Economic enviornment

Economic enviornment

What is economic environment?  Explain different kinds of economic system and their influence on international business.

Those Economic factors which have their affect on the working of the business is known as economic environment. It includes system, policies and nature of an economy, trade cycles, economic resources, level of income, distribution of income and wealth etc. Economic environment is very dynamic and complex in nature. It does not remain the same. It keeps on changing from time to time with the changes in an economy like change in Govt. policies, political situations.

Elements of Economic Environment:- It has mainly five main components:-
1. Economic Conditions
2. Economic System
3. Economic Policies
4. International Economic Environment
5. Economic Legislations

  Apart from the political and legal environment, the economic environment also influences international business decision.  This is because the decision to trade or locate manufacturing operations varies from one host country to other, depending upon the form of economic system existing there and various economic parameters prevailing there, for example, level of income and inflation, health of industrial, financial and external sector and many others.

Types : There are three types of economic system :

(a)   Centrally Planned Economy : It is an economy where production and distribution system is owned by the Government.  The Govt designs the investments and coordinates the activities of different economic sectors.  Ownership of the means of production and the whole process of production lies in the hands of Govt.

  the formerUSSR and other Eastern countries were examples of these types of economic system.  In international trade, normally the state trading corporation participates that highly influences the consumers and business.

(b)   Market Based Economy :   It is an economy where the decision to produce and distribute goods is taken by individual firm based on the forces of demand and supply.  They take such decision for the purpose of maximising profit or wealth.  Consumers are free to decide what they want to buy.  TheUnited States of Americaand Western European countries are example of market based economy. In market based economy, trade is handled by individual firms that affect the international business.

(c)   Mixed Economy: It is a compromise betweenCPE and market based economy where private and public sectors exist side by side.  There is no country that represents any of the two systems in its purest form.  Indian economy system represents mixed economic system.  Economic activities that are fraught with social considerations are owned and regulated by the Govt.  The others are owned and performed by private sectors.

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