Transcript Meaning of Economic Environment

Economic Terms
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Disinvestment
Globalisation
Liberalization
Privatisation
GDP
Balance of Payment
VAT
Inflation and Inflationary Gap
Economic Development &Sustainable Dev
Monetary & Fiscal Policies
Poverty Line
Important Questions?
 Q1. Is Inexpensive labor a Blessing or a Curse?
 Q2. Highlight the major areas where Govt Intervention is essential to
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facilitate Economic Growth?
Q3.The case for Privatization is essentially built around the poor
performance of the public sector. Do you agree? Elucidate.
Q4. What are the major global challenges which Indian economy is
facing? Discuss in detail.
Q5. Why HDI is considered to be a very important tool for economic
growth?
Q6. WTO highlighting on TRIPS AND TRIMS?
Q7. FDI’s & FII’s Inflows in India?
Definition
 Totality of economic factors, such as employment, income, inflation,
interest rates, productivity, and wealth, that influence the buying
behavior of consumers and firms
 The economic environment comprises of:
 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.
Classifications of the Economic
Environment
 Microeconomic environment: It includes the
economic environment of a particular industry, firm or
household and is primarily concerned with price
determination of individual factors. The main
consideration from a microeconomic perspective is the
efficient allocation of resources. This is necessary to
maximize total output.
 Macroeconomic environment: It includes all the
economic factors in totality. The main consideration
here is the determination of the levels of income and
employment in the economy.
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.
 Interest rates: 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.
The economic environment is also influenced by
various such as :
1. Political
2.Social and
3.Technological factors
These include a change in government and the
development of new technology and business tools.
Classification of Economies
 Economies of countries can be classified based on
parameters:
1. Ownership of means of production
a)capitalist economy
b)socialist economy
c) Mixed economy
2. Levels of economic development
a)Developing countries
b)Developed countries
Capitalism is an economic system characterized by
private ownership of productive goods and services.
Socialism is an economic and political system in
which private property is abolished and the means of
production (i.e., capital and land) are collectively
owned and operated by the state.
Mixed economy, in which some of the means of
production are owned by the government while some
is held by private individuals.
 The World Bank relies on income levels to classify
countries into these two categories.
GDP is the value of the total final output of all goods and
services produced in a single year within a country's
boundaries. GNP is GDP plus incomes received by
residents from abroad minus incomes claimed by
nonresidents.
Inflation is a general price rise in prices across the
economy.It is different from the rise in price of a particular
good or service. The amount of inflation in the economy
depends on the level of monetary demand in the economy,
and amount of demand in the economy relative to available
supply of goods and services.
WPI is an index of the prices of products and services
consumers buy.
The interest rate is the rate charged or paid for the use of
money, normally expressed as a percentage.
ECONOMIC INDICATORS
 An economic indicator is simply any economic
statistic, such as the unemployment rate, GDP, or the
inflation rate, which indicate how well the economy is
doing and how well the economy is going to do in the
future. As shown in the article "How Markets Use
Information To Set Prices" investors use all the
information at their disposal to make decisions. If a set
of economic indicators suggest that the economy is
going to do better or worse in the future than they had
previously expected, they may decide to change their
investing strategy.
What Does Economic Indicator
Mean?
 A piece of economic data, usually of macroeconomic scale,
that is used by investors to interpret current or future
investment possibilities and judge the overall health of an
economy. Economic indicators can potentially be anything
the investor chooses, but specific pieces of data released by
government and non-profit organizations have become
widely followed - these include:
- The Consumer Price Index (CPI)
- Gross Domestic Product (GDP)
- Unemployment figures
- The price of crude oil
Investopedia explains Economic
Indicator
 An economic indicator is only useful if one interprets it
correctly. History has shown strong correlations between
economic growth (as measured by GDP) and corporate
profit growth. However, determining whether a specific
company will grow its earnings based on one indicator is
nearly impossible. Indicators give us signs along the road,
but the best investors will utilize many economic
indicators, looking for patterns and verifications within
different sets of data.
Most economic indicators have a specific schedule for
release, allowing investors to prepare for and plan on
seeing certain information at certain times of the month
and year
The Effectiveness of Economic
Indicators
 Over time, economic indicators have greatly increased
the level of sophistication in economic forecasting and
the analysis of business performance. The usefulness
of these indicators, however, depends as much on the
user's knowledge of their limitations as on the
indicators themselves. Indicators provide only
averages, and as such record past performance. As
some economists have pointed out, applying
indicators to predict future developments requires an
understanding that history never repeats itself exactly.
