The term economic environment refers to all the external economic factors that

influence buying habits of consumers and businesses and therefore affect the
performance of a company. These factors are often beyond a company’s control, and
may be either large-scale (macro) or small-scale (micro).

Macro factors include:

 Employment/unemployment
 Income
 Inflation
 Interest rates
 Tax rates
 Currency exchange rate
 Saving rates
 Consumer confidence levels
 Recessions
 Micro factors include:
 The size of the available market
 Demand for the company’s products or services
 Competition
 Availability and quality of suppliers

The reliability of the company’s distribution chain (i.e., how it gets products to
customers) While companies often can’t control their economic environment, they can
evaluate economic conditions before choosing to enter a particular market or industry
or pursue other strategies.

Elements of Economic Environment

Several external factors have a significant influence on a country’s economy. These

factors play a huge role in deciding consumer behaviour and financial flow of a
country, thereby affecting its economic activities. All these elements together
constitute the economic environment definition.
These elements of economic environment are as follows –

Gross Domestic Product (GDP)

Gross Domestic Product is the total value of all products and services produced in a
country. Therefore, the growth of GDP signifies that the economy of a country is stable
and improving. It also means that people have more disposable income that, in turn,
leads to increased demand for products and services. It evaluates the financial worth
of final goods and services—those that are purchased by the end user—produced in a
country over a specific time period (say a year). It includes all of the output generated
within the country. GDP also includes non-market production, for example, education
services which are provided by the government itself. The GDP growth rate measures
the economic reports and amount of a country’s economic growth (or contraction).
Faster growth in the gross domestic product (GDP) expands the overall size of the
economy and strengthens fiscal conditions.

Unemployment

A high level of unemployment in a country means that such an economy is not using
its resources to its full potential. At the same time, it would negatively impact
individual disposable income that will result in lower demand. It affects the
commercial aspect of an economy significantly. This phenomenon is markedly noticed
in the existing economic environment in India. The individuals not only lose income
but also face other hurdles financially as well as mentally. Government expenses
extend further than the provision of benefits to the loss of worker output, which
eventually reduces the gross domestic product (GDP) which in turn leads to economic
issues and then poverty. It will lead to lower GDP growth and fall in tax revenue for
the government.

Inflation

When the overall prices of goods and services increase in a given period, it is known as
inflation. It happens when even though the prices of goods and services are rising the
general income level of consumers stays the same. Therefore, individuals have less
money at their disposal. Small businesses and cottage industries are also affected as
prices of raw goods and labour increase, resulting in smaller profit margins.
The propensity for the price level to rise over time is referred to as inflation. Inflation
boosts prices and has the potential to reduce the purchasing power of consumers.
People buy more than they need to avoid paying higher costs tomorrow, which drives
up demand for products and services. Suppliers are unable to keep up. Worse still,
neither can salaries. As a result, most individuals are unable to afford common
products and services. Inflation reduces the value of pensions and savings.

Government Policy

Government policies also play a huge role in influencing the economy of a country.
Government policy can have a major influence on the economic environment. This can
include fiscal or monetary policy. An example of monetary policy is a reduction in
interest rates on bank loans which encourages consumers’ demand for loans. An
example of fiscal policy would be when the government decides to reduce income tax.
Both of these policies attempt to gradually increase individual disposable income and
encourage consumers to spend more, thus boosting commercial activities. It can
influence interest rate, taxation and a rise, which tends to increase the borrowing cost.
Consumers will spend less if the interest is higher but if the interest rate is lower it
might attract investments. In general, a government’s active role in responding to the
economic circumstances of a country is for the purpose of preserving important
stakeholders' economic interests.

Reforms in the Banking Sector

The banks are considered to be one of the most crucial aspects of the Indian economy.
As a consequence, any reforms in this sector will have a huge impact on the economy.
The banking sector plays a vital role in the betterment of the economy. By boosting the
quality of financial services and increasing money accessible, banking sector openness
may directly improve growth.

Role of the Public and Private Sector

India has a mixed economy where both the private and public sector plays a
significant role. While the public sector plays a valuable role in carrying out plans and
reforms, developing infrastructure and building a strong industrial base, the private
sector is responsible for generating employment opportunities. About 80% of the
population is working in either organised or unorganised private sectors.

