I. Stages of Business CycleII. National Income, Per Capita Income and Distribution of

IncomeIII. Rate of Capital FormationIV. Demand and Supply TrendsV. Inflation Rate in the EconomyVI. Industrial Growth Rate, Exports Growth RateVII. Interest Rate prevailing in the Economy

VIII. Trends in Industrial SicknessIX. Efficiency of Public and Private SectorsX. Growth of Primary and Secondary Capital MarketsXI. Size of Market


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Economic Parameters

1. Gross Domestic Product (GDP) : The totalmarket value of all final goods and servicesproduced in a country in a given year.India GDP gives us a combined report of theperformance of the Indian economy. ' Costfactor' or 'Actual price' method - these are thetwo methods

2. Per Capita Income : Per capita income orincome per person is the numerical quotientof national income divided by population.


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Economic Policies

Government frames economic policies. EconomicPolicies affects the different business units in differentways. It may or may not have favorable effect on abusiness unit.

The Government may grant subsidies to one businessor decrease the rates of excise or custom duty or thegovernment may increase the rates of custom dutyand excise duty, tax rates for another business.

All the business enterprises frame their policieskeeping in view the prevailing economic policies.Important economic policies of a country are as

follows:-


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Economic Policies

1.) Industrial Policy2.) Trade Policy

3.) Foreign Exchange Policy4.) Foreign Investment and Technology Policy5.) Fiscal Policy

6.) Monetary Or Credit Policy


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Industrial Policy Industrial policy of a country promotes and

regulates the industrialization in the country. It isframed by government. The government fromtime to time issues principals and guidelines

under the industrial policy of the country. Industrial policy can even define the scope androle of different sectors like private, public, jointand cooperative, or large, medium, small and

tiny. It may influence the location of industrialundertakings, choice of technology, scale ofoperation, product mix and so on.


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Industrial Policy

In india, before liberalization in1991, the scope ofprivate sector, particularly of large enterprises, was verylimited.

In the remaining industries, cooperative enterprises,

joint sector enterprises and small scale units were to getpreferential treatment over large entrepreneurs in theprivate sector.

Further, the production of a large number of items wasreserved for the exclusive manufacture of the smallscale sector.


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In the pre-liberalization era, the governmentpolicy was a severe constraint on the portfolioand growth strategies of companies.

The new policy formulated in July 1991 haswide opened all.


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Trade Policy

The trade policy can significantly affect thefortunes of firms. For ex : restrictive importpolicy.

After liberalization, Domestic firms now faceincreasing competition from imports. In otherwords, they face a growing internationalcompetition in the domestic turf.


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Trade Policy

This implies that in many cases indian firmswhich do not come up to the internationalstandards- in quality, cost, marketing, aftersales service etc. will not be able to survive.

And a firm which effectively fights foreigncompetition in the home market may be

provoked to think why not compete withforeign firms in the foreign markets.


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Liberalization of imports facilitate globalsourcing and this could help many Indian firmsto become more competitive.

Foreign Trade Policy:- It also affects thedifferent business units differently. E.g. if

restrictive import policy has been adopted bythe government then it will prevent thedomestic business units from foreigncompetition and if the liberal import policyhas been adopted by the government then itwill affect the domestic products in other way.


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Foreign Exchange Policy

Exchange rate policy and the policy in respectof cross-border movement of capital areimportant for business.

Before liberalization, there was severecontrols in cross-border movement of capitalwhere as after liberalization, no restriction in

cross-border movement of capital. For ex :free from licensing.


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Foreign Investment Policy

The policy related to the investment by theforeigners in a country is known as ForeignInvestment Policy. If the government hasadopted liberal investment policy then it willlead to more inflow of foreign capital in thecountry which ultimately results in more

industrialization and growth in the country.


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Foreign investment and Technology policy

Before liberalization, there ware severerestrictions in many countries.

Restriction on foreign capital and technologyconstrain not only the foreign firms but alsothe domestic firms

Restriction on foreign capital may affect thegrowth plans of firms, including establishmentof joint ventures.


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A liberal foreign investment and technologypolicy will increase domestic competition

At the same time it would benefit manydomestic firms- by permitting global sourcingof capital and technology, by increasing thequantity and quality of domestic supply of

many goods and services etc.


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Fiscal Policy

It may be termed as budgetary policy. It is related with the income and expenditure of a

country. Fiscal Policy works as an instrument in economic

and social growth of a country. It is framed by the government of a country and it

deals with taxation, government expenditure,borrowings, deficit financing and management ofpublic debts in an economy.


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Fiscal Policy

Governments strategy in respect of publicexpenditure and revenue can have significant impacton the business.

The pattern of public expenditure may affect thedevelopment of various regions, sectors and/orindustries.

For ex: When an industry suffers from recession, a

reduction of taxes like excise duty or sales tax mayhelp improve the demand.


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Ratio (SLR) will significantly increase theloanable funds with the commercial bankingsystem.


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Global/International EconomicEnvironment

The role of international economic environmentis increasing day by day.

If any business enterprise is involved in foreign

trade, then it is influenced by not only its owncountry economic environment but also theeconomic environment of the country from/towhich it is importing or exporting goods.

There are various rules and guidelines for thesetrades which are issued by many organizationslike World Bank, WTO, United Nations etc.


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Economic Legislations:- Besides the above policies, Governments ofdifferent countries frame various legislationswhich regulates and control the business.

economic environment intro 1

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