190108 Economic Environment of Business[1]

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Economic Environment of

Business

Dr M S Mamik


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Overview

History of economic thought and eco systemsEconomics derived from greek oikos (house /settlement)+ nomos (laws or norms)

Nature of Economy

Development

Distribution of Wealth

Income and development

Structure of the Economy-

Economic Policies Economic conditions


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Amplification

History of economic thought and eco systems -Marketeconomy, Planned economy or command economy,Mixed Economy

Nature of Economy nature and size of demand, govt.policies

Development level-low Income, Middle Income, Highincome. Purchasing power parity (PPP)

Distribution of Wealth disparity

Income and development oil exporting countries


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Amplification (2)

Structure of the Economy- contribution of differentsectors primary, secondary and tertiary

Economic Policies Industrial, Trade policies, Foreignexchange policy, foreign investment and technologypolicy, fiscal policy, monetary policy

Economic conditions -cycles of boom recession orcrisis, regional factors, international factors ,size ofeconomy and export dependence, foreign exchange andbalance of payments position, exports and imports


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Macroeconomics

First, to supply a plentiful revenue or product forthe people, or, more properly, to enable them toprovide such a revenue or subsistence for

themselves and Secondly, to supply the state or commonwealth

with a revenue sufficient for the public services.It proposes to enrich both the people and thesovereign.


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Public Finance

Public finance is the field of economics thatdeals with budgeting the revenues andexpenditures of a public entity, usually

government. The subject addresses suchmatters as tax incidence (who really pays aparticular tax), cost-benefit analysis ofgovernment programs, effects on economicefficeincy and income distribution of different

kinds of spending and taxes, and fiscal politics.The latter, an aspect of public choice theory,models public-sector behavior analogously tomicroeconomics, involving interactions of self-interested voters, politicians, and bureaucrats


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Introduction

Economic Thought and Systems

Pre Modern Economic Thought

Modern market for exchange-money hasrational basis, property owned byindividuals, profit from goods and servicesusing money and labour

Market Economics


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Economic System

System in every country to facilitate the production tradeand consumption of goods and services.

A mechanism which deals with the production,distribution, and consumption of goods and services in aparticular society and comprises of people ,institutionsand relationships.

Addresses the problems like allocation or scarcity ofresources

Different economic systems adopt different ways toaddress these questions

Economic system defines the institutional frameworkregulating the business environment in a country


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Economic Systems

Different economic systems (production, distribution andconsumption ownership, organisation and consumers,institutions, relationship)

Market Economy - capitalism or economic systemsoperating in a free market (not planned or controlled bya central authority) However govt.intervention is possibleand govt. has a legitimate role in defining and enforcingthe basic rules in the market.

Mixed economy where both central planning andmarket mechanisms of production and distribution arepresent


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Economic Thought Process

1870 Alfred Marshall ( substitute forpolitical Economy)

Pre -modern Greeks ,Romans andmedieval Arabs

18th century - Adam Smith

Thought around systems that where goods

are exchanged in the market and buyersand sellers seek to maximise profits intrading


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Market Economics

Focuses on capitalist societies whereproperty is owned by individuals

Money has a rational basis Profit is derived from use of labour and

capital for the production of goods andservices for trade.

Also applied to markets where capital iscontrolled by the state or society


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Capitalism

Concept of free enterprise where govt.intervention in the economy should be restrictedand a free market based on supply and demandwill maximise consumer welfare.

Many forms US closest to definition, Japanconsensus politics, state sponsored industrialgrowth in South Korea (military dictatorship witheconomic liberalism),

Chinese socialist market economy is a newconcept


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Planned orCommand Economy

People rule both politically and economically

A totalitarian system of govt. in which a singleauthoritarian party allocates resources, controls stateownership and operation of means of production and

distribution for the pubic (type ,quantity and price ofgoods )with the professed aim of establishing a societywith equal rights

All production decisions are taken by govt.

Individual wishes are secondary Elements Cooperation, collectivisation, publicownership of property, equality of opportunity to sharethe wealth and maintain an assured minimum standardof living , central planning and peoples plan


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Mixed Economy

Equal importance is given to both publicand private sectors

Ideology supporting the interest of thegreatest number

Entail democratic control of the economybut differ on the degree of market

involvement and whether control shouldbe central or extensively disbursed.


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Policies Industrial

Defines the scope and role of differentsectors like private, public, joint,cooperative or large ,medium and smallscale or micro.

