MPANDE, D

UNIT 5 1
ECONOMIC ENVIRONMENT
5.0 Introduction

The economic environment comprises of micro and macro environments. These provide
indicators of economic activities and facilitate the assessment of business and economic
performance.

5.1. Economic development

The advancement of emerging economies into advanced economies is referred to as economic

development. This is basically the process through which country's standard of living improves
from low to high and ultimately resulting in improvements in overall health, academics and well
being of the population. During this time, a population shifts from being basically agriculture
oriented to industries and lastly to the provision of goods and services. Examples of results of
economic developments include better public education, higher life expectancy, improved
productivity and literacy levels.

Scholars such as Michael Todaro list three specific objectives of development as:

Goods and services that sustain life such as food, water, shelter, protection and health increase
incomes and jobs which of course raise the living standards

Ability to freely make decisions on social and economic issues. This can be achieved by expanding
the range of choices available to nations with respect to social and economic choices by giving
them freedom from servitude not only in relation to other nations buts also to forces of ignorance
and human misery.

5.3. Macroeconomic objectives

The fundamentals of macroeconomics are basically topics affecting an economy at large and
include statistics on Gross Domestic Product (GDP), supply and demand, unemployment,
inflation and growth and not forgetting considerations for fiscal policy, monetary and
international trade. Key macroeconomic variables can be divided into two variables for domestic
side and international side. The key variables on the domestic side include output, interest rates
and price level while on the international side, the key variables refer to exchange rates and the
balance of payments. Thus macroeconomic aspects have a considerable level of influence on
business and requires that businesses react in a manner that is positive for the purpose of its
growth and survival. The main macroeconomic issues are as follows:
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5.3.1. National Income

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This is basically the measure of money from the total flow of goods in an economy annually.
National income shows the value of goods and services that are or become available for
consumption together with total additions to the stock of capital of the nation. To be precise, we
normally use the term ‘national product’ or 'net national product'.

5.3.2 Gross Domestic Product GDP

Gross domestic product (GDP) refers to the monetary measure of the market value of all the
total goods and services that are produced quarterly or yearly or in a specified period of time. It
is the total measure of production factors located within the country with no regard of the
nationality of the owner of the factors of production. A good example here is the GDP of Zambia.
For the GDP of Zambia, you can see that it is a total sum of goods and services that are produced
from the input by both the local and foreign factors.

5.3.3 Gross National Income GNP

GNP on the other hand refers to the total output of production from only the residents of a
specified country. It also consider those assets that belong to the locals but are located overseas.
In simpler terms, we can define GNP as the total earnings from all assets that are owned by
Zambians even if some of the earnings don’t flow back into Zambia. GNP omits any earnings of
Non-Zambians living in Zambia regardless of whether they spend it within Zambia or not. Thus,
it is basically a report on how much you earn as a Zambian through your business or any other
source of income you might have and it doesn't matter where in the world you decide to spend
your earning.

5.3.4 Nominal GDP

Current market prices are used to evaluate Nominal GDP therefore, it includes all the market
price changes that have transpired over the course of the current year as a result of inflation or
deflation. Inflation in this case refers to a rise in the overall price level while deflation is a fall in
the overall price level. In order to relate to the overall price level, another measure of GDP called
real GDP is often used. When you evaluate GDP using the current market prices for a particular
base year, what you calculate is known as the Real GDP. If you take the year 2000 as your base
year, then the real GDP for 2005 can be calculated by taking the quantities of goods and services
that are purchased in 2005 and multiply them by their year 2000 prices. Nominal GDP is
commonly used to estimate the economic performance of a country and also to make comparisons
internationally among countries.
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5.3.5 Per capita Income

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This is obtained by dividing the total national income by the total population of the country. It
indicates the value of goods and services that an average man obtained during the year. Per
Capita Income simply put is the measure of the money earned by a person in a certain area and
it applies to the average income per-person in a city, region or country. Per capita income is used
to evaluate the quality of life as well as the conditions of living in different areas.

5.3.6 Economic Growth Rate

This indicates the change in the size of the national income in a given unit of time and it takes
into consideration the periodic growth in terms of percentages. Economic growth rate doesn't
adjust for inflation thus its only expressed in nominal terms. Practically speaking, it measures
the rate of change that a the GDP of a nation undergoes through from year to year. However if
the economy of a nation heavily depends on foreign earnings, the gross national product (GNP)
can also be applied.

Source: https://www.investopedia.com/terms/e/economicgrowthrate.asp#ixzz5MoupfeWn

5.3.7 Interest Rates

This refers to a return on an investment or the cost of borrowed funds for a specified period of
time. Further you can explain amount of interest due in a given time period as a proportion of
the lent amount, that is deposited or borrowed. It is basically the proportion of an amount you
are loaned which the lender charges to the borrower expressed in terms of the annual percentage

5.3.8 Exchange Rates

Exchange rates refer to the price of a particular currency in relation to another. This is the rate
at which a particular currency will be exchanged for another in the business environment. These
rates are determined in business market environment by foreign exchange and are open to a
variety of types of buyers and sellers and currency is trading continuous.

5.3.9 Unemployment

This is the number of jobless adult workers (adults) who are actively searching for a job. The
Central Statistics Office (CSO) is a custodian for this information in Zambia. Research has
revealed that officially, the unemployment statistics for developing countries tend to be highly
unreliable due to the fact that high GDP is expected to be coupled by declining unemployment
but this is not the situation in developing countries.
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5.3.10. Business Cycle and International Trade

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Business cycle refers to the pattern of regular expansion (recovery) and contraction (recession)
with respect to economic activity around the growth trend. Normally, the output fluctuates
around a trend in a cyclical manner with a cyclical peak corresponding to the highest economic
activity relative to the trend and a low point in economic activity indicated by the cyclical trough.
During expansion or in other terms recovery, the utilization of production factors increases
showing increased production.

5.4 Factor Market infrastructure

A factor market is defined as a marketplace where the services of a factor of production are found.
In this market place, factors of production such as labor, land, capital, and raw materials and
other requirements for producing a finished product can be sold or purchased. This market is
very different from the goods and services markets which trade in finished goods.

5.3.1 Explaining the Factor Market

Taking an example of the refrigeration market, the market were refrigerators and dishwashers
are sold is defined as the kitchen goods market. In the same way, a market for skilled workers in
fridges and dishwasher assembly is an example of a factor market. A market for steel and plastic
is also another example of a factor market for fridges and dishwashers because both steel and
plastics are required for the manufacture of fridges and dishwashers.

Both households and firms are prime to the economy. Households play the role of buyers while
firms act as sellers in market of goods and services. In the factor market, these two roles are
reversed. What we mean here is, you as the household owner provides labor and capital in form
of any savings you have made while firms become the buyers of your labor and capital. This
combination of factor markets with the goods and services market makes up a closed system of
flow of money. Households provide labor to firms which in turn pays wages and salaries to
households and then household use the salaries obtained to purchase goods and services from
firms. In so doing, the economy benefits from this symbiotic relationship.

The price of a factor is seen as an income to the owner. For example, considering a land owner,
we see that the income the land owner receives is in form the rent on land. Each factors price is
dependent on the supply and demand. If we are in a booming economy and in this economy the
labor market is tight, the wages of laborers will increase because the demand for these workers
will be high. In the opposite, if the economy is not booming, they will be lots of laborers without
jobs and thus wages will be low because the demand for such workers will be low.