Introduction to Economic Environment:
Economic environment has a profound impact on the conduct of businesses all around the world. The economic environment is very complex and dynamic in nature and it includes all major variables of the economy which has a significant impact on the growth and development of the economy. It includes the inflation rate, the interest rate, income, employment, consumer behavior and the distribution of wealth. It has significant influence on the long term survival and growth of each and every business enterprise. Any change in any of the parameter mentioned above results in either a massive exodus of demand and supply of a particular good from one country to another or vice-versa. Thus, the economic environment is of paramount importance for the growth and development of any economy.
Economic environment is very volatile and complicated in nature as it keeps on changing from time to time with the change in governmental policies, legal structure, and political situations of an economy. The economic environment is closely related to political environment and the legal environment of the economy. Any change in the political environment or a legal environment has a significant impact on the economic environment. Thus the Government also plays a critical role in facilitating a conducive economic environment for any country as most of policy making rests in the hands of government. Any change in the policy framed by the government is likely to have a significant impact on the business environment. For example, reduction of 1% of sales tax by the government on a particular commodity may increase the demand of that particular commodity in the home country, whereas increase in custom duty or excise duty on some imported goods may decrease the demand of the product. Any change or reform in an economy has to be properly debated and examined by giving emphasis on each and every aspect of the decision, considering the entire stakeholders who are likely to have an impact of it, before it is implemented or enforced.
Types of Economic Environment:
Mainly, the economic environment has been subdivided into two parts:
a. Microeconomic Environment
b. Macroeconomic Environment
Primarily, the microeconomic environment is affected by factors like the market size, the demand and supply, competitors, etc. which has a significant impact on the total business environment. Accordingly, the macroeconomic environment is affected by factors that either directly or indirectly have a significant impact on the growth of development of any economy. The macro economic factors include:
Both the above sub-divisions of economic environment play a critical part of success or failure of the market. Business Decisions get influenced by various elements of economic environment. The economic environment includes:-
1. The nature and structure of economic system i.e. capitalist, socialist or mixed economy, sectoral composition of output, occupational structure of labor working in different sectors of the economy, linkage among different sectors, level of development of the economy.
2. The condition of the economy like income level, demand and supply level, gross domestic product level, price level, per capita income, etc.
3. The various economic policies like industrial policy, trade policy, monetary policy, fiscal Policy, foreign exchange policy.
4. The financial system of the economy like the structure of banking System, capital market and money market.
5. The global linkage of the economy with the outside world like membership of WTO, IMF, World Bank, Balance of payment position of the country.
The present day economic environment of business is very complex and dynamic. The economic environment of business exercises a strong influence on the non-economic environment of business just as the non-economic environment can influence the economic environment. The economic environment is thus both exogenous and endogenous.