Economic Environment: Element, Components, importance

Economic environment: Economic environment refers to all those economic factors, which have a bearing on the functioning of a business. Business depends on the economic environment for all the needed inputs.

It also depends on the economic environment to sell finished goods. Naturally, the dependence of business on the economic environment is total and is not surprising because, as it is rightly said, business is one unit of the total economy.their elements are : -

(A). Economic condition:- 

The economic condition keeps on changing over time in the line with the economic the business cycle, as an economy goes through expansion and contraction. The economic condition can be influenced by macro and micro-environment. Including monetary and fiscal policy, GDP growth rate, inflation rate,  exchange rate.

The business cycle is also an important condition that has five different stages:-

(B). Economic system:

Normally there are three types of economic systems. capitalism and Socialism and a mixed economic system.

Market economic/capitalism:

The business unit is privately owned and governed is called capitalism. The profit earn is only the sole aim of the business. The government doesn’t interfere in economic activity in the country. It is also known as the free market economy.

Command economy/socialism: 

The business units are owned and governed by the government in the interest of the public. under this, the central government appoint a central planning authority that takes all economic decisions.

Mixed economic: 

It is the mixture of capitalism and socialism economic system.and the economic system in which both private and public sectors are co-existed. the factor is private or some are publicly owned.

(C). Economic Policy:

Business policies may or not have a favorable effect on a business unit. The economic policy of the government plays a significant role in determining the business environment of the business in any country.

Further, we can divide policy into different parts:- monetary policy, fiscal policy, foreign trade policy, foreign investment policy, industrial policy, etc

(D)International economic environment:-  

With the increasing foreign trade, investment and with the increasing scope of the world trade organization, the international monetary fund, world bank the role of the international economic environment has increased.  the international environment is particularly important for industries directly depend on imports and exports.

Components of economic environment:

Gross national income: 

The income generated both by total domestic production as well as the international production activities of national companies.

Gross domestic product: 

The total value of all final goods and services produced in a country in a given year equal to total consumer, investment, and government spending, plus the value of exports, minus the value of imports.

Per Capita Conversion: 

The per capita GNI is taking GNI of a country and converting it into a standard currency say at US DOLLARS at prevailing market rates and then dividing this sum by its population leads to a per capita conversion estimator.

It helps to explain an economy’s performance in terms of people who live in that country.

Importance of Economic Environment

• Manager assess economic environment and forecast market trends in the effort to make better investment choices and competitive strategies.

• Economic analysis look at several indicators of an economic environment with emphasis given to how local conditions require adjusting analysis and interpretation.

• The economic environment of foreign companies and markets can help managers predict events that might affect the company’s future performance