Economic Environment of Business

Overview and Constituents of

Economic Environment of Business
Veena Keshav Pailwar
Professor
IMT Nagpur

Veena Keshav Pailwar

copyright@Prentice Hall of India

Economic Environment and Business Fluctuations

Significance of the economic environment scanning

Various constituents of economic environment of business
Economic System
Planning Process
Trend in Macro-Economic Variables
Economic Structure and the Stage of Development
Government Economic Policies, Activities and Legislations
International Economic Environment
Business Fluctuations and Cycles
copyright@Veena Keshav Pailwar

Levels of Management and Economic Analysis

Levels
of Types of Activities
Management

Type of Economic Analysis

Lower

Day to day operations of the firm:

Production scheduling, ordering input
supplies, scheduling overtime hours

Not much of economic analysis

required

Middle

Current operations of the firm:

Demand forecasts.
Investment appraisal and risk analysis
Cost estimation and analysis
Pricing of the product and discount to
be offered
Choice of suppliers
Lower level recruitments

Micro-Economic Analysis:
Given overall economic
environment.
Demand Analysis and Forecasting
Production and Cost Analysis
Pricing Policies
Investment Appraisal and Risk
Analysis

Higher

Long term plans and strategic

decisions:
Diversification of product lines
Launching of new products
Expansion of production base
Competitive strategies such as
advertising, research and development,
packaging and marketing

Macroeconomic Analysis:
Government Policy and Impact
Analysis
Specific Industry Analysis
Strategic Planning

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Business Organizations
Strategic Decisions

Expansion

Diversification

Mergers &
Acquisition

Launching New
Products

R&D
Decisions

Affected by Changing
Macroeconomic Policies and
Environment
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Assessment of Economic
Environment

National
Income

Prices
& Inflation

Taxes,
Budget
Deficit

Exchange
Trade
Rate
& Foreign Capital
Employment
Interest rate
Wages
Credit

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Constituents of Economic Environment of Business

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Economic System
Institutions

Principles

Mechanism

Created by the society to address the

problems of allocation of scarce resources
and perform their basic economic activities.
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Economic System
Classification
of
Economic
Systems

On the basis
of
extent of
Market
Mechanism

On the basis
of
Ownership
of Resources

Capitalism

Mixed
System

Socialism/
Market
Mixed
Communism Economies Economies
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Planned
Economies
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Characteristics of Various Economic Systems

System

Objective

Ownership of Allocation
Resources
Mechanism

Capitalism

Individual economic
freedom and each
according to his
means

Private
Market
Individuals &
Organizations

Socialism: Each
according to his
deeds
Communism: Each
according to his
needs

State

Market
Economies
Socialism
Planned
Economies

Mixed System
Mixed
Economies

Jointly determined by Private and

Consumers,
Public
Businesses and the
Government
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Planning

Jointly
determined by
Consumers,
Businesses and
the Government
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Economic System in China, India and USA

Country/
Evolution

China

India

Base

Started with Started with

Communism mixed economic
system with
leading role to
public sector

Started more of a
capitalist system

Movement

Gradually
moved
towards
socialist
market
structure

Gradually given
important role to
the government in
the stabilization of
the economy and
maintaining
orderly conditions
in the economy

Has significantly
liberalized the
economy
Moving more
and more
towards free
market economic
structure

USA

Case UEE 1.1

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10

Types of Planning
Imperative
Basic Element Element of
Compulsion

Indicative
Element of Facilitation
and Guidance

Role for
Government

Planning body sets the

broad targets for the
economy
Government acts as a
facilitator and co-ordinator
in the process

Government
dictates the
production,
investment,
distribution,
consumption and
pricing decisions

Role for
Market forces have Market forces have
Market Forces no role to play
substantial role to play
Case: UEE 1.2

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11

Trend in
Macroeconomic Variables

Short Term

Various Phases of
Business Cycles

Case: UEE 1.5, 3.7

Long Term

Structure of
an Economy

Case: UEE 3.1 and 3.4

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12

Trend in Macroeconomic Variables

Economic Variable

What the Increasing Trend Indicate for Business

Managers

National Income

Market potential

Inflation

Moderate: Conducive environment for business

Very high: Uncertainty; Growth retarding

Employment and
Capacity Utilization

Emerging resource and capacity constrain

Pressure on wages & interest rate: Higher cost Overall
inflationary scenario

Saving

Easy availability of funds for capacity expansion

Investment

Growing capital stock

Expanding productive capacity

Fiscal Deficit

Expansionary fiscal policy

Expansion in money supply: Growing demand
Inflationary pressure
Increasing debt burden for the government Increasing
interest rate

Money Supply

Increasing liquidity
Easy availability of credit
Veena Keshav Pailwar
Inflationary
pressure
copyright@Prentice Hall of India

13

Trend in Macroeconomic Variables

Economic Variable

What the Increasing Trend Indicate for Business

Managers

Balance of Payment
Current Account Deficit

Economy consuming more than it is earning

Increasing debt burden
Depletion of foreign exchange reserves

Capital Account
FDI Inflow

Increasing availability of funds for investment

Growing competition for the domestic producers

Portfolio Inflow

Hot-money, Volatility,

Debt Inflow

Debt burden, debt trap

Exchange Rate
Depreciation

Inherent weaknesses in the economy

Socio- Economic Variable

Living conditions
Veena Keshav Pailwar
copyright@Prentice Hall of India

14

Government Economic Policies and

Economic Environment

Fiscal Policy
Monetary Policy
Industrial Policy
Trade Policy
Exchange Rate Policy
Other Government Policies

Affects
Level of Aggregate Demand
Production Capacity
Availability of Credit
Cost of Funds
Infrastructure
Market Structure
Competition
etc.