CATEGORIES OF ECONOMIC
INDICATORS
 There are three major attributes:
1. Relation to the Business Cycle / Economy
Economic Indicators can have one of three different relationships to
the economy:
 Procyclic: A procyclic (or procyclical) economic indicator is one that moves in
the same direction as the economy. So if the economy is doing well, this number
is usually increasing, whereas if we're in a recession this indicator is decreasing.
The Gross Domestic Product (GDP) is an example of a procyclic economic
indicator.
 Countercyclic: A countercyclic (or countercyclical) economic indicator is one
that moves in the opposite direction as the economy. The unemployment rate
gets larger as the economy gets worse so it is a countercyclic economic indicator.
 Acyclic: An acyclic economic indicator is one that has no relation to the health
of the economy and is generally of little use.
2. Frequency of the Data
In most countries GDP figures are released quarterly
(every three months) while the unemployment rate is
released monthly. Some economic indicators, such as
the Dow Jones Index, are available immediately and
change every minute.
3.Timing
Economic Indicators can be leading, lagging, or coincident
which indicates the timing of their changes relative to how the
economy as a whole changes.
 Leading: Leading economic indicators are indicators which change
before the economy changes. Stock market returns are a leading
indicator, as the stock market usually begins to decline before the
economy declines and they improve before the economy begins to
pull out of a recession. Leading economic indicators are the most
important type for investors as they help predict what the economy
will be like in the future.
 Lagged: A lagged economic indicator is one that does not change
direction until a few quarters after the economy does. The
unemployment rate is a lagged economic indicator as
unemployment tends to increase for 2 or 3 quarters after the
economy starts to improve.
 Coincident: A coincident economic indicator is one that simply
moves at the same time the economy does. The Gross Domestic
Product is a coincident indicator.
Types of Economic Indicators
 Total Output, Income, and Spending
 HDI(Human Development Index)
 Rainfall Index
 FDI
 Employment, Unemployment, and Wages
 Production and Business Activity
 Prices
 Money, Credit, and Security Markets
 Federal Finance
 International Statistics
Total Output, Income, and
Spending
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Gross Domestic Product (GDP) [quarterly]
Real GDP [quarterly]
Business Output [quarterly]
National Income [quarterly]
Consumption Expenditure [quarterly]
Corporate Profits[quarterly]
The Gross Domestic Product is used to measure economic
activity and thus is both procyclical and a coincident
economic indicator. The Implicit Price Deflator is a
measure of inflation. Inflation is procyclical as it tends to
rise during booms and falls during periods of economic
weakness. Measures of inflation are also coincident
indicators. Consumption and consumer spending are also
procyclical and coincident.
Human Development Index
 HDI is a measure of poverty, literacy, education,
life expectancy, childbirth, and other factors.
It is a standard means of measuring well being,
especially child welfare.
HDI stresses the importance of the quality of life.
The three basic dimensions of HDI :
1) Life expectancy at birth
2) Knowledge (as measured from adult literacy rate)
3) Standard of living
HDI - PARAMETERS
( 1) Education
It is an expression of human development. It helps to
develop knowledge, skills, makes people healthier,
confident & provide greater access to land, jobs and
financial resources, it is a key driving force against
poverty.
Human Development Index
EDUCATION :
 Literacy rates in India have arisen dramatically from
18% in 1951 to 65% in 2001, but these rates are still far
from the level of 95%.
 Literacy among males is nearly 50% higher than
females, and it is about 50% higher in urban areas as
compared to the rural areas.
 Literacy rates range from as high as 96% in some
districts of Kerala to below 30% in some parts of
Madhya Pradesh.
(2 ) HealthCare
 Health is Wealth. A healthy body makes
 one feel confident, makes him highly
 immune to diseases. It increases the level of
productivity and thereby enhance economic
growth.
Gender Equity
Women make up half of the world’s population (more
than 3.3 billion people),yet experience the brunt of the
world’s poverty, illiteracy and violent crime.ST / SC
tribes face natural obstacles everywhere
 Source : UNDP Survey, 2008
Poverty
27.5 percent of Indians live below the national income
poverty line. More than 60 percent of women are
chronically poor .296 million people are illiterate
233 million are undernourished ( espl.Below 3 years)
BENEFITS OF HDI( the index)
AIM of Human Development Index
 It helps in prioritizing sectors which have serious
crisis & necessitates appropriate action plan
It helps to create various pump priming project in
sectors like :
 1. HealthCare Sector ( Eg : the creation of National
Rural Health Mission)
2. Education (the creation of Sarva Shiksha
Abiyan)
 3. Decent standard of living (measured by
purchasing power parity, income).(The creation of
National Rural Emplyoment Guarantee Scheme)
Rainfall Index
58% of country's population depends on agriculture
27% of India ’s GDP comes from its agricultural
production.