Also influence location, choice oftechnology, scale of operation, product

mix etc


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Industrial Policy

Industrial Policy Resolution 1948 Licencing and powerto take over, prices methods volume of production anddistribution with state

Industrial policy Resolution 1956 Schedules A, B, C of

Industry Socialist pattern, SSI and employment Industrial Policy Statement of 1977 DICs and SSIs

Industrial Policy of 1980 Liberalisation, better PSUmanagement, integrateding private sector, reg. excess

capacity, merge sick units Industrial Policy of 1991 abolished licence except 18industries, expansion allowed, Schedule A industries cutdown to 8, Schedule B abolished, large could buy upto24% in small scale industries


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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 inquality ,cost, marketing and after sales service may not

be able to survive Those who can survive in domestic market can also

compete internationally


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Industrial Licensing

Industries Development and RegulationAct 1951 to implement Industrial Policy of1948

New Licensing Policy of 1970


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Foreign Exchange/Technology

Policy Exchange rate policy along with Policy forCross border movement of capital crucial for

business

Liberalisation of exchange controls all over the globeand especially in India wil help in cross border trade andmovement of capital and investment

Liberalisation of technological flows helps in import ofcapital goods and long term competitiveness of Indian

products and establishing of joint ventures andacquisitions


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Factors

Basic Information land, population, growth(GDP and people), prodction total and percapita, HDI, Life Expectancy)

Natural resources Labour Organisation of Resources Features of the Economy Govt, ,Enterprise and People role clarity Govt. Role -producer and user ,stabilisation and

growth, -provision of public goods Directservices, direct assistance


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National Income Accounting

Structure of the economy is given by the circularflow of income and output.

National income accounting has its foundation in

the circular flow model

Circular flow model can be depicted in twosector , three sector and four sector models

National income accounting provides thestandards by which the economic activity can beassessed


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Sectors

Household

Government

Firms External sector


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National Income

National Output National Expenditure

BASIC FLOWS


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Basic Flows

Expenditure induces the flow of output

Money value of that output generates the

flow of income Income finances the flow of expenditure


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FIRMS Households

Factor Services: Land,Labour, Capital , EnterpriseTotal Income = Rent +wages+ Interest + Profits

Money Value ofOutput = Expenditure on Final goods/Services

Final Goods and services

Value of Total Output flow is equal to the value of thefactor incomes and the value of personal consumption flow


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FIRMS Households

Factor Services: Land, Labour, Capital , EnterpriseTotal Income = Rent +wages+ Interest + Profits

Money Value ofOutput = Expenditure on Final goods/Services

Final consumer Goods and services

Value of Total Output flow is equal to the value of thefactor incomes and the value of personal consumption flow

FinancialSystem

Borrowings

Savings Savings

Borrowings

Factor Payments =

PRODUCT MARKET

FACTOR MARKET


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FIRMS HouseholdsFinancialSystem

Borrowings

SavingsSavings

Borrowings

GOVERNMENTSECTORGOVT.PURCHASES

SubsidiesTaxes

Savings Borrowings

Paymentfor Services

TaxesTransfer Payments

Consumption Expenditure

CIRCULAR FLOW OF INCOME IN A THREE SECTOR ECONOMY


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FIRMS HouseholdsFinancialSystem

Borrowings

SavingsSavings

Borrowings

GO

VERNMENTSECTORGOVT.PURCHASES

SubsidiesTaxes

SavingsBorrowings

Paymentfor Services

TaxesTransfer Payments

Consumption Expenditure

CIRCULAR FLOW OF INCOME IN A FOUR SECTOR ECONOMY

EXTERNALSECTOR

Payment

For

Imports Receipts for Exports InternationalFactor Income

International Transfer Income (Net)

Factor Payments


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National Income

Y= C + I + G + (X-M)

Where Y = National Income orOutput

C= Private consumption expenditure onConsumer goods

I = Investment expenditure by producingsectors

G= Govt. purchases

X-M = Net Exports where X = Exportsand M =Imports)


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Income

Employee Compensation

Profits

Rent

Interest Mixed Income (of the self employed) income of

own account workers and profits of dividends ofunincorporated enterprises

GDP as measured by aggregation of factorincomes is also called as Gross DomesticIncome


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GNP

GDP with addition of Net Factor Income fromAbroad will compute the value of GNP

Net Factor Income form abroad is the differencebetween the factor income received from therest of the world i.e abroad for renderingservices abroad and the income paid for factorservices rendered by non residents inside thedomestic territory of the country.

GNP= GDP + Net Factor Income fromA

broad


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GDP

Is the market value of all final goods andservices produced by the factors of productionlocated in the country during a period of one

year. Final goods are those goods that are meant forthe consumer or firms. These goods are notrequired to enter into further stages ofproduction or resale to change their form orcontent. They are finished goods meant only forfinal consumption and investment.


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GDP(MP)

GDP(MP) = GNP(MP) Net FactorIncome from Abroad)

Net Domestic Product = GDP(MP)-Depreciation


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GNP(FC)

GNP (FC) = GDP(MP) + Net FactorIncome from Abroad- Net Indirect Taxes


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NDP(FC)

NDP at FactorCost NDP(FC) = GDP(FC)- Depreciation


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GNP(MP)

Value of all final goods and servicesproduced in the economy + Net FactorIncome from Abroad.


