Classification of Economic Environment

8/2/2019 Classification of Economic Environment

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SUBMITTED TO:

THAKKAR SIR


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SUNIL BAHL,R. NO=03

SAGAR MHATRE,R. NO=44

PRAVIN PAWAR,R. NO=56

ROHIT KOLI,R.NO=36

ROHIT VANMORE,R.NO=80

ANKUSH KARHALE, R.NO=31

SHRIKANT BHOSLE, R.NO=7


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Natural Environment

Demographic Environment

Economic Environment

Political environment

Social Environment

Technological Environment

International Environment


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Natural environment consist of natural resources

like land , water, minerals, rainfall and otherresources found on the surface of the earth.These resources are available in limitedquantities and availability of these resourcesdoes affect the business decision.


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Demography is a science that studies humanpopulation with reference to its size, density,

distribution, growth rate, rate of literacy andlanguage. Business depends upon people ,therefore it should have detailed informationabout the consumer behavior , their preferences

, income, location ,etc.


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Economic environment is a sum total of theoverall economic conditions , the economic

policies of the government and the economicsystem operating in the country.


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It includes the political system , the rulingparty, the philosophy of the various political

party, political developments , politicalinstability,etc. A stable progressive and healthypolitical environment is very much necessaryfor the growth and development of the

business.


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It includes customs, traditions, beliefs, values,tastes and preferences , buying and

consumption habits of various social groups inthe society.Each group has some expectationfrom the business firms. Favourable socialenvironment should be created in the society.


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Introduction:- Various environmental factorssuch as economic environment, socio-culturalenvironment, political, technological,

demographic and international, affect thebusiness and its working. Out of these factorseconomic environment is the most importantfactor.


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Those Economic factors which have their affecton the working of the business is known aseconomic environment. It includes system,policies and nature of an economy, tradecycles, economic resources, level of income,distribution of income and wealth etc.Economic environment is very dynamic andcomplex in nature. It does not remain the same.

It keeps on changing from time to time with thechanges in an economy like change in Govt.policies, political situations.


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It has mainly five main components:-

1. Economic Conditions

2. Economic System 3. Economic Policies

4. International Economic Environment

5. Economic Legislations


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Economic Policies of a business unit are largelyaffected by the economic conditions of aneconomy. Any improvement in the economicconditions such as standard of living,purchasing power of public, demand andsupply, distribution of income etc. largelyaffects the size of the market.Business cycle is another economic condition

that is very important for a business unit.Business Cycle has 5 different stages viz. (i)Prosperity, (ii) Boom, (iii) Decline, (iv)Depression, (v) Recovery.


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Following are mainly included in Economic Conditionsof a country:-I. Stages of Business CycleII. National Income, Per Capita Income and

Distribution of IncomeIII. Rate of Capital FormationIV. Demand and Supply TrendsV. Inflation Rate in the EconomyVI. Industrial Growth Rate, Exports Growth Rate

VII. Interest Rate prevailing in the EconomyVIII. Trends in Industrial SicknessIX. Efficiency of Public and Private SectorsX. Growth of Primary and Secondary Capital MarketsXI. Size of Market


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An Economic System of a nation or a countrymay be defined as a framework of rules, goalsand incentives that controls economic relationsamong people in a society. It also helps inproviding framework for answering the basiceconomic questions. Different countries of aworld have different economic systems and theprevailing economic system in a country affect

the business units to a large extent. Economicconditions of a nation can be of any one of thefollowing type:-


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1. Capitalism:- The economic system in which business units or factors ofproduction are privately owned and governed is called Capitalism. The profitearning is the sole aim of the business units. Government of that country doesnot interfere in the economic activities of the country. It is also known as freemarket economy. All the decisions relating to the economic activities areprivately taken. Examples of Capitalistic Economy:- England, Japan, Americaetc.

2. Socialism:- Under socialism economic system, all the economic activities ofthe country are controlled and regulated by the Government in the interest ofthe public. The first country to adopt this concept was Soviet Russia. The twomain forms of Socialism are: -(a) Democratic Socialism:- All the economic activities are controlled andregulated by the government but the people have the freedom of choice ofoccupation and consumption.(b) Totalitarian Socialism:- This form is also known as Communism. Under

this, people are obliged to work under the directions of Government.3. Mixed Economy:- The economic system in which both public and privatesectors co-exist is known as Mixed Economy. Some factors of production areprivately owned and some are owned by Government. There exists freedomof choice of occupation and consumption. Both private and public sectors playkey roles in the development of the country.


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Government frames economic policies.Economic Policies affects the different businessunits in different ways. It may or may not havefavorable effect on a business unit. TheGovernment may grant subsidies to onebusiness or decrease the rates of excise orcustom duty or the government may increasethe rates of custom duty and excise duty, tax

rates for another business. All the businessenterprises frame their policies keeping in viewthe prevailing economic policies.


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1. Monetary Policy:- The policy formulated by thecentral bank of a country to control the supply andthe cost of money (rate of interest), in order toattain some specified objectives is known as

Monetary Policy. 2. Fiscal Policy:- It may be termed as budgetarypolicy. It is related with the income andexpenditure of a country. Fiscal Policy works as an

instrument in economic and social growth of acountry. It is framed by the government of acountry and it deals with taxation, governmentexpenditure, borrowings, deficit financing andmanagement of public debts in an economy


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3. Foreign Trade Policy:- It also affects the differentbusiness units differently. E.g. if restrictive import policyhas been adopted by the government then it will prevent thedomestic business units from foreign competition and if theliberal import policy has been adopted by the government

then it will affect the domestic products in other way.4. Foreign Investment Policy:- The policy related to theinvestment by the foreigners in a country is known asForeign Investment Policy. If the government has adoptedliberal investment policy then it will lead to more inflow of

foreign capital in the country which ultimately results inmore industrialization and growth in the country.


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5. Industrial Policy:- Industrial policy of acountry promotes and regulates theindustrialization in the country. It is framed by

government. The government from time totime issues principals and guidelines under theindustrial policy of the country.


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The role of international economicenvironment is increasing day by day. If anybusiness enterprise is involved in foreign trade,

then it is influenced by not only its owncountry economic environment but also theeconomic environment of the country from/towhich it is importing or exporting goods. There

are various rules and guidelines for thesetrades which are issued by many organizationslike World Bank, WTO, United Nations etc.


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Besides the above policies, Governments of

different countries frame various legislationswhich regulates and control the business


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Classification of Economic Environment

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