Critical Elements

In what follows, we intend to identify and describe a few critical elements of economic environment. These critical elements are relevant from the standpoint of both, corporate business management and national economic management in India. 

The critical elements of macro-economic environment are as follows : 

• economic system 
• nature of the economy 
• analyst of the economy 
• functioning of the economy 
• economic planning and programmes 
• economic policy statements and proposals 
• economic controls and regulations 
• economic legislation 
• economic trends and structure 
• economic problems and prospects 

An economic system defines the institutional framework of the environment. The ownership, control and management of the enterprise reveal the nature of the economic system. The role and responsibility of the private sector, public sector, joint  sector, etc. throw light on the philosophy  and practice of an economic system - capitalist, socialist or mixed. The mixed economic system operates through a combination of planning and pricing. 

The level of economic development and the structure of the economy define the physical framework of the environment. The level and composition of per capital income indicate the level of growth and development. Available natural resources, human resources and material resources of a country set a limit to its factor endowment which determines its production. The occupational distribution of labour force, the structure of national output; the composition and pattern of foreign trade, the structure of savings, investment and capital formation, the pattern of income distribution, inter-personal and inter-regional, the degree of urbanization, all these bring out the significance of agriculture, industry and  service sector in the national economy. 

The structure of the national economy can also be discussed in terms of its physical anatomy. The national economy is, after all, a combination of the household sector, the corporate business sector, the government administration, the capital market and the ,foreign sector. This is suggested by the national  income and the social accounting approach. The order and strength of each of these sectors, therefore, also throws light on our understanding of the macro-economic environment. 

If you can describe the environment with reference to the terms discussed above, you may now attempt an explanation of its functioning. You will discover that money is the life and blood of the business activity and the economic system. The flows of consumption, investment, saving, income, employment and output are all affected by transactions of money. Monetary transactions affect  price level, thereby influencing the real value of all macro-economic  variables. Significant developments have taken place in macro-economics to define the role of money. The essential question is : Does money matter ? There are different answers to this question: (1 ) Money does not matter at all (Classical); (2) Money matters least (Keynesian); and (3) Money matters most (Monetarist). The theoretical debate is quite interesting. But you have to examine its empirical relevance in.the economic environment of a country like India. This will provide you with' a further insight into the role of centralized planning, administered price system as well as free marketing pricing, and central banking. 

Economic planning is supposed to give a direction to the changes in the economic environment. Most countries function today on the basis of planning.  Either it is planning by direction typical of a socialist economy, or it is planning by incentives, i.e., democratic planning typical of a mixed economy, or it is indicative planning typical of the French Economy. It is through the system of a perspective planning, five-year planning and annual planning that the economies try to overcome their environmental constraints and optimize their achievements over a period of times. 

Planning is a programme for action, it is not a guarantee in itself. The formulation of plans and programmes must, therefore, be followed by proper implementation. This calls for economic policy statements and legislation. Apart from having general policy statements affecting the industry and agriculture, the government often formulates and executes fiscal-cum-budgetary policies. The central bank will work through the instruments of money and credit policies, exchange rate policies, etc. Some sort of physical policies of controls and regulations may also be needed. Price control, trade control and exchange control are all moves in the same direction. Sometimes legislation and enactments become necessary for effective implementation of all these policy statements and proposals. The national economic environment of business is determined by the existing macro-economic policy framework. 

These policies, planning and pricing together make the economy function effectively. The functioning of an economy is reflected in short-period-fluctuations and long-term trends in macro-economic variables like income, money supply, prices, production, employment, balance of trade and payments, foreign exchange earnings, etc. These trends decide the course of the prevailing economic environment. Some of these economic trends may define the nature and dimension of various macro-economic problems like inflation, unemployment, recession and the Like. The problems have analysed with the objective of making the national economic management efficient. Economic problems and economic prospects in the environment throw challenges to the management, corporate business management as well as national economy management.