IMPACT OF ECONOMIC

ENVIRONMENT

DDIVYA P KRISHNAN
Reg no: 327

ECONOMIC ENVIRONMENT
Those Economic factors which affect on the working of
the business is known as economic environment.
Elements of Economic Environment
1. Economic Conditions
2. Economic System

3. Economic Policies
4. International Economic Environment

5. Economic Legislations

ECONOMIC CONDITIONS
Economic Policies of a business unit are largely
affected by the economic conditions of an
economy.
Any improvement in the economic conditions
such as standard of living, purchasing power
of public, demand and supply, distribution of
income etc. largely affects the size of the
market.

Following are mainly included in Economic Conditions of a

country: Industrial Growth Rate, Exports Growth Rate
Efficiency of Public and Private Sectors
National Income, Per Capita Income and Distribution of
Income
Stages of Business Cycle
Rate of Capital Formation
Demand and Supply Trends
Inflation Rate in the Economy
Interest Rate prevailing in the Economy
Trends in Industrial Sickness
Growth of Primary and Secondary Capital Markets
Size of Market
Balance of payment position

Stages of business cycle

Recession - is a period of reduced economic activity
in which levels of buying, selling, production, and
employment typically diminish. This is the most
unwelcome stage of the business cycle for business
owners and consumers alike.
A particularly severe recession is known as a
depression.
Recovery - the point at which the economy starts
working its way up to better financial footing.

 Growth - a period of sustained expansion and higher

levels of business activity. Because the economy
tends to operate at or near full capacity during periods
of prosperity, growth periods
Decline- end of the period of growth in the business
cycle. Declines are characterized by decreased levels
of consumer purchases and reduced production by
businesses.

Demand and Supply Trends

The business cycle is affected by all the forces
of supply and demand

Inflation Rate in the Economy

During a high inflation period, wide fluctuations in
the inflation rate make it difficult for business
organizations to predict the future and accurately
calculate prices and returns from investments.
When inflation in a country is more than that in a
competitive country, the exports from former country
will be less attractive compared to the other country
and this will create a larger trade deficit.
At the same time, high inflation in a country weakens
its competitive position in the international level

 The primary job of the Federal Reserve is to control

inflation while avoiding recession.
It primarily does this by tightening or relaxing the
money supply, which is the amount of money allowed
into the market.
Tightening the money supply reduces the risk of
inflation, while relaxing controls on the money
supply increases the risk of inflation.

Interest Rate prevailing in the Economy

Business directly affected by a change in interest rates
Interest rate changes also affect individuals - and
individuals are customers
Different businesses will be affected in different ways
as a result of a change in interest rates

 If interest rates change, mortgage rates may also

change. When mortgage rates change, households
notice a change to their monthly outgoings and may
adjust their spending on other things as a result.
Businesses are affected directly by changes to their
loan costs

Trends in Industrial Sickness

Industrial Sickness contributes to high cost economy.
This in turn, will affect the competitiveness of the
economy at home and abroad.
Dead investment is a burden on both banks and
budgets and ultimately consumers should pay the
high cost.
Money locked up in sick units gives no returns and
effects the availability of resources to the other viable
units

Growth of Primary and Secondary Capital

Markets Size of Market
Capital market is one of the most important segments
of the Indian financial system.
It is the market available to the companies for
meeting their requirements of the long-term funds.
It refers to all the facilities and the institutional
arrangements for borrowing and lending funds.

 High investment tax rates cause international

investors to switch their investments to countries with
more favorable tax regimes.

Fluctuating investments, due to variations in the pace

of technological innovations, lead to business
fluctuations in the economy

 Variations in government spending are yet another

source of business fluctuations. This may appear to be
an unlikely source, as the government is widely
considered to be a stabilizing force in the economy
rather than a source of economic fluctuations or
instability,
These also led to economic expansions. However,
government spending not only contributes to
economic expansions, but economic contractions as
well. In fact, the recession of 1953-54 was caused by
the reduction in government spending after the
Korean War.

ECONOMIC SYSTEMS
Economic system in a country affect the business
units to a large extent
Capitalism
Socialism
Mixed Economy

Economic Policies
Government frames economic policies.
Economic Policies affects the different business units
in different ways.
It may or may not have favourable effect on a
business unit.
All the business enterprises frame their policies
keeping in view the prevailing economic policies.

Important economic policies of a country are as follows:

Monetary Policy:- Monetary policy is the regulation of a
country's money supply by the central bank of a country
Variations in the nation's monetary policies, independent
of changes induced by political pressures, are an
important influence in business cycles as well. Moreover,
the decisions of the Federal Reserve, which controls
interest rates, can have a dramatic impact on consumer
and investor confidence as well.

 When inflation rises, the central bank typically raises

interest rates. High inflation makes the costs of goods
higher. Central banks want to keep inflation low to
keep the prices of goods stable relative to the value of
the currency.
Monetary policy directly impacts interest rates. The
central bank raises or lowers the prime rate, or
interest rate the central bank loans money to other
banks, as a tool to impact the economy.

 Monetary policy attempts to minimize the speed and

severity of these expansions and contractions to
maintain steady growth or decrease a negative
contraction
Monetary policy impacts the amount of money spent
in an economy

 Fiscal Policy
Governments can affect business directly through
fiscal policy, which involves taxation and government
spending.
Fiscal policy moderates economic cycles and controls
inflation. An expansionary fiscal policy stimulates
business by increasing demand
Fiscal policy decisions have a widespread effect on
the everyday decisions and behaviour of individual
households and businesses

 Lower rates of corporation tax and other business

taxes can stimulate an increase in business fixed
capital investment spending. If planned investment
increases, the nations capital stock can rise and the
capital stock per worker employed can rise.

Use of fiscal policyincreased government spending

and/or tax cutsis the most common way of boosting
aggregate demand, causing an economic expansion.

Foreign Trade Policy

Stepping stone for the development of countrys foreign
trade.
It contains the basic principles and points the direction in
which it propose to go.
A trade policy cannot be fully comprehensive in all its
details it would naturally require modification from time
to time with changing dynamics of international trade.

 Foreign exchange policy Because net exports are a component of the aggregate
demand in the economy, variations in exports and
imports can lead to business fluctuations as well.
Growth in the gross domestic product of an economy
is the most important determinant of its demand for
imported goodsas people's incomes grow, their
appetite for additional goods and services, including
goods produced abroad, increases
Abolition/liberalisation of exchange control
encourages cross border movement of capital

Foreign Investment and technology 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.
Liberal foreign investment and technology policy will
increase domestic competition and put many
domestic firms into problems, Benefit many other
domestic firms- global sourcing of capital and
technology

Industrial Policy
Industrial or business support policies designed to
raise productivity and employment
Industrial policy of a country promotes and regulates
the industrialization in the country

Global or international economic

environment
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 exporting good

There are various rules and guidelines for these trades

which are issued by many organizations like World
Bank, WTO, United Nations

ECONOMIC LEGISLATIONS
Governments of different countries frame various
legislations which regulates and control the business.

THANK YOU