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Business Environment Economic Environment of Business Assignment Submitted by Chetan Chawhan Roll No. 2012100 Group 7, Section B Submitted to Dr. Gajavelli V S Professor Economics & Finance Area Topic 1: Nature & Scope of Economic Environment of Busines Various environmental factors such as economic environment, socio-cultural environment, political, technological, demographic and international, affect the business and its working. Out of these factors economic environment is the most important factor. Those Economic factors which have their effect on the working of the business are known as economic environment. It 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. It does not remain the same. It keeps on changing from time to time with the changes in an economy like change in Govt. policies, political situations. This course of Economic Environment of business takes us through the application of Macroeconomics & its factors. The Major elements of Economic environment are: Economic Conditions: Economic Policies of a business unit are largely affected by the economic conditions of an economy. Any improvement in the economic conditions such as standard of living, purchasing power of public, demand and supply, distribution of income etc. largely affects the size of the market. Business cycle is another economic condition that is very important for a business unit. Business Cycle has 5 different stages viz. Prosperity Boom Decline Depression Recovery Economic Systems: An Economic System of a nation or a country may be defined as a framework of rules, goals and incentives that controls economic relations among people in a society. It also helps in providing framework for answering the basic economic questions. Different countries of a world have different economic systems and the prevailing economic system in a country affect the business units to a large extent. Economic conditions of a nation can be of any one of the following type:- Capitalism Socialism o Democratic Socialism o Totalitarian Socialism Mixed Economy Economic Policies: Government frames economic policies. Economic Policies affects the different business units in different ways. It may or may not have favorable effect on a business unit. The Government may grant subsidies to one business or decrease the rates of excise or custom duty or the government may increase the rates of custom duty and excise duty, tax rates for another business. All the business enterprises frame their policies keeping in view the prevailing economic policies. Important economic policies of a country are as follows:- Monetary Policy Fiscal Policy Foreign Trade Policy Foreign Investment Policy Industrial Policy International Economic Environment: The role of international economic environment is increasing day by day. If any business enterprise is involved in foreign trade, then it is influenced by not only its own country economic environment but also the economic environment of the country from/to which it is importing or exporting goods. For example, if a country A is the importer of products of Country B, a recession in country A will reduce the demands of the product exported by Country B. It will result in reduction of income level in country B due to reduced exports. Similarly, if the rate of return on any money market instruments in a country A is high it will attract more foreign investment in the money market instruments of that country. There are various rules and guidelines for these trades which are issued by many organizations like World Bank, WTO, and United Nations etc. Economic Legislations: Besides the above policies, Governments of different countries frame various legislations which regulates and control the business. The case study The Surprise International Economy includes various macroeconomic factors & the impact of change of any of them on the Economy of the country as a whole. The case takes us through the various recessionary periods seen by the United States. The various statistics & graph revel that how fast the economy has started recovering after a recession. Topic 2: National Income & Environmental Scanning: In the most basic terms, business cycles refer to fluctuations in the economic growth of a nation's economy. Sometimes, business cycles are simply referred to as ups and downs in the economy. The U.S. economy has experienced economic fluctuations throughout its history. For example, while the U.S. income has grown more than six-fold during the last 70 years, the U.S. economy has also experienced many economic downturns, some of which were very severe. The Great Depression (1929-33) was the worst downturn of this century. More recently, a fairly deep downturn was experienced during the Reagan administration (1981-82) and a mild downturn during the Bush administration (1990-92). Economists have studied the causes, consequences, and possible cures for the recurrent business cycles; however, they have not been fully conquered. While business cycles are expressed in terms of fluctuations in real gross national product, they are usually accompanied by fluctuations in the labor unemployment rate as well. While economic