Economic conditions, economic policies and the economic system are the important external factors that constitute the economic environment of a business. The economic conditions of a country-for example, the nature of the economy, the stage of development of the economy, economic resources, and the level of income, the distribution of income and assets, etc- are among the very important determinants of business strategies.

1. Economic Environment

2. Important factors of economic
environment
Structure and
nature of economy
Economic
conditions
Economic policies Global linkage
• Levels of
development of
the economy.
• Sectoral
composition of
output.
• Inter – sectoral
linkage.
• Income levels.
• Distribution of
income.
• GDP Trends.
• Demand and
supply trends.
• Price trends.
• Trade and BPO
trends.
1. Industrial
policy.
2. Trade policy.
3. Foreign
exchange
policy.
4. Foreign
investment and
technology
policy.
5. Fiscal policy.
6. Monetary
Policy.
• Magnitude and
nature of cross
border.
• Trade flows.
• Financial flows.
• Membership of
WTO, IMF,
World Bank,
trade blocs etc

3. Economic Environment
• Economic conditions, economic
policies and the economic system
are the important external factors
that constitute the economic
environment of a business. The
economic conditions of a country-for
example, the nature of the
economy, the stage of development
of the economy, economic
resources, and the level of income,
the distribution of income and
assets, etc- are among the very
important determinants of business
strategies.

4. Nature of economy
• Low income economies-
Very low level of per capita
income.
• High income economies –
Very rich income per capita.
• Middle income economies –
Per capita income lies
between that of low income
and high income economies.

5. Nature of economy
• Developing economies –
This include Low income
and middle income are
economies.
• Developed economies –
High income economies.

6. Economic Environment
In a developing country, the low
income may be the reason for the
very low demand for a product. The
sale of a product for which the
demand is income elastic naturally
increases with an increase in income.
But a firm is unable to increase the
purchasing power of the people to
generate a higher demand for its
product. Hence, it may have to
reduce the price of the product to
increase the sales. The reduction in
the cost of production may have to
be effected to facilitate price
reduction. It may even be necessary
to invent or develop a new low-cost
product to suit the low-income
market

7. Economic Environment
Colgate designed a simple,
hand-driven, inexpensive ($10)
washing machine for low-income
buyers in less
developed countries. Similarly,
the National Cash Register
Company took an innovative
step backward by developing a
crank-operated cash register
that would sell at half the cost
of a modern cash register and
this was well received in a
number of developing
countries.

8. Economic Environment
In countries where investment and
income are steadily and rapidly rising,
business prospects are generally
bright, and further investments are
encouraged. There are a number of
economists and businessmen who
feel that the developed countries are
no longer worthwhile propositions
for investment because these
economies have reached more or less
saturation levels in certain respects.
In developed economies,
replacement demand accounts for a
considerable part of the total
demand for many consumer durables
whereas the replacement demand is
negligible in the developing
economies.

9. Economic Environment
The economic policy of the
government, needless to say,
has a very great impact on
business. Some types or
categories of business are
favourably affected by
government policy, some
adversely affected, while it is
neutral in respect of others. For
example, a restrictive import
policy, or a policy of protecting
the home industries, may
greatly help the import-competing
industries.