24-04-2014, 12:19 PM
Economic Environment and Business Fluctuations
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Significance of Environment Scanning for the Business Managers
An understanding of the economic environment is essential for business managers not
only at the strategic or planning level but also at the level of current operations of firms.
Strategic decisions such as expansion and diversification, competitive postures in the
form of R& D policy, packaging, advertising and other such policies are affected by the
evolving market and economic scenario. Similarly, production, investment, pricing and
hiring decisions are dependent on the market structure which itself gets influenced by the
structure of an economy and its economic environment.
Constituents of Economic Environment of Business
Economic System
Economic system refers to the set of institutions, principles and mechanism created by
the society to facilitate economic units to address the basic economic problems of
allocation of scarce resources and perform their basic economic activities.
On the basis of ownership of resources, the economic systems can be classified as
capitalism, socialism/ communism or mixed economic structure. In capitalism individuals
and organizations have freedom to own resources and take independent economic
decisions. On the contrary, in socialism or communism all the resources are owned by the
government. In mixed economic system, public sector co-exist with the private sector.
On the basis of extent to which market mechanism is allowed in the allocation and
distribution activities, the system can be characterized as market economies, planned
economies and mixed economies. In market economies market forces determine the
prices of various commodities and resources and guide the economic agents in the
allocation of resources. In the planned or command economies rather than market forces
the central planning authorities dictate the price and the allocation decisions.
Planning Process
Planning at the national level is carried out to allocate scarce national resources according
to the national priorities and economic and social objectives. Planning process can be
imperative or indicative. Under imperative planning there is an element of compulsion
with the government dictating production, investment, distribution, consumption and
pricing decisions. The market forces or mechanism has marginal or no role in such a
process. Under indicative planning process the planning body sets the broad targets for
the economy. The government acts as a facilitator and coordinator in the process and tries
to evolve the consensus among and co-operation from the different segments of the
economy for plan priorities and goals and methods of achieving the same.
In India, since independence, planning has been used as an important instrument for
achieving the objective of attainment of faster growth, full employment and self reliance,
reduction in regional disparities and economic inequalities, modernization of various
sectors of the economy and attainment of overall development of the country. So far ten
five year plans have been accomplished and eleventh five year plan has been currently
pursued. Planning process has helped India improve saving and investment levels, gain
self sufficiency in the foodgrain production, diversify its production base, reduce the
level of poverty and illiteracy and achieve sustainable growth of 8 to 10 percentage in the
recent years. However, regional and income disparities still persist, substantial proportion
of the population is still below the poverty line and country lags behind on Human
Development Index (HDI) front.
Trend in Macro-Economic Variables
The general trend in economic variables is indicative of overall economic environment of
a country with short trend indicating the various phases of business cycles and the long
term trends reflecting on the economic structure of a country. The changes in these
variables indicate the overall level of demand in the economy, hint at the cost structure
being faced by business organizations and the cost of living by households, and highlight
the constraints faced by business organizations.
International Economic Environment
International economic environment refers to all economic trends and conditions out side
a country. Changes in the international economic environment affect the level of exports
and, hence, aggregate demand for the products produced by business units. The changes
in the international environment also affect the cost of production of domestic enterprises
as many of the imported commodities are used as inputs in the process of production.
Through imports the inflation abroad gets imported to domestic markets. The decisions
taken on the platform of bilateral and multilateral organizations and regional trade
agreements affect the trading relations of a country with the foreign countries. These
agreements also affect the degree of openness of countrye country towards trade and
capital flows.