WHAT IS ECONOMIC ENVIRONMENT?

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 the most
important factor.
Meaning of Economic Environment: - Those Economic factors which have their affect
on the working of the business is known as economic environment. It includes system,
policies and nature of an economy, trade cycles, economic resources, level of income,
distribution of income and wealth etc. Economic environment is very dynamic and
comple in nature. It does not remain the same. It keeps on changing from time to time
with the changes in an economy like change in !ovt. policies, political situations.
Eement! of Economic Environment:- It has mainly five main components"-
"# Economic #onditions
$# Economic $ystem
%# Economic %olicies
&# International Economic Environment
'# Economic &egislations
Economic Condition!:- Economic %olicies of a business unit are largely affected by the
economic conditions of an economy. 'ny improvement in the economic conditions such
as standard of living, purchasing power of public, demand and supply, distribution of
income etc. largely affects the si(e of the market.
)usiness cycle is another economic condition that is very important for a business unit.
)usiness #ycle has * different stages vi(. +i, %rosperity, +ii, )oom, +iii, -ecline, +iv,
-epression, +v, .ecovery.
/ollowing are mainly included in Economic #onditions of a country"-
I# $tages of )usiness #ycle
II# 0ational Income, %er #apita Income and -istribution of Income
III# .ate of #apital /ormation
IV# -emand and $upply Trends
V# Inflation .ate in the Economy
VI# Industrial !rowth .ate, Eports !rowth .ate
VII# Interest .ate prevailing in the Economy
VIII# Trends in Industrial $ickness
I(# Efficiency of %ublic and %rivate $ectors
(# !rowth of %rimary and $econdary #apital 1arkets
(I# $i(e of 1arket
Economic S)!tem!:- 'n Economic $ystem of a nation or a country may be defined as a
framework of rules, goals and incentives that controls economic relations among people
in a society. It also helps in providing framework for answering the basic economic
2uestions. -ifferent countries of a world have different economic systems and the
prevailing economic system in a country affect the business units to a large etent.
Economic conditions of a nation can be of any one of the following type"-
3. Ca*itai!m:- The economic system in which business units or factors of
production are privately owned and governed is called #apitalism. The profit
earning is the sole aim of the business units. !overnment of that country does not
interfere in the economic activities of the country. It is also known as free market
economy. 'll the decisions relating to the economic activities are privately taken.
Eamples of #apitalistic Economy"- England, 4apan, 'merica etc.
5. Sociai!m:- 6nder socialism economic system, all the economic activities of the
country are controlled and regulated by the !overnment in the interest of the
public. The first country to adopt this concept was $oviet .ussia. The two main
forms of $ocialism are" -
+a, -emocratic Sociai!m:- 'll the economic activities are controlled and
regulated by the government but the people have the freedom of choice of
occupation and consumption.
+., Totaitarian Sociai!m:- This form is also known as #ommunism. 6nder
this, people are obliged to work under the directions of !overnment.
7. Mi/ed Econom):- The economic system in which both public and private sectors
co-eist is known as 1ied Economy. $ome factors of production are privately
owned and some are owned by !overnment. There eists freedom of choice of
occupation and consumption. )oth private and public sectors play key roles in the
development of the country.
Economic 0oicie!:- !overnment frames economic policies. Economic %olicies affects
the different business units in different ways. It may or may not have favorable effect on
a business unit. The !overnment may grant subsidies to one business or decrease the
rates of ecise or custom duty or the government may increase the rates of custom duty
and ecise duty, ta rates for another business. 'll the business enterprises frame their
policies keeping in view the prevailing economic policies. Important economic policies
of a country are as follows"-
3. Monetar) 0oic):- 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
ob8ectives is known as 1onetary %olicy.
5. 1i!ca 0oic):- It may be termed as budgetary policy. It is related with the income and
ependiture of a country. /iscal %olicy 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
taation, government ependiture, borrowings, deficit financing and management of
public debts in an economy.
7. 1oreign Trade 0oic):- 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.
9. 1oreign Inve!tment 0oic):- The policy related to the investment by the foreigners in
a country is known as /oreign Investment %olicy. 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 industriali(ation and growth in the country.
*. Indu!tria 0oic):- Industrial policy of a country promotes and regulates the
industriali(ation 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.
2o.a3Internationa Economic Environment:- The role of international economic
environment is increasing day by day. If any business enterprise is involved in foreign
trade, then it is influenced by not only its own country economic environment but also the
economic environment of the country from:to which it is importing or eporting goods.
There are various rules and guidelines for these trades which are issued by many
organi(ations like ;orld )ank, ;TO, 6nited 0ations etc.
Economic 4egi!ation!:- )esides the above policies, !overnments of different countries
frame various legislations which regulates and control the business.
'fter independence, India opted for a centrally planned economy to try to achieve an
effective and e2uitable allocation of national resources and balanced economic
development. The process of formulation and direction of the /ive-<ear %lans is carried
out by the %lanning #ommission, headed by the %rime 1inister of India as its
chairperson.
The number of people employed in non-agricultural occupations in the public and private
sectors. Totals are rounded. %rivate sector data relates to non-agriculture establishments
with 3= or more employees.
The number of people employed in non-agricultural occupations in the public and private
sectors. Totals are rounded. %rivate sector data relates to non-agriculture establishments
with 3= or more employees.
India>s mied economy combines features of both capitalist market economy and the
socialist command economy, but has shifted more towards the former over the past
decade. The public sector generally covers areas which are deemed too important or not
profitable enough to leave to the market, including such services as the railways and
postal system.
$ince independence, there have been phases of nationali(ing such areas as banking and,
more recently, of privati(ation.