Economic

environment
Preparing by:
Maryna Skomatchuk
Svitlana Polischuk
• Economic conditions, economic policies and the economic
system are the important external factors that constitute the
economic environment of a business.
• The economic conditions of a country-for example, the nature
of the economy, the stage of development of the economy,
economic resources, the level of income, the distribution of
income and assets, etc. are among the very important
determinants of business strategies.

Economic factors which have their affects on the working of the

business. Includes 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
and complex in nature.
 International
International economic
economic
Income-wise
Income-wise environment
environment .. WithWith the
the increase
increase in
in
classification
classification of
of the
the volume
volume of of foreign
foreign trade,
trade,
countries
countries foreign
foreign investment
investment and and with
with the
the
increasing
increasing scope
scope ofof world
world trade
trade
organization,
organization, IMF,
IMF, World
World Bank,
Bank,
Economic
Economic Economic
Economic regional
regional blocs
blocs life
life SAARC,
SAARC, ASEAN
ASEAN
policies
policies system etc.
etc. the
the role
role of
of international
international
Economic
Economic economic
economic environment
environment hashas
environment
environment increased.
increased.

Financial
Financial system.
system. International
International
International
International financisal
financisal system
system explains
explains and
and
Financial
Financial researches
researches the
the spread
spread of
of money
money over
over
economic
economic
systems
systems the
the international
international financial
financial markets,
markets, and
and
environment
environment
the
the impacts
impacts of
of the
the exchange
exchange rates.
rates.

Economic
Economic system
system is
is aa framework
framework of of
Economic
Economic policies
policies are
are framed
framed by by government.
government. rules,
rules, goals
goals and
and incentives
incentives that
that govern
govern
This
This policies
policies establish
establish relationship
relationship between
between economic
economic relationships
relationships among
among people
people
business
business and
and government.
government. Important
Important in
in aa society.
society. Economic
Economic system
system of
of aa
economic
economic policies
policies are
are as
as follows:
follows: monetary,
monetary, country
country cancan be:
be: capitalism,
capitalism, socialism
socialism
fiscal,
fiscal, foreign
foreign investment
investment etc.
etc. and
and mixed
mixed economic
economic system.
system.
 Important factors of economic
environment
Inter – sectoral
linkage
Sectoral
composition
of output GDP
GDP
Structure trend
trend
and ss
nature of
economy
Demand
Demand and
and
Level of Distribution
Distribution
of
of incomes
incomes supply
supply
development of trends
trends
Economic
Economic
the economy
condition
condition
ss

Income
Income levels
levels Price
Price trends
trends
 Important factors of economic
environment
Fiscal policy Foreign
Foreign
investment exchange
policy policy

Membership in international
Monetary Economi organization
c policies
policy

Trade policy Trade flows

Global
linkag
e

Financial flows
 In assessing the economic environment in foreign
countries, a business must pay particular attention to
the following four areas:
Average
Average income
income levels of the
population.
population. Tax
Tax structures.
structures.
• If the
the average income
income for the In
In some
some countries,
countries, foreign
foreign firms
firms pay
pay
population
population is
is very low,
low, no
no matter
matter much
much higher
higher tax
tax rates
rates than
than domestic
domestic
how
how desperately
desperately this
this population
population competitors.
competitors. These
These tax
tax differences
differences
needs a product or service, there
there may
may be
be very
very obvious
obvious or or subtle,
subtle, as
as in
in
simply is not a market
market for
for it.
it. hidden
hidden registration
registration fees.
fees.

Fluctuating
Fluctuating exchange
exchange rates.
rates.
Inflation
Inflation rates.
rates. The
The exchange
exchange rate,
rate, oror the
the value
value of
of
Inflation
Inflation results
results in
in aa general
general rise
rise in
in the
the level
level one
one country's
country's currency
currency in in terms
terms ofof
of
of prices,
prices, and
and impacts
impacts business
business inin many
many another
another country's
country's currency,
currency, is
is
ways.
ways. Inflation
Inflation usually
usually occurs
occurs when
when thethe determined
determined primarily
primarily by by supply
supply and
and
supply
supply of
of money
money isis too
too much
much in in the
the demand
demand forfor each
each country's
country's goods
goods
economic
economic environment
environment market market while
while not
not and
and services.
services. AA foreign
foreign investor
investor may
may
equally
equally supported
supported by by aa similar
similar availably
availably of
of sustain
sustain large
large losses
losses ifif the
the value
value of
of the
the
goods
goods andand services.
services. currency
currency drops
drops substantially.
substantially.
 The scope of international business depends, to a large extent, on the economic
system. At one end, there are the free market economies or capitalist
economies, and at the other end are the centrally planned economies or
communist countries. In between these two are the mixed economies. Within
the mixed economic system itself, there are wide variations.

The
The freedom
freedom of
of private enterprise is the
the greatest
greatest in
in the
the free
free market
market economy,
economy,
which
which is
is characterized
characterized by
by the
the following
following assumptions:
assumptions:

The
The factors
factors of
of production
production (labor,
(labor, land,
land, capital)
capital) are
are privately
privately owned,
owned, and
and production
production occurs
occurs
at
at the
the initiative
initiative of
of the
the private
private enterprise.
enterprise.

