1.

4 Macroeconomics and Business Environment

The environmental factors such as economic political, technological, social, etc. have a far reaching bearing
upon the functioning and performance of the firms. Environmental issues pertain to the general business
environment in which a business operates. They are related to the overall economic, social and political
atmosphere of the community. The economic, social and political factors are to be treated as business
parameters. The factors which constitute economic environment of a country include following:
i. Structure of economic system in the country i.e. state led mixed economy or market lead mixed
economy.
ii. General trends in macroeconomic indicators like, GDP, GNP, price level, saving and investment, etc.
iii. Growth and structure of financial institutions and distribution of their services
iv. Growth and trends in foreign trade
v. Trend in labour supply and strength of the capital market
vi. Nature and orientation of macroeconomic economic policies, e.g. industrial, monetary, fiscal, price
and foreign trade policies.
vii. Growth of infrastructure, key industries, technology and human capital.
viii. Growth and trends of global economy
ix. The degree of globalization of the economy and the influences of MNCs on the domestic markets.
The managers of business firms are therefore supposed to be fully aware of the economic conditions
prevailing in the country while taking decisions on business issues of wider implications. The major
macroeconomic or environmental issues that figure in business decision making with regard to forward
planning and formulation of the future strategy are explained below.
a. To examine the nature and extent (or trend) of domestic business environment. Business firms
require knowledge of macroeconomics to examine nature and extent of domestic business
environment. There are various issues that are related to the trends in macro variables, e.g., the general
trend in the economic activities of the country, investment climate, trends in output and employment
and price trends. These factors not only determine the prospect of private business, but also greatly
influence the functioning of individual firms. Therefore, a firm planning to set up a new unit or to
expand as its existing size would like to ask itself. What is the general trend in the economy? What
would be the consumption pattern of the society? Will it be profitable to expand the business? Answer
to these questions and alike are sought through the macroeconomic studies.
b. To examine the nature and extent (or trend) of international business environment.
Macroeconomics also helps to examine the nature and trend of international business environment.
An economy is also affected by its trade relations with other countries, so the sectors or firms deal with
exports and imports. Fluctuations in the international market, exchange rate, and inflows and outflows
of capital in an open economy have a serious bearing on its economic environment and, thereby, on
the functioning of its business undertakings. The managers of a firm would, therefore, be interested
in knowing the trends in international trade, prices, exchange rates, and prospects in the international
market. Answers to such problems are obtained through the study of trends in international trade,
trends in balance of payment, foreign direct investment policy, trade policy and international
monetary mechanism.
c. To examine the role of government policies. The government formulates various types of
macroeconomic policies in order to achieve national economic goals as well as to regulate and promote
 private sector. The nature and orientation of these policies affect the functioning of private business
firms. For example, if these policies are fully oriented by the principles of globalization and
liberalization, there is greater opportunity for accelerating growth of private sector.
d. To examine nature and extent of externalities of business environment. An attempt to maximize
gains (or profits) of private business firms leads to considerable social costs, in terms of environmental
pollution, congestion in the cities, creation of slums, etc. Such social costs not only bring firm’s interest
in conflict with that of the society, but also impose a social responsibility on the firms. The government
policies and its various regulatory measures are designed, by and large, to minimize such conflicts.
The managers should be therefore fully aware of the aspirations of the people and give such factors a
due consideration in their decisions. The macroeconomic concepts and tools of analysis help in
examining nature and extent of externalities.

1.5 Macroeconomic Indicators of Nepal

Macroeconomic indicators refer to the determinants of national economy. These indicators show the overall
economic activities, their interrelationship and interdependence in the economy. The business firms or
entrepreneurs must study these macroeconomic indicators in business decision making. Because, these
indicators or variables affect the production decision, pricing decision, wage determination, employment
decision, etc. For example, the GDP indicates the total productive activity within the domestic territory of
a country including the use of machinery. The increase in GDP, other thing remaining the same, increases
the per capital income of the country. This shows the increase in the purchasing power of the people and
upward trends in the growth of the economy.
The key macroeconomic indicators are listed below:
(i) Nominal GDP and Real GDP
(ii) BOP and BOT
(iii) Per capita income
(iv) GDP at producer’s price
(v) Aggregate demand and saving
(vi) Government finance – revenue, expenditure and fiscal deficit
(vii) Monetary aggregates – Narrow money and broad money

2.10 Importance and Uses of National Income

Today national income statistics are collected by all the countries of the world for a number of reasons.
Raising national income is the important goal of all economic activity. Economic welfare of a country
depends upon what goods and services are available for the consumption of its individuals. The changes
in national income statistics show how the economy is developing and enables the government to lay down
the appropriate economic policy necessary under the circumstances. With the help of national income
statistics it is possible to chart cyclical movements, find out the inflationary gap, measure economic growth
and development, and evaluate the country’s material standard of living in comparison with other
countries and other time periods. The following are the main uses of national income statistics:
1. To compute standard of living. Since income is a flow of wealth. Changes in the national income give
some indication of economic welfare. The total figure, however, can be misleading, since account must
 be taken of the changes in the value of money, and changes in the total production. Per capita income is
the best indicator of development. Other things being equal, economic per head is used to compare
standards of living in different countries.
2. To measure growth rate. Economic growth is measured in terms of per capita national income and the
national income figures (in real terms) are used to measure the rate of growth of a country.
3. To examine the behavior of economic sectors. The national income accounts make possible an
analysis of the behaviour of the different sectors of the economy. They provide the details of the
changes in consumption and investment spending, in the level of savings, in the output of different
branches of industry, in the expenditure of public authorities, and to the distribution of income among
the different income groups. These details are essential in planning development of various sectors.
4. To examine nature of fluctuation in price level. Inflationary and deflationary pressures can be
estimated with the help of national income statistics. The inflationary or deflationary gaps are the
‘inconsistencies of certain subtotals’.
5. To forecast business activities. National income statistics can be used to forecast the level of business
activity at later dates and to find out trends in other annual data.
6. To evaluate structure of the economy. The national income figures are useful in providing a correct
sense of proportion about the structure of the economy.
7. To examine production possibilities. In war time the study of the components of national income is
of great importance because they show the maximum possible production possibilities of the country.
8. Basis of economic planning. The national income statistics are used for planned economic
development of a country. In the absence of such data, planning will be a leap in the dark.
In the words of Prof. Samuelson, “By means of statistics of national income, we can chart the movements
of a country from depression to prosperity, its steady long term rate of growth and development, and
finally, its material standard of living in comparison with other nations.”