Critical Elements of The Economic Environment of Business

From the standpoint of both the corporate business management and national economic management in India, the following may be highlighted as the critical elements of the economic environment of business:

The institutional framework of the environment:

The philosophy and practice of an economic system will, to a large extent, determine the relative roles and responsibilities of the private sector, the public sector, the joint sector etc.

The physical framework of the environment:

The level of the economic development and the structure of the economy define the physical framework of the environment. The level and composition of per capita income indicate the level of growth and development. Available nature resources, human resources, and material resources of a country set limit to its factor endowment which determines its production. The occupational distribution of the labour force, the structure of savings, investment and capital formation, the pattern of income distribution, the degree of urbanization etc. bring out the significance of agriculture, industry, and the service sector in the national economy.

Physical anatomy of national economy:

The national economy is a combination of the household sector, the corporate business sector, the government administration, the capital markets, and the foreign sector. The order and strength of each of these sectors throw light on our understanding of the economic environment.

Functioning of the economy:

Money is a blood life of business activity and the economic system. The flows of consumption, investments, savings, income, employment, and output are all affected by it. The nature of monetary transactions affects the price level, thereby influencing the real value of all economic variables. It also provides further insights into the role of centralized planning, administered price system as well as free market pricing, and central banking.

Economics planning and programmes:

Economics planning gives a direction to the changes in the economic environment. Most economics today function through one king of planning or the other to overcome their environmental constraints, and optimize their achievements over a period of time.

Economic policy statements and legislation:

Planning is a programme for action, not an end in itself. It must, therefore, be followed by proper implementations. This calls for economic policy statements affecting both industry and agriculture. RBI works through the instrument of money and credit policies, while the government exercises its control through fiscal-cum-budgetary policies.

Fluctuations and trends in macro-economic variables:

The functioning of an economy is reflected in short-term fluctuations, and long-term trends, in macro-economics variables like income, money supply, price, production, employment, the balance of trade payment, foreign exchange earning etc. These trends decide the course of the prevailing economic activity.

Economic problems and prospects:

Some of the economic trends as mentioned above may define the nature and dimensions of various macro-economic problems like inflation, unemployment, recession etc. Economic problems and prospects in the environment throw challenges to corporate as well as national economic management.