ECONOMIC ENVIORNMENT OF BUSINESS

Environment: a Complex Phenomenon
A close/direct relationship between Eco.environment

and Business environment: close interlock. a. Business Managers· Basic Function: Making Decisions. b. Decision-making: selecting alternatives-choice of Decisionalternativesone among available. c. Basis for selection: concepts, tools techniques derived from economics.

Problems involved: complex environmental factors.

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Identification Description Explanation and Prediction

Environmental factors: Dynamic Difficult to ‡ Quantify the proportion ‡ Identify direction of change ‡ Conceptualise .

Term: Short. . Factors: Economic and NonNoneconomic environment. Long and Secular. Forces: Market and Non-market NonEnvironment. Time: Past.Classification ‡ ‡ ‡ ‡ ‡ Space: Local. national and international environment. Medium. regional. Present and Future.

Classification ‡ ‡ ‡ ‡ MicroMicro-economic factors MacroMacro-economic factors Endogenous factor Exogenous factor .

² Illustration: Matrix 7x5 Matrix ² Economic environment and nonnoneconomic environment.Interdependence of factors: Concept of Interaction Matrix. .

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² Illustration: Matrix 2x2 Matrix ² National Economic environment and National non-economic nonenvironment. .Interdependence of factors: Concept of Interaction Matrix.

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nonenvironment. . ² Illustration: Matrix 2x2 Matrix ² Present and Future Economic environment and Present and Future non-economic environment.Interdependence of factors: Concept of Interaction Matrix.

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ECONOMIC SYSTEMS .

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ECONOMIC SYSTEMS: Functioning .

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Arthur Laffer: Laffer: Concept of Laffer Curve Proposition: A sizeable proportion of tax cut will result in a significant flow back into the Treasury via indirect tax . B.EXPLANATION Classical Keynes Keynesian Monetanist Neokeynesian Classical Economist·s Explanation and Policy Implications Explanation A.rise in saving & capital accumulation and creates growth through stimulating demand Flexible price Wage policies Flexible tax policies . Say·s Law of Market Supply creates its own demand No rigidities.

Keynes Explanation Explanation Keynes· Explanation effective demand is the key to attain growth of output-income and employment. outputPolicy Absolute faith in Fiscal policies for promoting investment or additional public Investment .

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attain growth and stability Absolute faith in Monetary Policy .Monetarists Monetarists Explanation Through variation in aggregate Demand for money and interest Rate.

Growth and development. Stabilization. Macroeconomic policies are to geared towards the requirements of: a. c. d. Structural adjustments.New Keynes· Explanation Implies structural adjustment policies. b. Corporate adjustments and microlends such as adjustment in production marketing strategies. supply chain etc. Hence. ..

.Keynesian Explanation Implies a mix of fiscal and monetary policies.

Theory of Economic Policy .

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.NATIONAL INCOME (NI) Total value of all final goods and services produced in a country in a given year.

[ services ] { + Interest} { + Profit } .National Product = [ Value of Final] { Wages } [ goods and ] = { + Rent } = National Income.

Hicks: ´The value of net social product of the community and the sum of the incomes of its members are exactly the same.Prof. currently produced goods and services. It includes only values of final products. It excludes purchase and sale of assets such as stocks. . bonds etc.. Note: It is a monetary measure and physical output growth ² adjusted price changes.µ [GNP] [Gross National Product] Total market value of all final goods and services produced by normal residents of a country in a year.

Net Export (Xn) = Value of Ex-Imp. I = Gross product investments (New capital goods. (Xn) ExNet Factor Income (NFI) = Factor income received from abroad . G = value of output of general government. addition to inventories unfinished goods.Components of NGP: C = Consumption of final goods and services.

Gross Domestic Product (GDP) GDP = GNP ² Net Factor Income earned from abroad (NFA) GNP = GDP+NFA GDP = C+I+G+Xn Where Xn = (X-M) (X- Illustration 6 .

