Economic Environment[1]Ppt

8/8/2019 Economic Environment[1]Ppt

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Economic Environment

Submitted By,

Himangi

Saraswati Shalini

Bhavna

Submitted To,

Mr. Vijay Rajput


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Introduction

Economic environment refers to all those econ-omic factor

which have a bearing functioning of the business unit.

Business depends on the economic environment for all the

needed inputs. It also depends on the economic environment

to sell the finished goods.


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Factors of Economic Environment

Growth strategy

Economic system

Economic planning

Industry Agriculture

Infrastructure

Financial and fiscal factor

Removal of regional imbalance

Price and distribution control

Economic reforms

Per capita and national income


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Economic System

An economic environment system refers to the organization

arrangements and process through which a society makes its

production and consumption decision.

It is the method used by society to produce and distributegoods and services.

Types of Economic System

Capitalism

Socialism

Mixed Economy


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Capitalism

Capitalism is a social system based on the principle of

individual rights. It is an economic system based on the

private ownership of the means of production, distribution

and exchange, characterized by the freedom of capitalist tooperate or manage their property for profit in competitive

condition.

In capitalist economy the govt. plays a minor role

Enterprise can produced almost everything and has freedom

to produce and distribute goods and services according to

public demand.


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Features ofCapitalism

Private ownership

Free enterprise

Consumer liberty

Freedom to choose of occupation

Freedom to save and invest

The market system

Competition

Absence of central plan

Limited role of government


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Advantages

Provides optimum allocation of resources, development of

enterprise, invention and use of new technology etc. due to

individual freedom

Provides freedom to save and invest, result in higher growth rate

because saving made by sacrificing the consumption are invested

for growth.

In capitalism consumers liberty to buy or not to buy goods and

freedom of enterprise leads to competition. Therefore, price and

other factors are set to equilibrium by market forces, i.e., demandand supply, etc

Rational talents are better utilizing due to individual freedom and

therefore productivity Increases.


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Limitations

Right to property and freedom of enterprise will lead to

accumulation of wealth and income disparities

Theoretically, expressed that there will be free competition

but generally larger firms will take advantage, which will leadto monopoly

Absence of central planning results in no definite guidelines

for national development.

Cut-throat competition among individual may result inimperfection in market & adoption of unfair practices

Once the upward and downward cycle starts there is no

situation to normality. This results in price hike, inflation,

deflation, unemployment etc.


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Socialism

Socialism means an economic system in which the

means of production are owned by the state.

In most important aspect of this type of economy is

that all major decision related to the production,

distribution, commodity and service prices are all

made by the govt.

Govt. is the final authority to take decision regarding

production, utilization of the finished industrial

products and the allocation of the revenues earned

from their distribution


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Features of Socialism

Abolition of private property

Collective ownership of means of production

Central planning

Elimination of unfair gaps in income

Provision of necessaries of life


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Advantages

Elimination of wastage of resources

Elimination of concentrate of wealth

Elimination of unequal distribution of wealth

Provision of necessaries of life

Immunity from Economic crisis

Elimination of unemployment


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Disadvantages

End of liberty

Weakening of the will to work

Error in planning

Failure in practice


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Mixed Economy

Mixed economy is a mix between socialism and capitalism. It

is an economic system where some important production is

undertaken by the state, directly or through nationalizedindustry, & some is left for private enterprise.

In this type of economy both the private ownership as well

government takes part in the process of production,

distribution and other economic activities.


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Features

Right to private ownership

Free enterprise

Consumer liberty

Freedom of choice of occupation

Central planning

Significant role of government


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Privatization

Privatization means transfer of ownership of an enterprise

from the public sector to the private sector.

It also connotes the withdrawal of the state from an industryor sector, partially or fully.

Highlighting a further facet, it provides entry of private sector

into those fields which were exclusively for the public sector.


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Objectives of Privatization

Improve the performance of PSUs

Reduce govt. interference in the economy

Encourage & facilitate private sector investments fromdomestic & foreign sources

Increase size & participation of private sector

Reduce threat of losses


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Ways/Routes of Privatization

Sale to Outsiders

Management Employee Buyout

Equal Access Voucher Privatization

Spontaneous Privatization


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Advantages of Privatization

Improved Efficiency

Lack of Political Interference

Long-term View

Better Management of the Enterprise

Increased Fair Competition

Reduced Fiscal Burden

Encourage Entrepreneurship

Accelerate Growth of Economic Development


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Limitations of Privatization

Lack of proper norms

Ambiguity of objectives

Wrong timing

Monopoly eliminated Problem of cultural changes

Poor financial strategies

Wrong labor strategies


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Conditions for Success of Privatization

Committed by political leader to affect such changes

Multiplicity of suppliers

Freedom of entry to private sector firms Public services provided by private firms must be specific &

measurable

Consumer education & awareness about benefits

Private services should be less susceptible to fraud than govt.services

Benefits of privatization must be passed on to stakeholders


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Monetary Policy

Monetary policy refers to the process by which the central

bank or monetary authority of a country controls the supply

of money, often target Government appointed central bank,RBI in India, usually administers monetary policy.

