Topics: Economics, Macroeconomics, Microeconomics, Structure of economics, Economic Environment Components, Economic policies.

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The Economic
Environment for Business

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“Man is a social animal” – Aristotle
 Born, brought up and live until
death in society
 Performs economic activities to
satisfy his unlimited needs with
limited resources which have
alternative uses

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 Human life is influenced by various environmental factors –
economic, social, political, cultural, religious & natural

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Economic means "pertaining to the production and use of income.”
Economic Activities - Money earning & Spending
Circumstances, influences, stresses, and competitive, cultural,
demographic, economic, natural, political, regulatory, and
technological factors (called environmental factors) that effect the
survival, operations, and growth of an organization.
What is economic..??

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S
T
R
U
C
T
U
R
E
O
F
E
C
O
N
O
M
Y
Primary stage
- Involves the extraction and
production of raw materials,
such as corn, coal, wood
and iron.
(A coal miner and a
fisherman would be workers
in the primary degree).
Secondary stage
- Involves the transformation of
raw or intermediate materials
into goods e.g. manufacturing
steel into cars, or textiles into
clothing.
(A builder and a dressmaker
would be workers in the
secondary degree.)
- At this stage the associated
industrial economy is also sub-
divided into several economic
sectors (also called industries).
Their separate evolution during
the Industrial Revolution phase
is dealt with elsewhere.
Tertiary stage
- Involves the provision of
services to consumers and
businesses, such as baby-
sitting, cinema and banking.
(A shopkeeper and an
accountant would be
workers in the tertiary
degree).
Quaternary Stage
- Involves the research and
development needed to
produce products from
natural resources and their
subsequent by-products.
(A logging company might
research ways to use partially
burnt wood to be processed
so that the undamaged
portions of it can be made
into pulp for paper) Note
that education is sometimes
included in this sector

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Economic
Environment
- consists of external factors in a
business' market and the broader
economy that can influence a
business.
- Can be divided into:
Microeconomic environment
Macroeconomic environment
• Affects business
decision making
such as individual
actions of firms &
consumers.
• Affects an entire
economy & all its
participants

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Components of the Economic Environment
• Income and wealth: Income in an economy is measured by GDP, GNP and per
capita income. High values of these factors show a progressive economic
environment.
• Employment levels: High employment represents a positive picture of the
economy. However, there are many forms of unemployment, including partial
employment and disguised unemployment.
• Productivity: This is the output generated from a given amount of inputs. High
levels of productivity support the economic environment.

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Taxes
Inflati
on
Savin
gs
rates
Consumer
discretion
ary
income
Currency
exchange
rates
Consume
r
confiden
ce levels
Unemplo
y-ment
rate
Recessio
n
Depressi
on
Interest
rates
Macroecon
omic
Factors

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Macroeconomic Policies
• The set of government rules and regulations to control or stimulate the aggregate indicators of an
economy frames the macroeconomic policy.
• Aggregate indicators involve national income, money supply, inflation, unemployment rate,
growth rate, interest rate and many more. In short, policies framed to meet the macro goals.
• Regulatory macroeconomic policies are:
• Fiscal policy is the macroeconomic policy where the government makes changes in government
spending or tax to stimulate growth.
• Monetary policy deals with changes in money supply or changes with the parameters that affects
the supply of money in the economy.
• Contract laws, debt management policy, income policy are some of the other macroeconomic
policies designed to modify macroeconomic indicators of the economy.

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3. 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.
4. 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.
5. 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.

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Fiscal Policy
• Refers to the government actions that affect total government spending activities, tax rates or
tax revenues, or the government budget deficit.
• An instrument which can push the economy towards equilibrium, when there are destabilizing
elements operating in the economy.
• It is also concerned with the manipulation of inflows (government spending) and outflows
(taxes) of the government sector.
• Its actions are oriented towards stability in the economy and promoting economic growth.
• Is the deliberate control of government spending and tax policy for the purpose of affecting
output, employment, or inflation.

