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Published by: nehaseththedon on Jun 30, 2012
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Answer:Economic factor that affect businesses:1. Income2. Inflation3. Recession4. Interest Rate5. Exchange RateThere are four major elements that affect business environment. The elements are:1. Economic growth 2. The business cycle 3. Employment and unemployment 4. Inflation.
What Is Economic Environment?
Various environmental factors such as economic environment, socio-culturalenvironment, political, technological, demographic and international, affect the business and itsworking. Out of these factors economic environment is the most important factor.
Meaning of Economic Environment:-
Those Economic factorswhich have their affect on the working of the business is known as economic environment. Itincludes system, policies and nature of an economy, trade cycles, 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.
Elements of Economic Environment:-
It has mainly five main components:-
Economic Conditions
Economic System
Economic Policies
International Economic Environment
Economic Legislations
Economic Conditions:-
Economic Policies of a business unit are largely affected by theeconomic conditions of an economy. Any improvement in the economic conditions such asstandard of living, purchasing power of public, demand and supply, distribution of income etc.largely affects the size of the market.Business cycle is another economic condition that is very important for a business unit. BusinessCycle has 5 different stages viz. (i) Prosperity, (ii) Boom, (iii) Decline, (iv) Depression, (v)Recovery.
Following are mainly included in Economic Conditions of a country:-
Stages of Business Cycle
National Income, Per Capita Income and Distribution of Income
Rate of Capital Formation
Demand and Supply Trends
Inflation Rate in the Economy
Industrial Growth Rate, Exports Growth Rate
Interest Rate prevailing in the Economy
Trends in Industrial Sickness
Efficiency of Public and Private Sectors
Growth of Primary and Secondary Capital Markets
Size of Market
Economic Systems:-
An Economic System of a nation or a country may be defined as aframework of rules, goals and incentives that controls economic relations among people in asociety. It also helps in providing framework for answering the basic economic questions.Different countries of a world have different economic systems and the prevailing economicsystem in a country affect the business units to a large extent. Economic conditions of a nationcan be of any one of the following type:-1.
The economic system in which business units or factors of production areprivately owned and governed is called Capitalism. The profit earning is the sole aim of thebusiness units. Government of that country does not interfere in the economic activities of thecountry. It is also known as free market economy. All the decisions relating to the economicactivities are privately taken. Examples of Capitalistic Economy:- England, Japan, America etc.2.
Under socialism economic system, all the economic activities of the country arecontrolled and regulated by the Government in the interest of the public. The first country toadopt this concept was Soviet Russia. The two main forms of Socialism are: -
(a) Democratic Socialism:-
All the economic activities are controlled and regulated by thegovernment but the people have the freedom of choice of occupation and consumption.
(b) Totalitarian Socialism:-
This form is also known as Communism. Under this, people areobliged to work under the directions of Government.3.
Mixed Economy:-
The economic system in which both public and private sectors co-exist isknown as Mixed Economy. Some factors of production are privately owned and some are ownedby Government. There exists freedom of choice of occupation and consumption. Both privateand public sectors play key roles in the development of the country.
Economic Policies:-
Government frames economic policies. Economic Policies affects thedifferent business units in different ways. It may or may not have favorable effect on a businessunit. The Government may grant subsidies to one business or decrease the rates of excise orcustom duty or the government may increase the rates of custom duty and excise duty, tax ratesfor another business. All the business enterprises frame their policies keeping in view theprevailing economic policies. Important economic policies of a country are as follows:-1.
Monetary Policy:-
The policy formulated by the central bank of a country to control thesupply and the cost of money (rate of interest), in order to attain some specified objectives isknown as Monetary Policy.
Fiscal Policy:-
It may be termed as budgetary policy. It is related with the income andexpenditure of a country. Fiscal Policy works as an instrument in economic and social growth of a country. It is framed by the government of a country and it deals with taxation, governmentexpenditure, borrowings, deficit financing and management of public debts in an economy.3.
Foreign Trade Policy:-
It also affects the different business units differently. E.g. if restrictive import policy has been adopted by the government then it will prevent the domesticbusiness units from foreign competition and if the liberal import policy has been adopted by thegovernment then it will affect the domestic products in other way.4.
Foreign Investment Policy:-
The policy related to the investment by the foreigners in acountry is known as Foreign Investment Policy. If the government has adopted liberal investmentpolicy then it will lead to more inflow of foreign capital in the country which ultimately resultsin more industrialization and growth in the country.5.
Industrial Policy:-
Industrial policy of a country promotes and regulates the industrializationin the country. It is framed by government. The government from time to time issues principalsand guidelines under the industrial policy of the country.
Global/International Economic Environment:-
The role of international economicenvironment is increasing day by day. If any business enterprise is involved in foreign trade, thenit is influenced by not only its own country economic environment but also the economicenvironment of the country from/to which it is importing or exporting goods. There are variousrules and guidelines for these trades which are issued by many organizations like World Bank,WTO, United Nations etc.
Economic Legislations:-
Besides the above policies, Governments of different countries framevarious legislations which regulates and control the business.
Difference between WTO and GATT
WTO had its origin in Bretton woods conference after the end of second world war. It wasfounded in 1948 with 23 members by the name of GATT[General Agreement on Tariffs andTrade]. But in 1995,GATT was rechristined as WTO.DIFFERENCES1.GATT was a provisional legal agreement whereas WTO is an organization with permanentagreements.2.WTO has members while GATT had only contracting parties.3.GATT dealt only with trade in goods while WTO covers services and intellectual propertyrights as well.4.The real critical distinction between GATT and WTO is creation of a binding disputesettlement system.Under GATT contracting parties could bring cases before internationalbody but there was no effective enforcement mechanism. But in WTO an effectiveenforcement mechanism exists

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