Components of Economic Environment

1. Economic
Environment
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2. Those economic factors which have their affect
on the working of the business is known as
economic environment.
Economic environment is very dynamic and
complex in nature. It does not remain the same.
It keeps on changing from time to time with the
changes in an economy like changes in an
economy due to change in Govt. polices,
political situations.
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3. Elements of Economic Environment
It has mainly five main elements –
1) Economic policies
2) Economic system
3) Economic conditions
4) International economic environment
5) Economic legislations
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4. Economic policies
• Economic policies framed by government
.These policies establish relationship between
business and government.
• The effect of these policies may be favorable
or unfavorable. These policies affect different
business units in different ways.
• These policies may grant subsidy, tax holiday,
concession in excise duty, it may increase
duties and tax rates in business.
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5. Types of Economic Policies
• Monetary Policies
• Fiscal Policy
• Foreign Policy
• Foreign Investment Policy
• Industrial Policy
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6. Monetary Policy of India
Monetary policy is the process by which the
monetary authority of a country, like the central
bank (Reserve Bank of India) controls the supply
of money, credit policy often targeting an
inflation rate and interest rate to ensure price
stability and general trust in the currency.
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7. Objectives of Monetary Policy
• To control money supply in the country
(expanding & contracting)
• To attain price stability ( maintain inflation)
• Make available credit for the economic growth
of the country.
• To promote saving and investment
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8. Policies
• Central banks use contractionary monetary policy to
reduce inflation. They reduce the money supply by
restricting the amount of money banks can lend. The
banks charge a higher interest rate, making loans more
expensive.
• Central banks use expansionary monetary policy to
lower unemployment and avoid recession. They
increase liquidity by giving banks more money to lend.
Banks lower interest rates, making loans cheaper.
Businesses borrow more to buy equipment, hire
employees, and expand their operations.
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9. Tools of Monetary Policy
• Quantitative Tools
• Qualitative Tools
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10. Tools of Monetary Policy
1.Cash Reserve Ratio
2.Statutory liquid Ratio
3.Liquidity Adjustment Facility
a. Repo Rate
b. Reverse Repo Rate
4.Bank Rate
5.Marginal Standing Facility Rate
6. Benchmark Prime Lending Rate
7. Base Rate
8. MCLR
9.Market Stabilization Scheme
10.Open Market Operations
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11. Qualitative tools
• Regulations of Consumer Credit
• Change in Margin Money.
• Selective credit control on particular industry
• Moral Suasion or Advice.
• Helicopter hoover.
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12. Fiscal Policy
• Government decisions on spending and taxation
that are intended to improve or maintain the
economy.
• Fiscal system refer to total receipt and
expenditure.
• Policies formed to manage the receipt and
expenditure known as fiscal policies.
• In parliament, every year current and estimated
receipts and expenditure are presented is known
as budget.
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13. Types of fiscal policies
• Expansionary Policies: Policies that try to
increase the output of the economy buy cutting
down taxes and spending more on
development. Suitable at the time Recession.
• Contractionary Policies: Policies that try to
decrease the output of the economy by
increasing taxes and spending less on
development. Suitable at the time of excessive
inflation.
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14. Objective of Fiscal Policy
Its main objectives at:
1. Stability in Prices.
2. Achievement and maintenance of Full
Employment
3. Acceleration of the rate of economic
development.
4. Equitable distribution of income and wealth.
5. Capital Formation
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15. Foreign Policy
• "Foreign policy is well defined
comprehensive plan based on knowledge and
experience for conducting the business of the
government with the rest of the world".
• It is a government strategy to deal with other
nations.
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16. Foreign Investment
• In the recent years, the foreign policy of India is in
high priority, focusing on improving the relations
not only with the neighboring countries, but rather
lot of other countries located in different parts of
the world.
• Indian Foreign policy focus on Non alignment,
opposition to Racialism and maintain Peace.
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17. Foreign Investment
• Every country requires capital for its economic
growth and the funds cannot be raised alone
from its internal sources.
• Foreign Direct Investment (FDI) and Foreign
Portfolio Investment (FPI) are the two ways
through which foreign investors can invest in
an economy.
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18. Foreign Investment
Foreign direct investment (FDI) is when a
foreign company or individual makes an
investment in India that involves either:
(i) Green Field Investment
(ii) Brown Field Investment
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19. Foreign Portfolio Investment
FPI’s investment is in the stock markets &
securities & its approach is always of short term
whereas FDI’s investment is always of long
term.
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20. Foreign Portfolio/Institutional
Investments
Until 2014, SEBI classified foreign investors in
multiple buckets like FPI, FII, QFI etc. However,
with SEBI (Foreign Portfolio Investors)
Regulations, 2014 – Government of India
merged existing three investors classes and
created “FPI” – Foreign Portfolio Investor.
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21. Industrial Policy
• Industrial policy is probable the most
important document, which indicates
relationship between government and business.
• Industrial Policy is a formal declaration by the
government whereby it outlines its general
policies for industries.
• The industrial policy of a country generally
deals with ideology of the current political
dispensation.
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22. Objectives of Industrial Policy
• To increase in industrial production which help in
industrial growth.
• To optimize utilization of resources through use
of modern technology.
• To help in development of small, medium and
cottage industries.
• To maintain balance regional industrial
development.
• To set the direction of Foreign investors and
foreign investment.
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23. • Industrial Policy 1948
• Industrial Policy 1956
• Industrial Policy 1977
• Industrial Policy 1980
• Industrial Policy 1990
• Industrial Policy 1991
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24. Impact of changes in Industrial
policy
• Changes in technology
• Product diversity
• Market size
• Import substitution
• Export increases
• All round competition
• Buyer’s market
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25. Economy
Economy is a system of production, distribution,
exchange/trade and consumption of goods and
services by different economic agents of a particular
geographical area.
