Business Environment

1. Business Environment (CBA21) UNIT-4
Prepared by Dr.T.S.Kumar/AP/BBA Jawahar Science College, Block14,Neyveli. Page 1 of 2
BUSINESS ENVIRONMENT – ECONOMIC ENVIRONMENT – UNIT IV
ECONOMIC SYSTEM
Economic system: An economic system is the system of production, distribution and
consumption of goods and services of an economy. Alternatively, it is the set of principles and
techniques by which problems of economics are addressed, such as the economic problem of
scarcity through allocation of finite productive resources. The economic system is composed
of people and institutions, including their relationships to productive resources, such as through
the convention of property.
Types of Economic System
a. Capitalism
b. Socialism
c. Communism
a. Capitalist economic system: Capitalist economic system is a system in which individuals
own all resources, both human and non-human. Governments intervene only minimally in the
operation of markets, primarily to protect the private-property rights of individuals. Free
markets in which suppliers and demanders can enter and exit the market at their own discretion
are fundamental to the capitalist economic system.
b. Socialism: Socialist economic system is the one in which individuals own their own human
capital and the government owns most other, non-human resources that is, most of the major
factors of production are owned by the state. Land, factories, and major machinery are publicly
owned. A socialist system is a form of command economy in which prices and production are
set by the state. Movement of resources, including the movement of labor, is strictly controlled.
Resources can only move at the direction of the centralized planning authority. Economic
decisions about what and how much, how, and for whom are all made by the state through its
central planning agencies.
c. Communism: Communist economic system is the one in which, all resources, both human
and non-human, are owned by the state. The government takes on a central planning role
directing both production and consumption in a socially desirable manner. Central planners
forecast a socially beneficial future and determine the production needed to obtain that outcome.
The central planners make all decisions, guided by what they believe to be good for the country.

2. Business Environment (CBA21) UNIT-4
Prepared by Dr.T.S.Kumar/AP/BBA Jawahar Science College, Block14,Neyveli. Page 2 of 2
The central planners also allocate the production to consumers based on their assessment of the
individual's need.
NATIONAL INCOME
National income: National income is the total value a country‘s final output of all new goods
and services produced in one year. It is the total value of goods and services produced annually
in a country. There are few methods of calculating national income:
1. The income method: The income method of calculating national income is to work out the
total of all incomes received by people and organizations in the country. The national income
includes the income earned by all the resources of the country from their participation in
productive (i.e., money-earning) activities. It adds up all incomes received by the factors of
production generated in the economy during a year. This includes wages from employment and
self-employment, profits to firms, interest to lenders of capital and rents to owners of land.
2. The output method: National income is measured by the output method by calculating the
total value of goods and services produced in the country during the year. The money value of
goods and services produced in an economy in an accounting year is called Gross National
Product (GNP). It is defined by J. R. Hicks as ―the collection of goods and services reduced
to a common basis by being measured in terms of money. It is the combined value of the new
and final output produced in all sectors of the economy, including manufacturing, financial
services, transport, leisure and agriculture.
3. The expenditure method: The expenditure method is the most widely used approach for
estimating national income, which is a measure of the economy's output produced within a
country's borders irrespective of who owns the means to production. The national income under
this method is calculated by summing up all of the expenditures made on final goods and
services. There are four main aggregate expenditures that go into calculating the income, they
are consumption by households, investment by businesses, government spending on goods and
services, and net exports, which are equal to exports minus imports of goods and services.