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NNP(MP)

Net National Product (at Market Prices) =GNP(MP) Depreciation


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Summary

Gross -Depreciation = Net

National -net income from abraod=

Domestic Market Prices Net indirect taxes = FactorCost

Net Indirect taxes =Indirect taxes subsidies.


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GNP

NNPMP

(MP)

GNP(FC)

GDP(MP)

NDP

(MP)

NNP

(FC)

GDP

(FC)

NDP

(FC)

(- Net indirect taxes)


(- Net indirect taxes)(- Net Income fromabroad)


(- Net Income fromabroad)



(-Depreciation)

(-Depreciation)(-Depreciation)

(-Depreciation)


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Constant Prices

Measure of output that changes only when thequantity of goods produced changes. Such ameasure changes only when quantity changes,not prices

GNP is computed at constant prices is calledReal GNP which measures the real developmentand changes in the economy and enables a yearto year comparison by eliminating the effect ofprice changes.

GNP Deflator = Nominal GNP/Real GNP x 100


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FactorCost

Value arrived at by adding the paymentsmade to factors ( land labour, capital andentrepreneurship ) such as rent ,wages,interest and profit, then it is value added atfactor cost


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National Income

Net national Product at factor cost(through expenditure method) is calledNational Income

National income adjusted for populationand constant prices is referred as Real PerCapita Income


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Methods of Measuring National

Product Expenditure Method Income Method

Value Added Method


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Expenditure Method

GNP(MP) = Personal Consumptionexpenditure + Gross Investment {grossbusiness fixed investment+ inventory

investment + Gross residentialconstruction investment + Gross publicinvestment }+ Govt. purchases of goodsand services + Net exports (Exports

imports) + Net factor income from abroad


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Value Added Method

GNP(MP)= (Value of output in primarysector - intermediate consumption ofprimary sector) + (value of output n

secondary sector intermediateconsumption of secondary sector)

+ (value of output in tertiary sector intermediate consumption of tertiarysector) + Net factor income from abroad.


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Solution

GNP (MP) = Value of all goods and servicesproduced in the economy + Net factor incomefrom abroad

NNP (MP) = GNP(MP) Depreciation GDP (MP) = GNP (MP) Net Factor Income fromAbroad

NDP (MP) = GDP(MP) Depreciation

GNP (FC) = GNP (MP) Net Indirect Taxes)

NNP (FC) = GNP(FC) Depreciation

GDP (FC) = GDP(MP) Net Indirect taxes

NDP(FC) = GDP(FC) -Depreciation


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Fiscal Deficit

Is defined as excess of total (govt.)expenditure over revenue receipts, grantsand non debt capital receipts

This deficit is met by loans of all kinds andfrom all sources domestic and foreign(and is inclusive of the lending by the

centre to the states and others)


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Heads Ninth Plan Tenth Plan

Revenue

Reciepts

9.1 10.2

Rev. Exp. 12.5 10.7

Revenue Deficit 3.4 0.5

Total Exp 15.4 14.0

Plan Exp. 3.9 4.5

Non Plan Exp 11.5 9.5

Non Debt Cap

Rx

0.8 1.2

FISCAL DEFICIT (% of GDP)


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Objectives of Monetary Policy

To provide necessary finance to variousinvestors through commercial banks andcooperative banks for economic

development.

To control the inflationary pressuresgenerated in the economy

To maintain full or near full employment


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Functions of Money

Money as unit of value

Money as medium for exchange

Money as a standard for deferredpayments

Money as a store for value


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Classification of Money

Full Bodied Money value as great as acommodity for non monetary purposes goldsilver etc

Representative Full Bodied Money- Paper

Money which has representative value Credit Money- money whose value is greater

than the commodity value of the material fromwhich it is made- token coins, circulatingpromissory notes issued by central banks,deposits with banks which can be transferred bycheque


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Measurement of Money Supply

Total stock of money in circulation at agiven point of time

Supply of money is a stock variable

This stock of money should be held withthe public( household, firms etc)

f


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Alternate measures of MoneySupply

M1 = C + DD + OD

where C = Currency held by the Public

DD= Demand Deposit in banks(less inter bank deposits)

OD= Other deposits with RBI (alldeposits of public fin. institutions exceptgovt. and banks


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Indian Economy

Overview

Economic Reforms in India

Analysis of Sectors Analysis of Indian Economy

E i G th d


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Economic Growth anddevelopment

Economic growth and National Income

Measuring development

Measuring Poverty Country Analysis using HDI


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Indian Economy

Other sectors like manufacturing, pharmaceuticals,biotechnology, nanotechnology, telecommunication,shipbuilding, aviation and tourism are showing strongpotentials with higher growth rates.