• What goods and services must to be produced and
in what amount?
• How and where production should be organized?
• How to allocate resources?
• How the resultant output should be distributed?
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26. Types of Economy
• Capitalist Economy
• Socialism Economy
• Mixed Economy
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27. Capitalist Economy
• It is also known as market driven economic system, free
market economy, Laissez- faire system.
• It works on three principles laissez-faire, competition and
market forces.
• Production owned and controlled by private individuals.
• All factors of production are owned by individual.
• Freedom of enterprise.
• Profit motive is the driving force.
• Price are decided by market forces.
• Consumer is king they have a freedom of choice.(consumer
sovereignty)
• For e.g U.S.A , Canada , Japan etc.
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28. Socialism
• In socialist economic system means of
production are owned and managed by the
public authority.
• Ownership of means of production is not
allowed.
• Public welfare is the driving force.
• Economic activities are planned with the
motive of social benefit by a central planning
authority.
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29. Mixed Economy
• Mixed Economy is an economic system which
combines in itself the features of capitalism and
that of the Socialism.
• Mixed Economy has an important sector owned
and managed by the Government.
• The Government is not the all pervasive owner of
all means of production. Private enterprise is
allowed and even encouraged to operate a large
number of industries and to own the various
means of production. For e.g India.
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30. Economic Conditions
Economic conditions affect the economic
policies of the business. Improvement in
economic conditions improve the style and
quality of life, consumption level and purchasing
power of the people. Size of the market is largely
affected by economic condition.
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31. Inflation
• Inflation is a quantitative measure of the rate at
which the average price level of a basket of
selected goods and services in an economy
increases over a period of time.
• Inflation is a state in which the value of money
is falling i.e. price are rising.
• The value of a rupee is observed as a
purchasing power of money.
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32. Causes of Inflation
• Demand Pull Inflation
• Cost Push Inflation
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33. Inflation can be the result by a combination of
situations as follows:
• Money supply goes up
• Supply of goods declines
• Slow down in services when demand is high
• Demand for money goes down
• Demand of goods increases
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34. Gross Domestic Product
• Value of the all final goods and services produced
within the boundary of a nation during one year.
• Foreigner working in India counted in India GDP.
• Indian overseas earning not counted in India GDP.
• % change in GDP is known as Growth rate of an
economy.
• It is a quantitative concept and not qualitative concept.
• Helps in comparative analysis of different countries.
• For India, the year is from 1st April to 31st March.
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35. Gross National Product
• GNP is the total value of all final goods and
services produced within a nation in a
particular year plus the income earned by its
citizens, including those located abroad ,
minus income of non residents located in that
country.
• GNP= GDP + Net Income from abroad
• It indicate towards the external and domestic
strength of the economy.
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36. GDP focuses on output is produced in a country.
GNP focuses on output produced by Indian
nationals.
For e.g Two companies (U.S.A & Indian
company) produced companies in India, output
is included in gdp.
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37. Net Domestic Product
• NDP is the annual measure of the economic
output of a nation that is adjusted to account
for depreciation, calculated by subtracting
depreciation from the GDP.
• Net Domestic Product= GDP – Depreciation
• NDP is used to understand the loss due to
depreciation.
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38. Net National Product
Net National product is defined as the total value of the
goods and services that a country produces during a
period of time, minus the depreciation cost of producing
those goods and services.
• NNP = GNP – Depreciation
or
NNP = GDP + Net income from abroad – Depreciation
This is the National Income of the company.
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39. Per Capita Income
• Per capita income is calculated by dividing Net
National Product to population of a country.
• Per capita Income= NNP / Total Population
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40. Disposable & Discretionary Income
• Disposable income is the amount of net
income a household or individual has available
to invest, save or spend after income tax.
• Discretionary income is the amount of income
that a household or individual has to invest,
save or spend after taxes and necessities are
paid.
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41. Rate of Saving
• A saving rate is the amount of money
expressed as percentage or ratio, that a person
deducts from his disposable personal income
to set aside as nest egg or for retirement.
• Saving rate= Saving/ Disposable income * 100
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42. Balance of trade
• Balance of trade is difference between export
of goods and import of goods (visible).
• When BOT is favorable is known trade
surplus.
• When BOT is unfavorable is known as Trade
deficit.
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43. Balance Of Payment (BOP)
• Balance Of Payment (BOP) is a statement
which records all the monetary transactions
made between residents of a country and the
rest of the world during any given period.
• This statement includes all the transactions
made by/to individuals, corporates and the
government and helps in monitoring the flow
of funds to develop the economy.
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44. Global and International Economic
Environment
If any business enterprise is involved in foreign
trade, foreign investment and with the increasing
areas of WTO, IMF , World Bank, regional
blocks like SAARC, NAFTA etc . It is largely
affected.
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45. Economic Legislation
This refer to set of laws, regulations which influence the
business organization and their operations. Every
business organization has to obey and work within the
framework of the law. It includes:
• The Indian contract Act 1872
• Negotiable Instrument Act 1881
• Workmens Compensation Act 1923
• Sale of Goods Act 1930
• Payment of Wages Act 1936
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46. • Industrial Disputes Act 1947
• Factories Act 1948
• Maternity Benefit Act 1961
• Payment of Bonus Act 1965
• Indian Payment Act (1979)
• Payment of Gratuity Act 1972
• Copyright Act 1975
• Consumer Protection Act 1986
• Competition Act 2002
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