The public sector promotes economic development at a rapid pace by filling gaps in
the industrial structure. It reduces the disparities in the distribution of income and
wealth by bridging the gap between the rich and the poor. Agriculture and other
activities like dairying, poultry come under the private sector. It plays an important
role in managing the entire agricultural sector.

Balance of Trade and Balance of Payment

Briefly, Balance of Trade (BOT) is the difference between the money value of a
country's imports and exports of material goods only whereas Balance of Payment
(BOP) is the difference between a country’s receipts and payments in foreign exchange.
When the exports are greater than the imports, it leads to a favourable trade balance.
It means there is a high demand for its goods offshores, and that increases the
demand for its currency. On another hand, when the outflow is greater than the
inflow, there is a current account deficit. BOT records only merchandise and doesn’t
record transactions of a capital nature. BOP records transactions relating to both
goods and services. BOP is a true indicator of the economic performance of an
economy.

Consumer Confidence

The consumer is confident about his purchasing habits or decisions when they know
they have income stability, and income is stable when the overall economy of a
country is. It also affects the markets. For instance, if manufacturers and retail stores
detect weak consumer confidence, they have to manage their inventory and cut back
on production. Therefore, the economy will experience a slowdown and ultimately,
recession. A stable and growing economy usually boosts a consumer’s confidence. The
confidence of consumers impacts their economic decision and hence is a key indicator
for the overall shape of an economy.
Meaning of Economic System

An economic system is a mechanism with the help of which the government plans and
allocates accessible services, resources, and commodities across the country.
Economic systems manage elements of production, combining wealth, labour, physical
resources, and business people. An economic system incorporates many companies,
agencies, objects, models, and deciding procedures.

Types of Economic Systems

Capitalist economy: In a capitalist system, the products manufactured are divided

among people, not according to what they want but on the basis of purchasing power,
which is the ability to buy products and services. This means an individual needs to
have the money with him to buy the goods and services. The low-cost housing for the
underprivileged is much required but will not include demand in the market because
the needy do not have the buying power to back the demand. Therefore, the
commodities will not be manufactured and provided as per market forces.

Features of Capitalism

Let us discuss the important features of capitalism or capitalist economy.

 Private property: This is one of the most important characteristics of capitalism

where private properties like factories, machines, and equipment can be owned
by private individuals or companies.
 Freedom of enterprise: Under this system, every individual has the right to
make their own economic decisions without any interference. This is applicable
to both consumers and producers.
 Profit motive: The motive of earning profit is one of the most important drivers
of a capitalist economy. In this system, all the companies are looking to produce
and sell their products to consumers to earn maximum profit.
 Price mechanism: Under this system, the demand and supply in the market will
determine the production level and correspondingly the price set for the
products without any kind of involvement from the government.
 Consumer sovereignty: In this system, the market is controlled by the demands
  of the consumer. It regulates the level of production undertaken by the
companies, and the consumer is free to decide which products to purchase.
 Free trade: In this system, the low tariff barriers exist that promote
international trade.
 Government interference: In a capitalist economy, there is no government
interference in the daily activities of the business. The customers and producers
are free to make their own decisions regarding any product or service.
 Flexibility in labour markets: In capitalism, there is flexibility in hiring and
firing of the workforce.
 Freedom of ownership: In this system, an individual can accumulate any
amount of property and use it according to his will. After his death, the same
property is passed on to the successors by the right of inheritance.

Advantages of Capitalist Economy

 There is more efficiency in the capitalist economy as the products are produced
according to the demand of the consumers.
 There is less intervention from the government or bureaucratic interference.
 There is better scope for innovation as companies look to obtain a major part of
the market with their offerings.
 It discourages any form of discrimination so that the trade can take place
between two parties without any barriers.

Disadvantages of Capitalist Economy

 Capitalism leads to inequalities in income.

 In capitalism, firms can get monopoly over workers and consumers.
 A high profit-earning motive of a capitalist economy is to use resources in such
a way that it leads to environmental problems by destroying the natural
balance.

Socialist economy: This economy system acknowledges the three inquiries in a

different way. In a socialist society, the government determines what products are to
be manufactured in accordance with the requirements of the society. It is believed that
the government understands what is appropriate for the citizens of the country.
Therefore, the passions of individual buyers are not given much attention. The
government concludes how products are to be created and how the product should be
disposed of. In principle, sharing under socialism is assumed to be based on what an
individual needs and not what they can buy. A socialist system does not have a
separate estate because everything is controlled by the government.

