1. Economics Environment MATHIVANAN K. MBA 2014 SOURASHTRA COLLEGE, MADURAI

2. Introduction Economic environment refers to all those economic 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. 3. Definition of Environmental Economics That part of economics which deals with inter-relationship between environment and economic development and studies the ways and means by which the former is not impaired nor is the latter impeded. 4. 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 5. 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 distribute goods and services. Types of Economic System Capitalism Socialism Mixed Economy 6. Capitalism: On the one extreme, there is a capitalist economic system or free market economy. It is characterized by free enterprise & profit motive. People have freedom of choice concerning occupation, savings, investment. Socialism: It is the socialist or communist economic system. The state owns & control all means of production. Mixed Economy: In a mixed economic like India, both public & private sectors together. Some resources are owned & controlled by the state. Other economic activities are left to the private initiative. 7. Capitalism (features) The rights to private property Freedom of Enterprise Freedom of choice for consumers Profit motives Competition Price mechanism Role of the government 8. Capitalism Merits Demerits Incentive Utilization of resources Economic growth Capital formation Flexibility & Adaptability Democratic Nature Innovation Concentration of economic power Economic instability Lack of satisfaction Social waste Rise of monopoly social discrimination (inequity) Loss of human values 9. Socialism: (features) State ownership of means of production Social welfare Central economic planning Equality of opportunity Class less social Absence of competition 10. Socialism Merits Demerits Social justice Economic stability Rational allocation of resources Higher economic growth Absence of class struggle Concentration of economic power Lack of incentive & initiative Loss of consumer Loss of occupational freedom Inefficiency & low productivity corruption 11. Mixed Economy:(features) Co-existence of public & private sectors Classification of industries Economic planning Price mechanism Profit motive & social welfare 12. Mixed Economy Merits Demerits Individual freedom Rapid economic growth Social welfare Economic instability Lack of freedom Inefficiency Lack of co-ordination 13. Economic parameters Definition of 'Gross Domestic Product GDP The monetary value of all the finished goods and Services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, Government outlays, investments and exports less imports that occur within a defined territory. 14. Definition of 'Net National Product - NNP' The monetary value of finished goods and services produced by a country's citizens, whether overseas or resident, in the time period being measured (i.e., the gross national product, or GNP) minus the amount of GNP required to purchase new goods to maintain existing stock (i.e., depreciation). 15. Per capita income Per capita income, also known as income per person, is the mean income of the people in an economic unit such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate (such as GDP or GROSS NATIONAL INCOME) and dividing it by the total population. 16. Economic Policies Monetary Policy:- The policy formulated by the central bank of a country to control the supply and the cost of money (rate of interest), in order to attain some specified objectives is known as Monetary Policy. Fiscal Policy:- It may be termed as budgetary policy. It is related with the income and expenditure of a country. Fiscal Policy works as an instrument in economic and social growth of a country. It is framed by the government of a country and it deals with taxation, government expenditure, borrowings, deficit financing and management of public debts in an economy. 17. Foreign Trade Policy:- It also affects the different business units differently. E.g. if restrictive import policy has been adopted by the government then it will prevent the domestic business units from foreign competition and if the liberal import policy has been adopted by the government then it will affect the domestic products in other way. Foreign Investment Policy:- The policy related to the investment by the foreigners in a country is known as Foreign Investment Policy. If the government has adopted liberal investment policy then it will lead to more inflow of foreign capital in the country which ultimately results in more industrialization and growth in the country. 18. Industrial Policy:- Industrial policy of a country promotes and regulates the industrialization in the country. It is framed by government. The government from time to time issues principals and guidelines under the industrial policy of the country. 19. Financial Environment It refers to the financial sector or financial system of a country . It comprises various financial institutions, instruments, policies, & service concerning in the financial sector. 20. Constituents of financial system Financial Markets Financial Institutions Financial Instruments Financial services 21. Financial Market Capital Market Primary Market Secondary Market or Stock Exchangers Money Market Organized Sector Unorganized sector Foreign Exchange Market Authorized Dealers Money Changers Foreign Banks Importers & Exporters Government securities market Treasury Bills Bonds 22. FINANCIAL INSTITUTIONAL BANKING INSTITUTIONS CENTRAL BANK(RBI) COMMERCIAL BANKS COOPERATIVES BANKS DEVELOPMENT BANKS AGRICULTURAL BANKS MERCHANT BANKS INDIGENOUS BANKS NON-BANKING INSTITUTIONAL HIRE-PURCHASE &LEASING COMPANIES INVESTMENT COMPANIES HOUSING FINANCE COMPANIES FACTORING COMPANIES VENTURE CAPITAL FUNDS MUTUAL FUNDS NON-BANKING FINANCE COMPANIES (NBFCS) 23. Functions of RBI Issue of bank notes Banker to government Bankers bank Controller of credit Custodian of foreign exchange reserves Clearing house facility Collection & publication