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MCO4 Unit2 Economic Environment Notes

The economic environment encompasses external factors such as economic conditions, policies, and systems that influence business performance and consumer behavior. Key components include economic systems (capitalist, socialist, mixed), monetary and fiscal policies, and recent reforms in India like GST and initiatives to promote manufacturing and digitization. Understanding these elements is crucial for businesses to adapt their strategies in response to economic changes and government regulations.

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72 views3 pages

MCO4 Unit2 Economic Environment Notes

The economic environment encompasses external factors such as economic conditions, policies, and systems that influence business performance and consumer behavior. Key components include economic systems (capitalist, socialist, mixed), monetary and fiscal policies, and recent reforms in India like GST and initiatives to promote manufacturing and digitization. Understanding these elements is crucial for businesses to adapt their strategies in response to economic changes and government regulations.

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deepak asnora
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MCO-4: Business Environment - Unit 2

Notes
UNIT 2: ECONOMIC ENVIRONMENT OF BUSINESS

Meaning of Economic Environment:

The economic environment consists of all the external economic factors that influence
buying habits, spending patterns, and overall business performance. These include:

- Economic conditions (growth, recession, inflation)

- Economic policies (monetary, fiscal, industrial)

- Economic system (capitalist, socialist, mixed)

Key Components of the Economic Environment:

1. Economic System:

- Capitalist (e.g., USA): Free-market, private ownership.

- Socialist (e.g., North Korea): Government ownership.

- Mixed Economy (e.g., India): Coexistence of private & public sectors.

2. Economic Planning:

- Planned development through Five-Year Plans in India.

- Objective: growth, equity, self-reliance, and modernization.

3. Industrial Policy:

- Guidelines by government to regulate and boost industrial growth.

- India's key Industrial Policies: 1956, 1991.


4. Monetary Policy:

- Formulated by RBI.

- Controls money supply, credit, and interest rates to maintain economic stability.

5. Fiscal Policy:

- Managed by the government through taxation and public expenditure.

- Aims to manage economic growth and control inflation.

6. Foreign Trade Policy:

- Export-import policy impacting business and trade environment.

- Encourages foreign exchange earnings and balance of trade.

7. Liberalization, Privatization, and Globalization (LPG):

- Liberalization: Removal of government restrictions.

- Privatization: Transfer of ownership to private entities.

- Globalization: Integration with the world economy.

Impact of Economic Environment on Business:

- Investment Climate: A good environment attracts domestic and foreign investment.

- Business Strategy: Changes in policy force businesses to adapt.

- Consumer Behavior: Affected by inflation, employment, and income levels.

- Competition: Open economy increases competition from MNCs.

Recent Economic Reforms in India:

1. 1991 Economic Reform:


- Triggered by BOP crisis.

- Key reforms: Liberalization, deregulation, FDI policies.

2. GST Implementation:

- Unified indirect tax system.

- Simplifies tax structure and enhances compliance.

3. Make in India, Digital India, Start-up India:

- Promote manufacturing, digitization, and entrepreneurship.

Role of Government in Economic Development:

- Regulator: Frame rules and policies.

- Promoter: Encourage sectors through incentives and subsidies.

- Entrepreneur: Operate PSUs in key industries.

- Planner: Prepare economic blueprints (plans).

Conclusion:

The economic environment significantly impacts the functioning and decision-making of


businesses. An understanding of economic systems, policies, and reforms helps businesses
to align their strategies with national priorities and global trends.

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