ECONOMIC ENVIRONMENT

Dimensions of business environment (or macro environment or general environment) have the following important factors:

(1) Economic Environment

Among the various factors of macro environment, the economic environment has a special significance. Economic environment can be divided into three parts. We shall now study their effect on business. They are as under:

i) Economic system, (ii) Economic policies, (iii) Economic conditions,

(i) Economic System:

It is necessary to know about the economic system prevailing in a country in order to understand the economic environment. Economic system influences the freedom or openness of business. Economic system is mainly of three kinds:

a) Socialistic Economic System (b) Capitalistic Economic System (c) Mixed Economic System.

(a) Socialistic Economic System:

Under this system, business is directed and controlled by the government. In other words, individuals have no freedom to run business. The government owns all the means of productions.

No individual has the right to have private property. All persons enjoy the benefits of centrally planned economy. All have equal rights. This system of economy is mainly adopted by Russia, China, Hungary and Poland.

(b) Capitalistic Economic System:

Under this system, private ownership of business is given importance. Hence, business gets extended. It is also known as free market economy.

Under this, all means of production (such as labour, land, capital, etc.) are owned by private people. What to produce, how to produce and by whom it will be produced-all such considerations are determined by the market forces.

Hence, it can be said that there is a complete freedom of consumption, production, savings, investment, etc. Such type of economic system is prevailing in USA and Canada

(c) Mixed Economic System:

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Under this system, business is owned both by the government and individuals. Under this, several basic industries are run under the control and ownership of the government.

As far as the private sector is concerned, it is run by the private persons, but to save the interest of the country government regulates its activities. India is a good example of countries following these concepts of economy.

(ii) Economic Policies:

Economic policies deeply influence the business of a country. The economic policies are laid down to direct the economic activities.

Economic activities include import-export, employment, tax structure, industry, public expenditure, public debt, foreign investment, etc. In order to direct all these economic activities, the following economic policies are laid down:

(a) Export-Import Policy

(b) Employment Policy

(c) Taxation Policy

(d) Industrial Policy

(e) Public Expenditure Policy

(f) Public Debt Policy

(g) Agriculture Policy

(h) Foreign Investment Policy.

All these policies influence business. For example, under the import-export policy, restrictions on imports will benefit the indigenous industry.

(iii) Economic Conditions:

Economic conditions are those conditions which are related with the possibilities of economic development of a country. On the basis of the economic conditions the government starts various programmes for the welfare of the people.

These programmes influence business. Businessmen are influenced by these programmes and they start their own programmes like the advertisement policy, discovery of new market, bringing new products in the market, new methods of production, etc. Some of the examples of economic conditions are as under: (a) Flow of Foreign Capital (b) Supply of Natural Resources (c) Level of Economic Development (d) Rate of Interest (e) National Income (f) Industrial Development (g) Foreign Trade (h) General Price Level.

The following are the chief examples of the impact of economic environment on business:

(i) When reforms were introduced in the banking sector, the bank loans were allowed on easy terms. It also led to better services. It helped really fast development of business.

(ii) The change in the economic environment resulted in the establishment of Leasing Companies, Mutual Funds and Venture Capital Business.

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