GNP (At Market Price) Net Factor Income from abroad GDP(MP) NDP Gross Private Investment (GPI) Net Exports Xn (Export-Import) GPI Less Depreciation NPI Xn G C NDP (at Factor cost) Less Indirect Taxes Wages + Rent + Interest + Profit Xn Government G Purchases (G) Consumption Expenditure (C) C .

Instruments Treasury Bills Inter-Bank Call Money Command Trade Bills Market Commercial Paper market Money market mutual funds Commercial papers Certificate of Deposits Participation certificates .ORGANISED SECTOR OF THE INDIAN MONEY MARKET Sub-markets Call Money Market Treasury Bill Market Repo-Market Commercial/Trade Bills market Certificate of Deposits Institutes Participating RBI Discount Fin.Companies Mutual Funds Repos.#. Banks DFIs Investment F.

> Currency demand. > Festive season currency demand . > Trends in capital flows. . > Credit demand.IMPORTANT EVENTS: $ FACTORS/DETERMINANTS OF CALL MONEY RATES > Advance tax outflows. > Govt. cash balances. > Changes in CRR/SLR/Report rate.

Repo: Holder sell securities with agreement to repurchase. 2006Dec.22 percent. . Reverse Repos => Securities are purchased with an agreement to sell.2006 Hike in CRR 25 + basis point. Collateralised Short-term borrowing and lending: Shortthrough sale/purchase operations.During 2006-07 average call rate: 7.

Set-up. Vaghul Committee recommended. rates administered ² Fixed at 10% by IBA. Vaghul Committee SetCeiling on Call Money Rate withdrawn ² 1989 1990s. LIC/UTI were allowed to lend ² not to borrow. IDBI. .C. July 1988 DFHI. ‡ ‡ ‡ ‡ ‡ ‡ 1980s . AFI allowed to participate.Important events in Call Money.

Changes CRR/SLR/Repo rates. Currency Demand. cash balances. . Trends in Capital Flows. Festive season currency demand. Govt.Determinants of Call Money Rates ‡ ‡ ‡ ‡ ‡ ‡ Advance tax outflows.

It could be seen from the figure during Nov. LIQUIDITY ADJUSTMENT FACILITY (LAF) LAF: Collateralised Segments of the money market. The call rate high: Attributed to Advance Tax. Dec. Festive season at average rate around 7%. It accounts for 70% of the total volume in the call money market. Cash Balances following Heavy spending. Jan ranging between 17 to 18 percent. . Govt.

CASE. . ‡ ‡ ‡ ‡ ‡ ‡ Is it due to Wrong Business Model ? (borrowing short funds ² Lend Long) Is it due to abnormally high Leveraging? [ Leverging upto 30-40 times their equity] 30=> Lehman Brothers et al and Bear Stearns. Is Rating Agencies at fault? Is it because ignorance/ indifference / loose supervision of Regulatory Authorities. Case Analysis of Collapse/ Debacle of Investment Banks. $ 600 bn worth of assets on the equity base of $ 26 bn.

2008 Economist. 17/11/2008 Entrepreneurship. 2008 The Economic Times 15th December. 2008. The Financial Express 15th December. Fiscal measures to revive Sources of material for quick reference. December 1.ECONOMIC ENVIORNMENT OF BUSINESS Project Work for Internal Test. 2008 Business Standard 25th November. Growth and economic Integration ± A Linkage. Reserve Bank of India. The Recent Credit Crisis . 2008. Economic and Political Weekly. September 2. 4 5 6 7 Global Fiscal Crisis Globalisation. 1 2 3 Topics for Class Projects Debacle of Investment Banking Keynesian solution to the problem of Crisis. 2008. December 6. pages 33-41.-2009 Semester II. RBI Annual Reports and Business Standard 11th August. Business Line. S. Regulations and Recent Crisis. Economic Times 24th October. 2008 9th December. Successive issues of Trend and Progress of Banking. 2008 The Economic Times 8th December. 2008.N. 2008 Business Line: 15/12/2008 Business Standard. India¶ Policy response to Economic Slow-down Anatomy of A Recent Global Crisis 8 9 10 11 12 Restructuring Financial Rules Implications of Globalisation Indian Balance of Payments Critical Issues in Long-Term Debt Market.

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