 13-18% of India ’s total annual exports are agricultural
products.
 Good monsoon always means a good harvest
 Bad monsoon results in a big loss in the country GDP
levels.
FDI in India
 FDI is investment made by a foreign individual or
company in productive capacity of another country. It
is the movement of capital across national frontiers in
a manner that grants the investor control over the
acquired asset.
 India is considered a stable country for investing in by
corporate overseas.
 FDI is a tool for jump-starting economic growth
through its bolstering of domestic capital, productivity
and employment.
FDI in India
FDI has an impact on
1.
Country's trade balance
2. Increasing labour standards and skills
3. Transfer of new technology and innovative ideas
4. Improving infrastructure, skills and the general business
climate.
US INVESTMENT IN INDIA
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U.S. is one of the largest foreign direct investors in India.
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The stock of actual FDI Inflow increased from U.S. $11.3
million in 1991 to US $4132.8 million as on August 2004
recording an increase at a compound rate of 57.5 percent
per annum.
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The FDI inflows from the US constitute about 11 percent
of the total actual FDI inflows into India.
Employment, Unemployment, and
Wages
 These statistics cover how strong the labor market is
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and they include the following:
The Unemployment Rate [monthly]
Level of Civilian Employment[monthly]
Average Weekly Hours, Hourly Earnings, and Weekly
Earnings[monthly]
Labor Productivity [quarterly]
The unemployment rate is a lagged, countercyclical
statistic. The level of civilian employment measures
how many people are working so it is procyclic. Unlike
the unemployment rate it is a coincident economic
indicator
Production and Business Activity
 These statistics cover how much businesses are producing
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and the level of new construction in the economy:
Industrial Production and Capacity Utilization [monthly]
New Construction [monthly]
New Private Housing and Vacancy Rates [monthly]
Business Sales and Inventories [monthly]
Manufacturers' Shipments, Inventories, and Orders
[monthly]
Changes in business inventories is an important leading
economic indicator as they indicate changes in consumer
demand.
Prices
 This category includes both the prices consumers pay
as well as the prices businesses pay for raw materials
and include:
 Producer Prices [monthly]
 Consumer Prices [monthly]
 Prices Received And Paid By Farmers [monthly]
These measures are all measures of changes in the
price level and thus measure inflation. Inflation is
procyclical and a coincident economic indicator.
Money, Credit, and Security
Markets
 These statistics measure the amount of money in the
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economy as well as interest rates and include:
Money Stock (M1, M2, and M3) [monthly]
Bank Credit at All Commercial Banks [monthly]
Consumer Credit [monthly]
Interest Rates and Bond Yields [weekly and monthly]
Stock Prices and Yields [weekly and monthly]
Nominal interest rates are influenced by inflation, so
like inflation they tend to be procyclical and a
coincident economic indicator. Stock market returns
are also procyclical but they are a leading indicator of
economic performance.
Federal Finance
 These are measures of government spending and
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government deficits and debts:
Federal Receipts (Revenue)[yearly]
Federal Outlays (Expenses) [yearly]
Federal Debt [yearly]
Governments generally try to stimulate the economy
during recessions and to do so they increase spending
without raising taxes. This causes both government
spending and government debt to rise during a
recession, so they are countercyclical economic
indicators. They tend to be coincident to the business
cycle.
International Trade
 These are measure of how much the country is exporting and how
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much they are importing:
Industrial Production and Consumer Prices of Major Industrial
Countries
U.S. International Trade In Goods and Services
U.S. International Transactions
When times are good people tend to spend more money on both
domestic and imported goods. The level of exports tends not to change
much during the business cycle. So the balance of trade (or net
exports) is countercyclical as imports outweigh exports during boom
periods. Measures of international trade tend to be coincident
economic indicators.
While we cannot predict the future perfectly, economic indicators help
us understand where we are and where we are going.
Salient features of Indian Economy
 Agrarian Economy
 High Population
 Unequal Distribution of Income and Wealth
 Centralization
 Prevalence of Zamindari system
 Lack of proper Infrastructure
 Low Percapita Income
 Less Economic Welfare
 Developing Economy
 Mixed Economy
 Low Quality of Life
 Illiteracy and skill shortage
 Fragmentations and Distortions of Markets
Cont……
 High Levels of Unemployment & Underemployment
 Less Production
 Unfavourable BOP
 Prevalence of Povety
 Lack of Social Security Measures
 Scarcity of natural Resources
 Lack of Capital
 Brain Drain
 High Dependency Burdens
 Low Level of Productivity
 Technological Backwardness
Structure of Indian Economy
Over the last 56 years, the Indian economy has experienced a
gradual structural change. Though the
pace of the structural transformation was more or less slow
throughout the pre-reform period, it has become
rapid after the introduction of new economic reforms in the decade
of the nineties. At the time of
independence, Indian economy was predominantly rural and
agricultural. At the beginning years of the First
Five-year Plan, contribution of the primary sector (agriculture,
forestry and logging, fishing) in GDP at factor
cost was largest followed by tertiary sector and secondary sector
respectively. Thereafter the major drive
towards diversification and modernization of the Indian economy
in the following plans resulted in increased
shares of the secondary and tertiary sectors and declined share of
the primary sector in the national product.