It is the process by which central bank of a country controls

Supply of money

Availability of money Cost of money/rate of interest


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Objectives

To achieve price stability by controlling inflation and

deflation.

To promote and encourage economic growth in the economy.

To ensure the economic stability at full employment or

potential level of output.


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Instruments of Monetary Policy

The instruments of monetary policy (method of credit control)

maybe broadly divided into-

General credit control or quantitative methods

Selective credit control or qualitative methods


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General Credit Control

Its main instruments are:

Bank rate

Open market operations

Reserve requirements


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Bank Rate Policy

Discount rate or bank rate is the rate at which central bank

rediscounts the bills of exchange presented by the

commercial bank.

The central bank can change this rate increase or decrease

depending on whether it wants to expand or reduce the flow

of credit from the commercial bank.


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Open Market Operations

The open market operations is sale and purchase of

government securities and Treasury Bills by the central bank

of the country. When the central bank decides to pump money into

circulation, it buys back the government securities, bills and

bonds.

When it decides to reduce money in circulation it sells the

government bonds and securities.

The central bank carries out its open market operations

through the commercial banks.


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Cash Reserve Ratio(5.25%)

The cash reserve ratio is the percentage of total deposits

which commercial banks are required to maintain in the form

of cash reserve with the central bank.

The objective of cash reserve is to prevent shortage of cash

for meeting the cash demand by the depositors.

Statutory Liquidity Ratio(25%)

In India ,the RBI has imposed another reserve requirement inaddition to CRR. It is called statutory liquidity requirement.

The SLR is the proportion of the total deposits which

commercial banks are statutorily required to maintain in the

form of liquid assets in addition to cash reserve ratio.


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Selective Credit Control

Minimum margin of lending against specific securities

Fixing a ceiling on the amounts of credit for certain purposes

Discriminatory rates of interest charged on certain types of

advances Direct action against commercial banks that violate the rules

& regulations

Moral persuasion may restrict commercial banks to deal in

speculative business or from liberal lending Legislation adopted for expanding or contracting credit money

in the market

Publicity may be resorted, suggesting commercial banks to

control credit by either expansion or contraction


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Increase OR Decrease the lending

Rates

The RBI makes an adjustment in its lending rate in order to

influence the cost of credit.


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The Central Bank does this by issuing fresh bonds and

treasury bills in open market.


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CRRCRR

ByBy increasingincreasing thetheC

RR,C

RR, thethe RBI

RBI

decreasesdecreases thethe lendinglending capacitycapacityofof thethe bankbank toto thethe extentextent ofof thethe increaseincrease inin thethe ratioratio.


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Fiscal Policy

The term fiscal policy refers to the expenditure a government

undertakes to provide goods and services and to the way in

which the government finances these expenditures. Government spending policies that influence macroeconomic

conditions are known as fiscal policies.


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Objectives ofFiscal Policy

Economic Growth

Equitable Distribution of Wealth

Full Employment

Exchange Stability

Balanced Regional Development


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Instruments ofFiscal Policy

Budget- Keeping budget in balance, surplus or deficit is in itself a fiscalinstrument. When the govt. keeps its total expenditure equal to itsrevenue as a matter of policy it means it has adopted a balanced budgetpolicy.

Taxation- Tax is an important source of raising revenue, taxes maybedirect or indirect.

Public Expenditure-Public expenditure results in overall rise in theeconomic activity. Therefore, govt.s tax revenue will also increase.H

ence, there is no increase in the fiscal deficit in such cases.

Government Borrowings- In developing economies, the govt. resorts toborrowing in order to finance schemes of economic development. Publicborrowing becomes necessary because taxation alone cannot providesufficient funds for economic development.


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Regulatory Role

By regarding the countries, persons or business firm through the

several policies and act.

E.g. Industrial licensing policy, MRTP (Monopoly Restricted Trade

Practices)

By regulating the conduct of business firm through laying down

general standard

E.g. 8 hours of week, prohibition, of child labor etc.

Regulating and result of business that is profit and dividend through

limiting the profit utility, ceiling of dividend, high tax imposition onexcess profit, etc.

By regulating the relationship between various part of business.

Government regulation of the economy broadly divided into direct

control and indirect control


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Promotional Role

The promotional role played by the government is very

important in developed countries as well as developing

countries. Following are the main objectives behind the

promotional role of the government. To assist and develop industrial, agricultural labor and consumer

interest.

By providing various fiscal monetary and other incentive

government can promote overall economic development.

E.g.. Tax holiday for 5 years, tax free dividend etc.

By establishing financial institution such as IFC,ICICI,IDBI, SFC, etc.


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Entrepreneurial Role

In many countries, states also play the role of an entrepreneur

where state establish the business and bear the risk. The

government act as on entrepreneur because of the following

reason:-

To balance economic ups and down such as inflation and

deflation.

To take over on profitable business to services are required

to general public.

To prevent the wastage of natural resources such as coalfuel petroleum products steel etc.

To prevent monopoly or oligopoly.


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Economic Environment[1]Ppt