The economic environment for business

Topics: Economics, Macroeconomics, Microeconomics, Structure of economics, Economic Environment Components, Economic policies.

1. ©KPG The Economic Environment for Business

2. ©KPG “Man is a social animal” – Aristotle Born, brought up and live until death in society Performs economic activities to satisfy his unlimited needs with limited resources which have alternative uses

3. ©KPG Human life is influenced by various environmental factors – economic, social, political, cultural, religious & natural

4. ©KPG Economic means "pertaining to the production and use of income.” Economic Activities - Money earning & Spending Circumstances , influences, stresses, and competitive, cultural, demographic, economic, natural, political, regulatory, and technological factors (called environmental factors) that effect the survival, operations, and growth of an organization. What is economic..??

5. ©KPG STRUCTURE OF ECONOMY

6. ©KPG Economic Environment consists of external factors in a business' market and the broader economy that can influence a business . Can be divided into: Microeconomic environment M acroeconomic environment Affects business decision making such as individual actions of firms & consumers. Affects an entire economy & all its participants

7. ©KPG Components

8. ©KPG Components of the Economic Environment Income and wealth: Income in an economy is measured by GDP, GNP and per capita income. High values of these factors show a progressive economic environment. Employment levels: High employment represents a positive picture of the economy. However, there are many forms of unemployment, including partial employment and disguised unemployment.   Productivity: This is the output generated from a given amount of inputs. High levels of productivity support the economic environment.

9. ©KPG Consumer discretionary income Currency exchange rates Consumer confidence levels Unemploy-ment rate Recession Depression Interest rates Macroeconomic Factors

10. ©KPG Macroeconomic Policies The set of government rules and regulations to control or stimulate the aggregate indicators of an economy frames the macroeconomic policy. Aggregate indicators involve national income, money supply, inflation, unemployment rate, growth rate, interest rate and many more. In short, policies framed to meet the macro goals. R egulatory macroeconomic policies are : Fiscal policy is the macroeconomic policy where the government makes changes in government spending or tax to stimulate growth. Monetary policy deals with changes in money supply or changes with the parameters that affects the supply of money in the economy. Contract laws, debt management policy , income policy are some of the other macroeconomic policies designed to modify macroeconomic indicators of the economy.

11. ©KPG 3. 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. 4. 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. 5. 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.

12. ©KPG ©KPG Fiscal Policy Refers to the government actions that affect total government spending activities, tax rates or tax revenues, or the government budget deficit. An instrument which can push the economy towards equilibrium, when there are destabilizing elements operating in the economy. It is also concerned with the manipulation of inflows (government spending) and outflows (taxes) of the government sector. Its actions are oriented towards stability in the economy and promoting economic growth. Is the deliberate control of government spending and tax policy for the purpose of affecting output, employment, or inflation.

13. ©KPG Types of Fiscal Policy Automatic Stabilizers - are government spending or taxation actions that takes place without any deliberate government control and that tend to automatically dampen the business cycle. Example : Personal income tax collections fall during recessions as wages drop and people lose their jobs. Thus, during recessions, government spending automatically rises and tax collection fall. While if the economy is in full or near full employment, government spending falls and tax collections rise to avoid inflations. Discretionary Fiscal Policies - are government spending and taxation actions that have been deliberately taken to achieve specified macroeconomic goals. Example: If the economy is headed to a recession, the government can make a decision to cut taxes to maintain purchasing power.

14. ©KPG Three Components of Fiscal Policy Taxation – the most important generating measure of the government. One of the three fundamental powers of the state, the other two are police power and eminent domain. The state needs taxation to defray its expenses and to promote equitable distribution of wealth. Government borrowings – come from international sources such as local, commercial banks, and the public through bond offering. External sources are bilateral and multilateral agreements such as the World Bank, International Monetary Fund, and Asian Development Bank. Government Spending – is the government fiscal arm producing, allocating, and distributing social goods and services.

15. ©KPG The Major Functions of Fiscal Policy Allocational Function – process by which total resources are divided between private and social goods and by which the mix of social goods is chosen. Distribution Function – adjustment of income and wealth to assure conformance with what society considers as “fair” and “just” state of distribution. Stabilization Function – the use of budget policy to maintain high employment, price level stability, and economic growth.

16. ©KPG Monetary Policy Is the deliberate control of the money supply, and in some cases, credit conditions for the purpose of achieving macroeconomic goals. The control of money supply is normally vested in the monetary authority known as the Central Bank. The Central Bank tries to influence the economy by operating on such monetary variables as the quantity of money and the rate of interest.

17. ©KPG Central Bank Is the central monetary authority which provides policy direction in the areas of money, credit, and banking. It also supervises the operations of banks and regulates the activities of non-bank financial institutions or intermediaries. Central Bank was created through Republic Act No. 265, otherwise known as the “Central Bank Act” and took effect on June 15, 1948. Opened for business in 1949 wherein Miguel Cuaderno was the first governor. During the time of President Ramos, he signed Republic Act No. 7653 into law on June 10, 1993, otherwise known as the “New Central Act” which established and organized the “ Bangko Sentral ng Pilipinas ” or “BSP”.

18. ©KPG Objectives of the Bangko sentral ng Pilipinas (BSP) or Central Bank 1. To maintain monetary stability in the Philippines. 2. To preserve the international value of the peso and the convertibility of the peso into other freely convertible currencies. 3. To promote a rising level of production, employment and real income in the Philippines. The BSP has a mandate “to maintain price stability conducive to a balanced sustainable growth of the economy. It shall also promote and maintain monetary stability and convertibility of the peso”.

19. ©KPG Targets of Monetary Policy Monetary policy has three targets to achieve the inflation rate or GNP growth. 1. Monetary Aggregates – refer to the different measures of money. These are deemed directly related to the inflation rate. 2. Interest Rates – refers to the payment, expressed in percent per year, made by borrower to lender in exchange for a loan of a proportion of money. The nominal interest rate is expressed in terms of the money payments made on loan. The real or inflation adjusted interest rate is expressed in terms of goods and services, it is approximately equal to the nominal rate minus inflation rates.

20. 3 . Inflation Targeting - Inflation means a rise in the average level of all prices. Sometimes restricted to prolonged or sustained rises. Inflation rate is the percentage rate of increase in some price index from one period to another. In the event of a drop in the price level, deflation occurs. ©KPG

21. ©KPG Microeconomic Factors - Influence how your business will make decisions . -Unlike macroeconomic factors, these factors are far less broad in scope and do not necessarily affect the entire economy as a whole. Competitors Demand Distribution Chain Microeconomic factors influencing a business

22. ©KPG Factors Affecting the Economic Environment Inflation and deflation - Inflationary and deflationary pressures alter the purchasing power of money. This has a direct impact on consumer spending, business investment, employment rates, government programs and tax policies.

23. ©KPG Interest rates - determine the cost of borrowing and the flow of money towards businesses. Exchange rates - This impacts the price of imports, the profits made by exporters and investors and employment levels (also through the impact on the tourism industry). Monetary and fiscal policy - This helps in attaining full employment, price stability and economic growth.