1. Economics Environment
MATHIVANAN K.
MBA 2014
SOURASHTRA COLLEGE,
MADURAI

2. Introduction
Economic environment refers to all those economic factor
which have a bearing functioning of the business unit.
Business depends on the economic environment for all
the needed inputs.
It also depends on the economic environment to sell the
finished goods.

3. Definition of Environmental Economics
“That part of economics which deals with inter-relationship
between environment and economic development and
studies the ways and means by which the former is not
impaired nor is the latter impeded.”

4. Factors of Economic Environment
Growth strategy
Economic system
Economic planning
Industry
Agriculture
Infrastructure
Financial and fiscal factor
Removal of regional imbalance
Price and distribution control
Economic reforms
Per capita and national income

5. Economic System
 An economic environment system refers to the
organization arrangements and process through which
a society makes its production and consumption decision.
 It is the method used by society to produce and distribute
goods and services.
Types of Economic System
 Capitalism
 Socialism
 Mixed Economy

6.  Capitalism: On the one extreme, there is a capitalist
economic system or free market economy. It is
characterized by free enterprise & profit motive.
People have freedom of choice concerning
occupation, savings, investment.
 Socialism: It is the socialist or communist economic
system. The state owns & control all means of
production.
 Mixed Economy: In a mixed economic like India,
both public & private sectors together. Some resources
are owned & controlled by the state. Other economic
activities are left to the private initiative.

7. Capitalism (features)
 The rights to private property
 Freedom of Enterprise
 Freedom of choice for consumers
 Profit motives
 Competition
 Price mechanism
 Role of the government

8. Capitalism
Merits Demerits
 Incentive
 Utilization of resources
 Economic growth
 Capital formation
 Flexibility & Adaptability
 Democratic Nature
 Innovation
 Concentration of economic power
 Economic instability
 Lack of satisfaction
 Social waste
 Rise of monopoly
 social discrimination (inequity)
 Loss of human values

9. Socialism: (features)
 State ownership of means of production
 Social welfare
 Central economic planning
 Equality of opportunity
 Class less social
 Absence of competition

10. Socialism
Merits Demerits
 Social justice
 Economic stability
 Rational allocation of
resources
 Higher economic growth
 Absence of class struggle
 Concentration of economic
power
 Lack of incentive & initiative
 Loss of consumer
 Loss of occupational freedom
 Inefficiency & low
productivity
 corruption

11. Mixed Economy:(features)
 Co-existence of public & private sectors
 Classification of industries
 Economic planning
 Price mechanism
 Profit motive & social welfare

12. Mixed Economy
Merits Demerits
 Individual freedom
 Rapid economic growth
 Social welfare
 Economic instability
 Lack of freedom
 Inefficiency
 Lack of co-ordination

13. Economic parameters
Definition of 'Gross Domestic Product – GDP’
The monetary value of all the finished goods and
Services produced within a country's borders in a specific time
period, though GDP is usually calculated on an annual basis.
It includes all of private and public consumption,
Government outlays, investments and exports less imports that
occur within a defined territory.

14. Definition of 'Net National Product - NNP'
The monetary value of finished goods and services
produced by a country's citizens, whether overseas or
resident, in the time period being measured (i.e., the gross
national product, or GNP) minus the amount of GNP
required to purchase new goods to maintain existing stock
(i.e., depreciation).

15. Per capita income
Per capita income, also known as income per person, is
the mean income of the people in an economic unit such
as a country or city. It is calculated by taking a measure of
all sources of income in the aggregate (such as GDP
or GROSS NATIONAL INCOME) and dividing it by the
total population.

16. Economic Policies
 Monetary Policy:- The policy formulated by the central
bank of a country to control the supply and the cost of
money (rate of interest), in order to attain some specified
objectives is known as Monetary Policy.
 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 of public debts in an economy.

17.  Foreign Trade Policy:- It also affects the different business
units differently. E.g. if restrictive import policy has been
adopted by the government then it will prevent the domestic
business units from foreign competition and if the liberal
import policy has been adopted by the government then it will
affect the domestic products in other way.
 Foreign Investment Policy:- The policy related to the
investment by the foreigners in a country is known as
Foreign Investment Policy. If the government has adopted
liberal investment policy then it will lead to more inflow of
foreign capital in the country which ultimately results in
more industrialization and growth in the country.

18.  Industrial Policy:- Industrial policy of a country
promotes and regulates the industrialization in the
country. It is framed by government. The government
from time to time issues principals and guidelines under
the industrial policy of the country.

19. Financial Environment
It refers to the financial sector or financial system of a
country . It comprises various financial institutions,
instruments, policies, & service concerning in the
financial sector.

20. Constituents of financial system
 Financial Markets
 Financial Institutions
 Financial Instruments
 Financial services

21. Financial Market
Capital Market
Primary
Market
Secondary
Market or Stock
Exchangers
Money Market
Organized
Sector
Unorganized
sector
Foreign
Exchange Market
Authorized
Dealers
Money
Changers
Foreign
Banks
Importers &
Exporters
Government
securities market
Treasury
Bills
Bonds

22. FINANCIAL INSTITUTIONAL
BANKING INSTITUTIONS
CENTRAL BANK(RBI)
COMMERCIAL BANKS
COOPERATIVES BANKS
DEVELOPMENT BANKS
AGRICULTURAL BANKS
MERCHANT BANKS
INDIGENOUS BANKS
NON-BANKING INSTITUTIONAL
HIRE-PURCHASE &LEASING
COMPANIES
INVESTMENT COMPANIES
HOUSING FINANCE
COMPANIES
FACTORING COMPANIES
VENTURE CAPITAL FUNDS
MUTUAL FUNDS
NON-BANKING FINANCE
COMPANIES (NBFCS)