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Types
of
Fiscal
Policy
• Automatic Stabilizers
- are government spending or taxation actions that takes
place without any deliberate government control and that tend to
automatically dampen the business cycle.
Example: Personal income tax collections fall during recessions as wages drop and
people lose their jobs. Thus, during recessions, government spending automatically
rises and tax collection fall. While if the economy is in full or near full employment,
government spending falls and tax collections rise to avoid inflations.
• Discretionary Fiscal Policies
- are government spending and taxation actions that have
been deliberately taken to achieve specified macroeconomic goals.
Example: If the economy is headed to a recession, the government can make a
decision to cut taxes to maintain purchasing power.

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Three Components of Fiscal Policy
• Taxation – the most important generating measure of the
government. One of the three fundamental powers of the state, the
other two are police power and eminent domain. The state needs
taxation to defray its expenses and to promote equitable
distribution of wealth.
• Government borrowings – come from international sources such as
local, commercial banks, and the public through bond offering.
External sources are bilateral and multilateral agreements such as
the World Bank, International Monetary Fund, and Asian
Development Bank.
• Government Spending – is the government fiscal arm producing,
allocating, and distributing social goods and services.

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The Major Functions of Fiscal Policy
• Allocational Function – process by which total resources are divided between
private and social goods and by which the mix of social goods is chosen.
• Distribution Function – adjustment of income and wealth to assure
conformance with what society considers as “fair” and “just” state of
distribution.
• Stabilization Function – the use of budget policy to maintain high employment,
price level stability, and economic growth.

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Monetary Policy
• Is the deliberate control of the money supply, and
in some cases, credit conditions for the purpose of
achieving macroeconomic goals.
• The control of money supply is normally vested in
the monetary authority known as the Central
Bank.
• The Central Bank tries to influence the economy by
operating on such monetary variables as the
quantity of money and the rate of interest.

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Central Bank
• Is the central monetary authority which provides policy direction in the areas of
money, credit, and banking.
• It also supervises the operations of banks and regulates the activities of non-
bank financial institutions or intermediaries.
• Central Bank was created through Republic Act No. 265, otherwise known as
the “Central Bank Act” and took effect on June 15, 1948.
• Opened for business in 1949 wherein Miguel Cuaderno was the first governor.
• During the time of President Ramos, he signed Republic Act No. 7653 into law
on June 10, 1993, otherwise known as the “New Central Act” which established
and organized the “Bangko Sentral ng Pilipinas” or “BSP”.

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Objectives of the Bangko sentral ng
Pilipinas (BSP) or Central Bank
1. To maintain monetary stability in the Philippines.
2. To preserve the international value of the peso and the convertibility of the peso into
other freely convertible currencies.
3. To promote a rising level of production, employment and real income in the
Philippines.
• The BSP has a mandate “to maintain price stability conducive to a balanced
sustainable growth of the economy. It shall also promote and maintain monetary
stability and convertibility of the peso”.

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Targets of Monetary Policy
• Monetary policy has three targets to achieve the inflation rate or GNP growth.
1. Monetary Aggregates – refer to the different measures of money. These are
deemed directly related to the inflation rate.
2. Interest Rates – refers to the payment, expressed in percent per year, made by
borrower to lender in exchange for a loan of a proportion of money. The nominal
interest rate is expressed in terms of the money payments made on loan. The real or
inflation adjusted interest rate is expressed in terms of goods and services, it is
approximately equal to the nominal rate minus inflation rates.

20. 3. Inflation Targeting
- Inflation means a rise in the average level of all prices. Sometimes
restricted to prolonged or sustained rises. Inflation rate is the percentage rate of
increase in some price index from one period to another. In the event of a drop in
the price level, deflation occurs.
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Microeconomic
Factors
- Influence how your business
will make decisions.
-Unlike macroeconomic factors,
these factors are far less broad in
scope and do not necessarily
affect the entire economy as a
whole.
Market
Size
Supply
Suppliers
Competitors
Demand
Distribution
Chain
Microecono
mic factors
influencing
a business

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Factors Affecting the
Economic Environment
• Inflation and deflation
- Inflationary and deflationary pressures alter the purchasing power of
money. This has a direct impact on consumer spending, business investment,
employment rates, government programs and tax policies.

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• Interest rates
- determine the cost of borrowing and the flow of money towards businesses.
• Exchange rates
- This impacts the price of imports, the profits made by exporters and investors and employment levels (also through
the impact on the tourism industry).
• Monetary and fiscal policy
- This helps in attaining full employment, price stability and economic growth.