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15

International Business
Environment
Economic trends and conditions
out side the country
Affects
Exports: Aggregate demand
Cost of Production
Inflation
Trade and Capital Flows
Exchange Rate
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16

Economic
Structure
Determines the Physical Framework
for the Economy and Business Units
Determinants

Impact

Population Size

Level of Demand

Income Per Capita Structure of Demand/ Product Composition

Factor Endowment Factor Intensity, Production Possibility
Frontier
Demography

Consumption Pattern, Demand Structure

Technology

Production Method
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17

Economic Structure

Constituents
Production Structure
Demand Structure
Employment Structure
Fiscal Structure
Financial Structure
Trade Structure
Demographic Structure

Measurements
Sectoral composition of output
Expenditure composition
Employment by eco activities
Composition of government
expenditure and revenue
Bank vs Market based
Sectoral export and import shares
Population Age, Gender
Distribution, and Density
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copyright@Veena Keshav Pailwar

Economic Structure and Stages of Development

Production Structure

Stage of Development

Agrarian Economy

Underdeveloped Stage of the

Economy

Industrial Economy

Second Stage of Development

of the Economy

Service Oriented
Economy

Advanced Stage of
Development of the Economy
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19

Components of a Time Series of An

Economic Variable

Trend
Seasonal
Cyclical
Random

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20

Business Fluctuations Cycles and Economic Environment

Business
Fluctuations
Recurrent
No fixed periodicity
Much larger duration than
the seasonal fluctuations
Approaches to the Analysis
Conventional Business Cycles
Growth Cycles
Growth Rate Cycles
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21

Causes of Business Cycles

Endogenous Factors: Affect the Demand side
Inventory accumulation
Expansionary/ contractionary monetary policy
Expectations, etc.

Exogenous Factors: Affect the Supply side

Natural Calamities: war, famine epidimic,
Scientific breakthrough
Technological innovations and inventions
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22

Phases in Conventional Business Cycles

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23

Course Objectives/ What Will You Learn?

Analyze various macro-economic indicators and
link them to overall economic environment of the
business.
Assess the current economic structure and
evolving domestic and global economic
environment for strategic decisions.

Comprehend role of the government in shaping

and stabilizing economic environment.

Identify the trend and predict the implications of

evolving global and domestic economic scenario
for business.
copyright@Veena Keshav Pailwar

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Course Coverage
Constituents of Business Environment
National Income & Environment Scanning
Inflation and Business Environment
Fiscal Policy and Environment
Financial System, Crisis & Reforms
Balance of Payment
Trade Flows and International Linkages
Capital Flows, Growth and Macroeconomic Instability
Exchange Rate Regimes & Currency Convertibility
Text Book:
Economic Environment of
Business, 3rd edition
Veena K. Pailwar
copyright@Veena Keshav Pailwar

25

Pattern of Evaluation
S. No.
I
1.

Components

Weightages

Topics

Internal Assessment
Group Activities*
Group Case Report

60%
20%

2.

Class Preparedness &

Participation**

20%

Attendance,
Punctuality,
Assignments,
Quizzes, Class
Discussion, Class
Behaviour, etc.

II.

Mid Term Exam***

20%

III

End Term Exam****

40%

Topics covered till

10th sessions
All the topics

Given Country
Given Topic

Group Case Report

Countries for Group
Case Report
Argentina
Australia
Brazil
Canada
China
Chile
France
Greece
Germany
Italy
Japan
Mexico
New Zealand
Singapore
Thailand
Turkey
UK
USA
Industries for Project
Finance
Cement
Iron & Steel
Automobile
Computer Software
Textile
Food & Beverages
Telecommunication
Pharmaceuticals, etc.

A Case on a selected company/

organization/country
Reflecting how the working of the
company/industry selected by the group
is affected by changes in its economic
environment.
The Decision Dilemmas that the selected
company faces in a changing environment

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27

End Term Project Report

Countries for Project
Argentina
Australia
Brazil
Canada
China
Chile
France
Greece
Germany
Italy
Japan
Mexico
New Zealand
Singapore
Thailand
Turkey
UK
USA
Industries for Project
Finance
Cement
Iron & Steel
Automobile
Computer Software
Textile
Food & Beverages
Telecommunication
Pharmaceuticals, etc.

Sub-headings in the Reports

1.Introduction
2.Background
3.Business Model
4.External Environment
5.Decision Dilemma
6.Case Analysis: Economic Concepts,
Questions & their Answers
References

Submission Deadline: 5th March 2016:

by 5 pm
Word Limit: 2000 word
Page Limit: 10 pages
copyright@Veena Keshav Pailwar

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