India followed a socialist-inspired approach for most ofits independent history, with strict government controloverprivate sectorparticipation, foreign trade, andforeign direct investment. However, since the early1990s, India has gradually opened up its markets

through economic reforms by reducing governmentcontrols on foreign trade and investment.


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Indian Economy

Populationbelow poverty line 25% (2002 est.)

Labour force 509.3 million (2006 est.)Labour force

by occupation Agriculture: 60%,industry: 12%, services: 28% (2003)

Unemployment 7.8% (2006 est.)Main industries textiles, chemicals, food

processing, steel, transportation equipment,cement, mining, petroleum, machinery,software


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Public finances

Publicdebt $132.1 billion (2006 est.)

Revenues $109.4 billion (2006 est.)

Expenses $143.8 billion; including capital expenditures of

$15 billion (2006 est.)Economic

aid

recipient: $2.9 billion (FY98/99


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Strengths

The World Bank classifies India as a low-income economy. India's economy is diverse, encompassing agriculture, handicrafts,

textile, manufacturing, and a multitude of services. Although two-thirds of the Indian workforce still earn their livelihood

directly or indirectly through agriculture, services are a growingsector and play an increasingly important role of India's economy.

The advent of the digital age, and the large number of young andeducated populace fluent in English, is gradually transforming Indiaas an important 'back office' destination for global outsourcing ofcustomer services and technical support.

India is a major exporter of highly-skilled workers in software andfinancial services, and software engineering


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Changes in Policy

The privatisation of publicly owned industriesand the opening up of certain sectors to privateand foreign interests has proceeded slowly amidpolitical debate.

India faces a fast growing population and thechallenge of reducing economic and socialinequality. Poverty remains a serious problem,although it has declined significantly since

independence. Official surveys estimated that inthe year 2004-2005, 27% of Indians were poor.


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Foreign Trade

Exports $125 billion (Financial Year 2006-2007)

Export goods textile goods, gems and jewelry,engineering goods, chemicals, leather

manufacturesMain export partners US 18%, the People's

Republic ofChina 8.9%, UAE 8.4%, UK 4.7%,Hong Kong 4.2% (2005)

Imports $187.9 billion f.o.b. (2006 est.)Import goods crude oil, machinery, gems,

fertilizer, chemicalsMain import partners the People's Republic ofC

hina 7.2%, US 6.4%, Belgium 5.1%, Singapore


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DEPARTMENTOF COMMERCEECONOMIC DIVISION

EXPO

RTS & IMPO

RTS : (PRO

VISIO

NA

L)NOVEMBER APRIL-NOVEMBER

EXPORTS (including re-exports)

2006-2007 43943.22 368807.15

2007-2008 49000.16 398385.78

%Growth 2007-2008/ 2006-2007 11.51 8.02

IMPORTS

2006-2007 68811.54 544674.11

2007-2008 78209.43 612356.61

%Growth 2007-2008/ 2006-2007 13.66 12.43

TRADE BALANCE

2006-2007 -24868.32 -175866.96

2007-2008 -29209.27 -213970.83

*Figures for 2006-07 are the latest revised whereas figures for 2007-08are provisional.


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EXPORTS (Including Re-exports) Exports during November, 2007 were valued at US $

12425.11 million which was 26.82% higher than the levelof US $ 9797.67 million during November, 2006.

In rupee terms, exports touched Rs. 49000.16 crore,

which was 11.51 % higher than the value of exportsduring November, 2006.

Cumulative value of exports for the period April-November, 2007 was US$ 98386.06 million (Rs.398385.78 Crore) as against US$ 80590.19 million (Rs.

368807.15 Crore) registering a growth of 22.08% inDollar terms and 8.02% in Rupee terms during the sameperiod last year.


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Trade Balance

The trade deficit forApril-November, 2007was estimated at US $ 52804.31 millionwhich was higher than the deficit at US $38488.04 million during April-November,2006.

IMPORTANT FACTORS OF ECONOMIC ENVIRONMENT


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Structureand NatureofEconomy

EconomicLevels

EconomicPolicies

Globallinkages

Level ofdevelopment of theEconomy

SectoralComposition of theEconomy

Inter-sectoralLinkages

Income Levels

Distribution of

IncomeGDP Trends

Sectoral growthDemands

Demand andSupply trends

Price TrendsTrade and BOPTrends

Foreign ExchangeReserves Position

Global EconomicTrend

Industrial Policy

Trade Policy

Monetary PolicyFiscal policy

Foreign Exchangepolicy

Foreign Investmentand Technology

Policy

Magnitude andnature ofCrossborder flows

Trade Flows

Financial Flows

Membership ofWTO,IMF,WorldBank, Trade Blocks


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Documents

190108 Economic Environment of Business[1]