Income is received in monetary form by the sale of services of the factors of production
and from the profits of the private enterprise.

Members
Members ofof the
the free
free market
market economy
economy have
have freedom
freedom of
of choice
choice in
in so
so far
far as
as
consumption,
consumption, occupation,
occupation, savings
savings and
and investment
investment are
are concerned.
concerned.

The
The free
free market
market economy
economy is
is not
not planned
planned controlled
controlled or
or regulated
regulated by
by the
the government.
government. The The
government
government satisfies
satisfies community
community or
or collective
collective wants,
wants, but
but does
does not
not compete
compete with
with private
private firms,
firms,
nor
nor does
does itit tell
tell the
the people
people where
where to
to work
work or
or what
what to
to produce
produce
 The
The completely
completely free
free market
market economy,
economy, however,
however, is is an
an abstract
abstract system
system rather
rather than
than
aa real
real one.
one. Today,
Today, even
even the
the so-called
so-called market
market economies
economies areare subject
subject to
to aa number
number of
of
government
government regulations.
regulations. Countries
Countries like
like the
the United
United States,
States, Japan,
Japan, Australia,
Australia,
Canada
Canada and
and some
some of
of member
member countries
countries of
of the
the EEC
EEC are
are regarded
regarded asas market
market economies.
economies.

The communist countries have, by and large, a centrally planned economic system. Under
the rule of a communist or authoritarian socialist government, the state owns all the
means of production, determines the goals of production and controls the economy
according to a central master plan. The consumption pattern in a centrally planned
economy is dictated by the state.
China, Vietnam, Laos, North Korea and Cuba had centrally planned economies.

In
In between
between the
the capitalist
capitalist system
system and
and the
the centrally
centrally planned
planned system
system falls
falls the
the
system
system of
of the
the mixed
mixed economy,
economy, under
under which
which both
both the
the public
public and
and private
private sectors
sectors .. The
The extent
extent
of
of state
state participation
participation varies
varies widely
widely between
between thethe
mixed
mixed economies.
economies. However,
However, inin many
many mixed
mixed economies,
economies, thethe strategic
strategic and
and other
other
nationally
nationally very
very important
important industries
industries are
are fully
fully owned
owned or or dominated
dominated byby the
the state.
state.
Britain,
Britain, France,
France, Italy
Italy and
and Sweden
Sweden can
can all
all be
be classified
classified as
as mixed
mixed economies.
economies.
Economic development differs widely among the countries and regions of the world.
Countries can be categorized as either developing or developed. Developing
countries are referred to as less developed countries (LDCs). The criterion
traditionally used to classify countries as developing is per capita income, which is
the income generated by the nation’s production of goods and services divided by
total population. The developing countries have low per capita incomes. LDCs
generally are located in Asia, Africa, and South America. Developed countries are
generally located in North America , Europe and Japan.
In
In aa developing
developing country,
country, the
the low
low income
income maymay bebe the
the reason
reason forfor the
the very
very
low
low demand
demand for for a product.
product. The
The sale
sale of
of aa product
product for
for which
which the
the demand
demand is is
elastic
elastic naturally
naturally increases
increases with
with anan increase
increase in
in income.
income. But
But aa firm
firm is
is unable
unable
to
to increase
increase thethe purchasing
purchasing power
power of of the
the people
people to to generate
generate aa higher
higher
demand
demand for for its
its product.
product. Hence, it may have to reduce the price of of the
product
product to to increase
increase the sales. The reduction in the the cost of
of production
production maymay
have
have to to be
be effected
effected to
to facilitate
facilitate price reduction. ItIt may even be necessary
to
to invent
invent oror develop
develop aa new
new low-cost
low-cost product
product toto suit
suit the
the low-income
low-income
market.
market.

Example.
Example. ThusThus Colgate
Colgate designed
designed aa
simple,
simple, hand-driven,
hand-driven, inexpensive
inexpensive ($10)
($10) washing
washing machine
machine for
for low-income
low-income buyers
buyers
in
in less
less developed
developed countries.
countries. Similarly,
Similarly, the
the National
National Cash
Cash Register
Register Company
Company
took
took anan innovative
innovative step
step backward
backward by by developing
developing aa crank-operated
crank-operated cash
cash register
register
that
that would
would sell
sell at
at half
half the
the cost
cost of
of aa modern
modern cash
cash register
register and
and this
this was
was well
well
received
received in in aa number
number of of developing
developing countries.
countries.
 Conclusions
• The economic environment represents the economic conditions
in the country where the international organization operates.
This part of the environment includes such factors as economic
development, infrastructure, resource and product markets,
and exchange rates etc. In addition factors such as inflation,
interest rates, and economic growth are also part of the
international economic environment.

• Every manager should have through understanding of

international economic environment, only then he can drive the
organization to the path of success. All over the world, all
countries differ in conditions of: stage of economic
development, the level of economy openness and
transnationalization etc.
•Thank you for attention!