23. Functions of RBI
 Issue of bank notes
 Banker to government
 Banker’s bank
 Controller of credit
 Custodian of foreign exchange reserves
 Clearing house facility
 Collection & publication of data

24. Credit control by RBI
METHODS OF CREDIT CONTROL
GENERAL OR QUANTITATIVE
METHODS
BANK RATE
CASH RESERVE RATIO
STATUTORY LIQUIDITY
RATIO
OPEN MARKET
OPERATIONS
SELECTIVE OR QUALITATIVE
METHOD
MARGIN
CREDIT
RATIONING
MORAL SUASION
PUBLICITY

25. Role of RBI in Economic Development
 Development of Banking System
 Development of Financial Institution
 Development of Backward areas
 Economic stability
 Economic Growth
 Proper Interest Rate structure
 Miscellaneous (various facilities)

26. Industrial Finance Corporation of India (IFCI)
 The IFCI was established on July 1, 1948 by a special act of
the parliament.
 It was jointly owned by the government of India.
 IFCI has since been converted into a public limited company
with effect from July 1, 1993.
 It was completed more than fifty years of operations.
 During this period, the activities of the corporation have
progressively expanded both in scope & magnitude.
 It has emerged as a leading institution providing financial &
other assistance to industry in diverse forms.

27. Unit Trust of India (UTI)
 UTI came into existence on February 1, 1964 under the Unit
Trust of India Act, 1963.
 Its establishment has been a landmark in the history of
investment trusts in India.
 It is playing an important role in mobilizing savings of the
community through sale of units under the various schemes
& channelizing them into corporate investments.

28. Globalization
The shift towards a more integrated & interdependent
world economy.
It has two main components – the globalization of
market & globalization of productions.

29. Strategies for Globalization
 Exporting: This is the simplest & the traditional mode of
entering a foreign market.
 Licensing & franchising: These are easy methods of entering
foreign markets because little commitment of resources &
efforts are involved.
 Contract manufacturing: Under this strategy, the company
enters into a contract with a firm in the foreign market to
manufacture or assembles the products.
 Management contract: A company contracts with a firm or
government in a foreign country to manage the entire project
or undertaking for a specified period.

30.  Turnkey contract: The company contracts with a foreign firm
to design & built an entire operation.
 Third country location: When commercial transactions
between two countries are not possible due to political
reasons, a company may have to enter the foreign market
from a third country.
 Joint Venture: A company may enter a foreign market by
entering into a joint venture with a foreign firm.
 Direct Investment: A company which means to have
substantial & long-term interest in the foreign market has to
establish fully owned manufacturing facilities aboard.

31. Advantage of Globalization
 Wider Markets
 Rapid Industrialization
 Greater Specialization
 Competitive gains
 Higher production
 Price stabilization
 Increase in employment & income
 Higher standards of living
 International economic cooperation
 World peace

32. Dis-Advantage of Globalization
 Interdependence
 Threat of domestic industry
 Unemployment
 Drain of basic resources
 Technological dependence
 Culture

33. Problems in Globalization
 High cost
 Poor quality
 Poor infrastructure
 Resistance of change
 Lack of professional management
 Limited R&D
 Trade Barriers

34. Impact of Globalization in India
 Trade
 foreign investment flows
 Employment
 Poverty & inequality

35. Foreign Direct Investment
It means investment in a foreign country where the
investor retains control over the investment in terms power
of management & effective decision making.

36. Foreign Direct Investment by Indian Industry
Reasons:
A large protected domestic market
A restrictive government policy
Curbs on growth & financial restrictions.
Indian companies are now investing in a large number of
industries in both developing countries(Eg: Malaysia,
Indonesia), & developed countries(Eg: Japan, UK)

37. Multinational Corporation
The essential nature of the multinational enterprises lies in the
fact that its managerial headquarters (called parent company)
are located in one country( known as home country) while the
enterprise carries out operations in a number of other countries
(known as host countries)

38. Reasons for the growth of MNC
 Market expansion
 Marketing superiorities
 Financial superiorities
 Technological superiorities

39. General Agreement on Tariffs & Trades (GATT)
 The GATT was signed at Geneva on 30th October, 1947 by 23
nations who negotiated to prevent economics from the
recession.
Objectives:
 To raise standard of living
 To ensure the full employment
 To develop the full use of resources
 To expand production & international trade

40. Trade Related Intellectual Property Rights (TRIPS)
Protection of patents
Copyrights
Design
Trade marks
Trade secrets
It provides for graining product patents also in these
areas.
Protection will be available for 20 years in case of patents
& 50 years in case of copyrights.
Trademarks will be protected for at least seven years & semi
conductor layout designs for 10 years.

41. Public Enterprises
It means an enterprise which involves no private
ownership, which is governed by public or social interest
& where the management is responsible to the
government.

42. Advantage of Public Sector
 Acceleration of economic growth
 Control on natural monopoly
 Socialist pattern of society
 Generation of economic surplus
 Balanced regional development
 Entrepreneurial development
 Employment generation

43. Role of public sector in Indian economy
Share in national income
Commanding heights of the economy
Share in capital formation
Employment generation
Growth of industries
Foreign exchange earnings
Balanced regional development
Resource mobilization

44. Privatization:
It means reducing the involvement of the government / public
sector in the economic activities of a nation.
It involves the transfer of government assets or functions
to the private sector.
Disinvestment:
It is used to refer to the process of privatization.
Public offer
Cross-holdings, golden share & warehousing
Strategic sale
Qualified institutional placement