Cont…
The share of the primary sector in GDP at factor cost
declined from 54.56% in 1950-51 to 27.87% in 1999-00
while share of the secondary sector was 16.11% in 195051 and increased to 25.98% in 1999-00. The share of
the tertiary sector increased from around 29% to 46%
during this period. Indian economy also experienced a
major structural change within the industrial sector as
a result of the major drive for industrial diversification
in the mid-fifties.
Cont…..
 However, the pace of transition of the Indian economy
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from an agricultural economy to an industrial
one was quite slow since 1951. It was in the decade of the
eighties the economy emerged from the phase of
slow growth rate and deceleration. Finally, a major shift in
the macroeconomic policies in the decade of the
nineties accelerated the pace of the structural
transformation of the Indian economy and set India on a
high
growth trajectory. In terms of average growth rate, the
performance in the nineties (6.5%) was better than that
recorded in the eighties (5.8%). While both the industrial
and service sectors registered relatively high growth
rates during recent period, agriculture and allied activities
experienced a relatively low rate of growth as
Cont……….
 compared to the eighties. This underlines a major
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structural shift in the Indian economy in recent years, with
economic growth becoming more vulnerable to the
performance of industrial and service sectors and less to
the performance of the agricultural sector. In order to keep
the momentum of the structural transformation of
the Indian economy, investment should be concentrated to
those sectors which are strongly integrated with the
rest of the economy and have a larger multiplier effect on
growth and development.
Classification of Sectors
 All economic activities can be classified into three broad categories according to the
factors used
 intensively in the production process. These three categories are:
 (a) Ricardo sectors.
 (b) High technology sectors
 (c) Heckscher - Ohlin sectors.
 RICARDO SECTORS: Ricardo sectors are those which use natural resources
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intensively in their production
process. Production of agricultural crops and other allied activities like milk and
milk products, animal
services, forestry and logging, fishing are basically natural resource intensive and
therefore treated as Ricardo
sectors. By the same argument minerals like coal and lignite, crude petroleum and
natural gas, iron ore,
metallic and non metallic minerals are included in the category of Ricardo sectors.
The industries like leather products, petroleum products, cement are characterized
by intensive use of natural resources and therefore are regarded as Ricardo sectors. T
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HIGH-TECHNOLOGY SECTORS: The sectors requiring relatively higher proportion of
research and
development are included into the second category called High-Technology sectors (H-T sectors).
This
category contains most of the sophisticated technology-using manufacturing sectors like industrial
electrical
and non-electrical machines, electronic equipment, transport equipment, communication
equipment,
pesticides, heavy chemicals etc. Education and research, medicines and drugs, medical and health,
communication are also regarded as H-T sectors because these sectors require higher proportion of
research
and development. There are all total twenty-three sectors in this category.
HECKSCHER-OHLIN SECTORS: The sectors that use relatively standardized production
technologies are
regarded as Heckscher-Ohlin sectors (H-O sectors). In other words, H-O category contains the
sectors which
are either capital or labour intensive. This category consists of capital intensive sectors like iron &
steel,
fertilizers, synthetic fiber and resin, non-ferrous basic metals, rubber and plastic products etc. and
labour
intensive sectors like printing and publishing, furniture and fixtures, miscellaneous manufacturing
etc. Being
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labour intensive sectors banking and insurance, transport services, trade, other services
 HECKSCHER-OHLIN SECTORS: The sectors that use
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relatively standardized production technologies are
regarded as Heckscher-Ohlin sectors (H-O sectors). In
other words, H-O category contains the sectors which
are either capital or labour intensive. This category consists
of capital intensive sectors like iron & steel,
fertilizers, synthetic fiber and resin, non-ferrous basic
metals, rubber and plastic products etc. and labour
intensive sectors like printing and publishing, furniture
and fixtures, miscellaneous manufacturing etc. Being
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labour intensive sectors banking and insurance, transport
services, trade, other services
Measures for Development
 Increasing Capital formation
 Improving Human Capital
 Raising Entrepreneurship Ability
 Enhancing Natural Resources
 Upgrading Technology
 Market Orientation of an Economy
 Need for Planning
 Important Role of State