Economic Environment

(EE)
• Business fortunes and strategies are
influenced by economic policy
dimensions.
• EE includes:-
– The structure and nature of economy
– The stage of development of
economy.
– Economic resources
– The level of income
– The distribution of income and assets
– Global economic linkage and
– Economic policies
 Nature of Economy
• Economies depend on the nature and
size of demand, govt. Policies of
business.
• Economies are divided into 3 according
to the per-capita income
1.Low Income Economies: economies
with Low per-capita Gross National
Income $825 or low. 59 countries in
2004 – Third world countries
2.High Income Economies: GNI Income
$10,066 or above. 56 countries in the
world – First World.
3.The middle Income Economies: Per-
capita GNI between $826 to $3255
(lower middle) GNI with $3256 to $
10065 (Upper middle Income) –
 Structure of Economy
• Economy is divided into 3 different
sectors:
1.Primary Sector: Agriculture
2.Secondary Sector: Industry
3.Tertiary sector: service sector(small,
medium, and large sectors)
• If the Economy is highly integrated with
global Economy, it will be quickly
affected by developments in the
global economy.
• In most of the countries service sector
is the largest and fastest growing
sector.
• The share of services in the GDP of
• Growing importance of service sector
is reflected in the international
trade too.
• Electronic commerce has a
tremendous growth.
•
 Economic policies
• EP has a greater impact on business.
• Some categories or types of business
are favourable affected or adversely
affected by the govt. Policy and some
may be neutral in some categories.
• There are mainly 6 main Economic
Policies
1.Industrial policy
2.Trade Policy
3.Foreign Exchange Policy
4.Foreign Investment and Technological
Policy
5.Fiscal Policy
6.Fiscal Policy
1.Industrial policy
• IP is defined, the scope and role of
different sectors like, private, public,
joint and cooperative, large, medium
and Scope small industries.
• Till 1991 of large private sector was
limited. 17 major important industries
were owned by the state. In 12 major
industries state had a dominant role,
joint sector,
• Lot of licensing regulations for the
entry and growth of private sector
companies – limited scope
• Liberalization gave enormous
business opportunities – new
 2. Trade policy
• Trade policy can significantly affect
the fortunes of the firms.
• Restrictive trade policy can protect
the home industries.
• As a part of liberalization and
complying with the WTO, liberalized
the import so, small home domestic
industry may exist or cease to
exist.
• Home products may not have the
quality, int. Standards, etc.
 3. Foreign Exchange Policy
• Cross movement of capital and imp
for business.
• Cross movement of capital helps
global sourcing, improves due to
competition, innovative product
development, etc.
•
•
 4. Foreign investment and
technology policy
• Until late 1980’s there was severe
restrictions on import and
technology policy.
• Restrictions on foreign investment
and import of foreign technology.
• Restri. On foreign joint investment
• This increases the quality and
quantity of domestic product.
 5. Fiscal Policy
• Government strategy on public
expenditure and revenue – play
signt role on bus.
• Govt policy of taxation – encourage
and discourage industries
• Less tax – more money in the public
and more demand.
•
 6. Monetary policy
• Policy of RBI / central bank and
control the cost, credit availability
• Influences the credit , saving,
investment and consumer
spending.
• RBI – expansionary or contractionary
methods or neutral policy.
• Cash reserve ratio -
•
 Economic conditions
• Boom or recession affect the economy
• The countries business depends on the
economic conditions of the region. –
the prices of the rubber/ commercial
crop fall it affects the economic
situation of the state.
• In late 1990s steel exports to South
East Asia underwent a great set back-
India exported to US.
• Current Bop and Ac can affect economic
policies and business environment.
• Import and export depends on set
external factors, internal factors and
 Advantage of business
analysis
• The very idea business analysis
makes one aware of the business-
organization linkage.
• It helps the organization to identify
the present and future threats and
opportunities.
• It provides useful picture of
important factors which influence
the business.
• Business analysis will indicate the
future opportunities and
challenges.
 Disadvantage of business
analysis
• Closed economic system – Do not
permit the free business analysis
• Political structure of the Country and
state can be favourable or
unfavourable.
• Changing policies of the govt. Can
adversely affect efficient business
running.
•