Economic Environment

Dr M S Mamik
 Economic Thought Process
• 1870 –Alfred Marshall ( substitute for
political Economy)
• Pre -modern –Greeks ,Romans and
medival Arabs
• 18th century - Adam Smith
• Thought around systems that where goods
are exchanged in the market and buyers
and sellers seek to maximise profits in
trading
 Market Economics
• Focuses on capitalist societies where
property is owned by individuals
• Money has a rational basis
• Profit is derived from use of labour and
capital for the production of goods and
services for trade.
• Also applied to markets where capital is
controlled by the state or society
 Capitalism
• Concept of free enterprise where govt.
intervention in the economy should be restricted
and a free market based on supply and demand
will maximise consumer welfare.
• Many forms – US closest to definition, Japan
consensus politics, state sponsored industrial
growth in South Korea (military dictatorship with
economic liberalism),
• Chinese socialist market economy is a new
concept
Planned or Command Economy
• People rule both politically and economically
• A totalitarian system of govt. in which a single authoritarian
party allocates resources, controls state ownership and
operation of means of production and distribution for the
pubic (type ,quantity and price of goods )with the
professed aim of establishing a society with equal rights
• All production decisions are taken by govt.
• Individual wishes are secondary
• Elements – Cooperation, collectivisation, public ownership
of property, equality of opportunity to share the wealth
and maintain an assured minimum standard of living ,
central planning and people’s plan
 Mixed Economy
• Equal importance is given to both public
and private sectors
• Ideology supporting the interest of the
greatest number
• Entail democratic control of the economy
but differ on the degree of market
involvement and whether control should
be central or extensively disbursed.
 Policies –Industrial
• Defines the scope and role of different
sectors like private, public, joint,
cooperative or large ,medium and small
scale or micro.
• Also influence location, choice of
technology, scale of operation, product
mix etc
 Trade policies
• Effects fortunes of business
• Restrictive import policy can help domestic industry
• Liberalisation will open local industries to competition
• Trade policy is normally integrated with industrial policy
• With WTO compliance, India has to open up areas
hitherto protected
• Firms which do not come up to international standards in
quality ,cost, marketing and after sales service may not
be able to survive
• Those who can survive in domestic market can also
compete internationally
 Foreign Exchange/Technology
Policy
• Exchange rate policy along with
• Policy for Cross border movement of capital crucial for
business
• Liberalisation of exchange controls all over the globe
and especially in India wil help in cross border trade and
movement of capital and investment
• Liberalisation of technological flows helps in import of
capital goods and long term competitiveness of Indian
products and establishing of joint ventures and
acquisitions
 Fiscal Policy
• Government strategy concerned with the determination of state
income and expenditure so as to enable rapid economic growth.
• Includes public borrowing and deficit financing
• An effective fiscal policy consists of policy decisions relating to the
entire financial structures of the government including tax revenue,
public expenditures, loans , transfers, debt management, budget
deficit and so on
• Changes in government expenditure and taxation designed to
influence the pattern and level of activity
• Any design to change the price level, composition or timing of
government expenditure or to vary the burden, structure of
frequency of tax payment, employment and stability
 Fiscal Policy Aspects
• Taxation policy
• Public Expenditure policy
• Public Debt policy
• Deficit Financing policy
 Fiscal Deficit
• Is defined as excess of total (govt.) expenditure over revenue receipts,
grants and non debt capital receipts
• This deficit is met by loans of all kinds and from all sources –domestic and
foreign (and is inclusive of the lending by the centre to the states and
others)
• These loan funds are raised from:-

1 Open market loans,

2 Subscribed by banks and other FIs under statutory requirements like SLR
for banks,
3. Small savings
4. Net RBI credit to Govt. (through monetisation of the government debt and
thereby increase in money supply and in prices)
5. Govt. debt was also raised at a lower rate causing a high rate to be passed
to the economy due to starving of bank credit to commercial sector
 Monetary Policy
• Primarily concerned with the management of the supply
of money in a growing economy and managing the rate
of growth of money supply per period
• Annual rate of growth of money supply should optimally
be consistent and with the attainment of desired social
goals i.e. stability (price) with equity (distribution and
employment with maximum output)
• All actions of the government or the central government
of a country which affect ,directly or indirectly the supply
of money , credit, rate of interest and banking system.
• Affects the cost and availability of credit in the economy
 IMPORTANT FACTORS OF ECONOMIC ENVIRONMENT

Structure Economic Economic Global

and Nature Levels Policies linkages
of
Economy
Level of Income Levels Industrial Policy Magnitude and
development of the Distribution of Trade Policy nature of Cross
Economy Income border flows
Monetary Policy
Sectoral GDP Trends Trade Flows
Fiscal policy
Composition of the Financial Flows
Sectoral growth Foreign Exchange
Economy Demands Membership of
policy
Demand and WTO,IMF,World
Foreign Investment
Inter-sectoral Supply trends Bank, Trade Blocks
and Technology
Linkages
Price Trends Policy
Trade and BOP
Trends
Foreign Exchange
Reserves Position
Global Economic
Trend
 Factors affecting Exports
and Imports
• External Factors
1. Rate of growth of the economies of importing
countries
2. Rate of growth of world trade
3. Rate of change in the price level of the
importing country
• Internal Factors
1. Rate of growth of the Indian economy
2. Rate of change of domestic price level
 Economic Growth and
development
• Economic growth and National Income
• Measuring development
• Measuring Poverty
• Country Analysis using HDI
 Economic Growth and National
Income
• GDP
• GNP
• NDP
• NNP
 NATIONAL INCOME
FC- Factor Cost, MP –Market Prices
GNP
(MP) (- Net indirect taxes)
(-Depreciation)
(- Net Income from
abroad)
NNP GDP GNP
MP(- Net indirect taxes) (MP) (FC)
(- Net Income from (- Net indirect taxes)
abroad) (- Net Income from
abroad)
(-Depreciation) (-Depreciation)
NDP NNP GDP
(MP) (FC) (FC)
(- Net Income from
(- Net indirect taxes) abroad)
(-Depreciation)

NDP
(FC)