fluctuations are often simply referred to as ups and down in the economy, these fluctuations follow a broad path—each business cycle displays all phases of a cycle, but its characteristics differ from one cycle to another. In other words, business cycles are not regular or consistent. This will become clearer below. Four Phases of Business Cycle: Each business cycle can be divided into four phases. As the economic downturn continues, the output level reaches a bottom, called a "trough." A trough is basically a turning point— the real output stops declining any further and starts to increase after hitting the trough. The phase when the economy's real output is rising from the trough is termed expansion. The expansion continues to a peak where it achieves the highest output level for this particular business cycle. When output starts declining from the level achieved at the peak, a recession or contraction is said to have set in. The four phases—trough, expansion, peak, and recession—constitute a business cycle. Cause of Business Fluctuations: There are a multitude of factors that are considered responsible for causing business cycles. In a theoretical sense, though, they can be broadly characterized as belonging either to the demand side (the aggregate demand from all sections—consumers, investors, government, and foreign—for the economy's goods and services) or the supply side (which pertains to factors relevant to supply of goods and services, such as changes in input costs, technological advances, etc.). To understand why economic activities fluctuate at all, one needs to understand the macroeconomics theory. Basically, this theory explains how the equilibrium level of output is determined in the economy. The equilibrium output also determines the associated equilibrium price level. Aggregate demand for an aggregate supply of goods and services ultimately determine the equilibrium output (and thus the price level). The case Economic (Market) Reforms in India Since 1991: Has Gradualism Worked?, is an article by Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission. In the article he states various reasons & the situations when the economic reforms were introduced by the then Finance Minister Dr. Manmohan Singh. The major reason were extremely high fiscal deficit of the country & the foreign reserve that India had was sufficient for import of only one week of the requirements. India launched its market-oriented economic reforms in 1991. The Driving Forces behind the Reforms: As in many developing countries, India also launched its massive economic reforms in 1991 under the pressure of economic crises. The twin crises were reflected through an unmanageable balance of payments crisis and a socially intolerably high rate of inflation that were building up in the 1980s and climaxed in 1990-91. The current account deficit as a percentage of GDP peaked at a high of 3.1 percent (compared to an average level of 1.4 percent in the early 1980s). The inflation rate (as measured by point-to-point changes in the Wholesale Price Index) had also climbed to the socially and politically dangerous double- digit level, hitting 12.1 percent in 1990-91. Most economic policy makers and analysts held widely convergent views on the causes of the unprecedented economic crisis faced by India in 1990-91. The root cause of the twin crisis could be traced to macro-economic mismanagement throughout the 1980s as reflected in an unsustainably high fiscal deficit, in particular the revenue deficit and the monetized deficit. The central government’s fiscal deficit alone peaked at 7.9 percent as a percentage of GDP in 1989-90. Thus growing fiscal profligacy (and irresponsibility) and the unviable financing patterns of the fiscal deficit prevailing in the 1980s made high levels of annual GDP growth (peaking at 5.6 percent in 1989-90) unsustainable. Foreign-exchange reserves dwindled to a low of US$2.2 billion (with less than 15 days’ cover against annual imports). India stared bankruptcy in the face as it struggled to meet external debt obligations. Economic reforms launched since June 1991 may be categorized under two broad areas: major macro-economic management reforms; and structural and sector-specific economic reforms Macro-economic management reforms: Macro-economic management reforms have focused on controlling the politically difficult problems of reducing the fiscal and (even more so) revenue deficits. The capital account deficit does not pose long-term problems as investment in productive capital made in the present, if prudently carried out, will generate an adequate income stream to pay for capital costs incurred and generate positive returns in the future. Structural Reforms: Structural reforms since 1991 have been sector-specific. The sectors subjected to reform have been carefully selected and the coverage of sectors under structural reforms has been extended over time. The major structural economic reforms carried out since 1991 have been primarily in the following areas: Trade Policy/External Sector; Industrial Policy; Infrastructural Sector Policies; Divestment/Privatization Policies; the Financial Sector; and in Policies for Attracting Foreign Direct Investment.