of data 24. Credit control by RBI METHODS OF CREDIT CONTROL GENERAL OR QUANTITATIVE METHODS BANK RATE CASH RESERVE RATIO STATUTORY LIQUIDITY RATIO OPEN MARKET OPERATIONS SELECTIVE OR QUALITATIVE METHOD MARGIN CREDIT RATIONING MORAL SUASION PUBLICITY 25. Role of RBI in Economic Development Development of Banking System Development of Financial Institution Development of Backward areas Economic stability Economic Growth Proper Interest Rate structure Miscellaneous (various facilities) 26. Industrial Finance Corporation of India (IFCI) The IFCI was established on July 1, 1948 by a special act of the parliament. It was jointly owned by the government of India. IFCI has since been converted into a public limited company with effect from July 1, 1993. It was completed more than fifty years of operations. During this period, the activities of the corporation have progressively expanded both in scope & magnitude. It has emerged as a leading institution providing financial & other assistance to industry in diverse forms. 27. Unit Trust of India (UTI) UTI came into existence on February 1, 1964 under the Unit Trust of India Act, 1963. Its establishment has been a landmark in the history of investment trusts in India. It is playing an important role in mobilizing savings of the community through sale of units under the various schemes & channelizing them into corporate investments. 28. Globalization The shift towards a more integrated & interdependent world economy. It has two main components the globalization of market & globalization of productions. 29. Strategies for Globalization Exporting: This is the simplest & the traditional mode of entering a foreign market. Licensing & franchising: These are easy methods of entering foreign markets because little commitment of resources & efforts are involved. Contract manufacturing: Under this strategy, the company enters into a contract with a firm in the foreign market to manufacture or assembles the products. Management contract: A company contracts with a firm or government in a foreign country to manage the entire project or undertaking for a specified period. 30. Turnkey contract: The company contracts with a foreign firm to design & built an entire operation. Third country location: When commercial transactions between two countries are not possible due to political reasons, a company may have to enter the foreign market from a third country. Joint Venture: A company may enter a foreign market by entering into a joint venture with a foreign firm. Direct Investment: A company which means to have substantial & long-term interest in the foreign market has to establish fully owned manufacturing facilities aboard. 31. Advantage of Globalization Wider Markets Rapid Industrialization Greater Specialization Competitive gains Higher production Price stabilization Increase in employment & income Higher standards of living International economic cooperation World peace 32. Dis-Advantage of Globalization Interdependence Threat of domestic industry Unemployment Drain of basic resources Technological dependence Culture 33. Problems in Globalization High cost Poor quality Poor infrastructure Resistance of change Lack of professional management Limited R&D Trade Barriers 34. Impact of Globalization in India Trade foreign investment flows Employment Poverty & inequality 35. Foreign Direct Investment It means investment in a foreign country where the investor retains control over the investment in terms power of management & effective decision making. 36. Foreign Direct Investment by Indian Industry Reasons: A large protected domestic market A restrictive government policy Curbs on growth & financial restrictions. Indian companies are now investing in a large number of industries in both developing countries(Eg: Malaysia, Indonesia), & developed countries(Eg: Japan, UK) 37. Multinational Corporation The essential nature of the multinational enterprises lies in the fact that its managerial headquarters (called parent company) are located in one country( known as home country) while the enterprise carries out operations in a number of other countries (known as host countries) 38. Reasons for the growth of MNC Market expansion Marketing superiorities Financial superiorities Technological superiorities 39. General Agreement on Tariffs & Trades (GATT) The GATT was signed at Geneva on 30th October, 1947 by 23 nations who negotiated to prevent economics from the recession. Objectives: To raise standard of living To ensure the full employment To develop the full use of resources To expand production & international trade 40. Trade Related Intellectual Property Rights (TRIPS) Protection of patents Copyrights Design Trade marks Trade secrets It provides for graining product patents also in these areas. Protection will be available for 20 years in case of patents & 50 years in case of copyrights. Trademarks will be protected for at least seven years & semi conductor layout designs for 10 years. 41. Public Enterprises It means an enterprise which involves no private ownership, which is governed by public or social interest & where the management is responsible to the government. 42. Advantage of Public Sector Acceleration of economic growth Control on natural monopoly Socialist pattern of society Generation of economic surplus Balanced regional development Entrepreneurial development Employment generation 43. Role of public sector in Indian economy Share in national income Commanding heights of the economy Share in capital formation Employment generation Growth of industries Foreign exchange earnings Balanced regional development Resource mobilization 44. Privatization: It means reducing the involvement of the government / public sector in the economic activities of a nation. It involves the transfer of government assets or functions to the private sector. Disinvestment: It is used to refer to the process of privatization. Public offer Cross-holdings, golden share & warehousing Strategic sale Qualified institutional placement