Features of Socialist Economy

Suppose a country is following various principles and norms which direct to the
socialist economy's meaning. In that case, those characteristics are considered as
features of a Socialist Economy, and the government is socialistic. Let us have a
glimpse of the features.

 Ownership should be Collective: It is the primary feature of socialism that

explains the ownership of all the goods of production is for the government and
not for any individual.
 Equality: Socialism aims to attain equality between rich and poor. The
eradication of class, caste, skin colour, will be achieved with the principles of
socialism.
 Planning: As the government has the power, it sets some goals and makes
necessary plans to achieve the goals. It helps in the growth of the economy.
 Competition: Compared to a capitalist country, there is no place for competition
in the concept of socialism. It looks like solo business and profit are sharable to
the whole country.
 Positive Power: As the government plays a vital role in all the activities like
decision making, financial issues, policies, production, it should be utilized
positively. The government should not misuse it.
 Work and Wages: In socialism, the government should delegate work based on
the individual's ability and provide wages according to their needs, to achieve
and maintain transparency.
 Social Welfare: The motto of socialism is to achieve social welfare. It refers to
the growth of society, especially for poor people. There should be no lower class
and higher class.
  Absence of Marketers: If the government plays monotony, there is no scope for
marketing and advertising sales. If the options are less, then the occupancy will
be more.
 Income Distribution: The equal distribution of income among all the citizens
will discard the difference between rich and poor. Education, hospitals, and
other facilities are open and equal to the entire nation.

These are the several features of the Socialist Economy. Whenever a country follows all
these, then it is the best socialist country and stands top of the world.

Examples of Socialist Economy

The countries which can understand what a socialist economy is and implement it in
their system are treated as socialist economy examples.

Many of the countries follow the principles of combined economies. Some states are
capitalistic, but countries like Norway, Sweden, Denmark, Iceland, and Finland follow
socialism strictly. They are purely socialistic countries.

These five Nordic countries are examples of the Socialist Economy. They distribute the
income equally according to their hard work and contribution. They consider health
and education are more critical subjects for utilizing the maximum of savings. The
best part is the involvement of common people in decision-making.

Types of Socialism

Many forms of socialism exist around the world, and they all differ when it comes to
ideas on how best to incorporate capitalism into a socialistic structure. In addition,
the different forms of socialism emphasize the diverse aspects of social democracy.
Here are some of the types of socialistic systems:

1. Democratic socialism

In democratic socialism, factors of production are under the management of an elected

administration. Vital goods and services such as energy, housing, and transit are
distributed through centralized planning, while a free market system is used to
distribute consumer products.
2. Revolutionary socialism

The running philosophy of revolutionary socialism is that a socialistic system can’t

emerge while capitalism is still in play. Revolutionaries believe that the road to a
purely socialistic system requires a lot of struggle. In such a system, the factors of
production are owned and run by workers through a well-developed and centralized
structure.

3. Libertarian socialism

Libertarian socialism works on the assumption that people are always rational, self-
determining, and autonomous. If capitalism is taken away, people naturally turn to a
socialistic system because it is able to meet their needs.

4. Market socialism

Under market socialism, the production process is under the control of ordinary
workers. The workers decide how resources should be distributed. The workers sell off
what is in excess or give it out to members of the society, who then distribute
resources based on a free market system.

5. Green socialism

Green socialism is protective of natural resources. Large corporations in a green

socialistic society are owned and run by the public. In addition, green socialism
promotes the development and use of public transit, as well as the processing and sale
of locally grown food. The production process is focused on ensuring that every
member of the community has enough access to basic goods. Moreover, the public is
guaranteed a sustainable wage.

Advantages of Socialism

1. Absence of exploitation

A socialistic system ensures that no worker is exploited. How? Well, each of the
workers in the community has a say on how the resources are managed, and each
person receives and contributes based on an individual’s potential.
According to the socialistic system, each person is guaranteed access to basic goods,
even those who are not able to contribute. As a result, the system helps to minimize
poverty levels in the society. In addition, each person has the same right to
access health care and other important social aspects, such as education.

2. Rejection of discrimination

The system disapproves discrimination, and each person does what he is good at or
what he enjoys best. If there are jobs that should be done and there is no one to
perform them, a higher remuneration is provided. Natural resources are protected for
posterity.

Disadvantages of Socialism

1. Dependence on cooperative pooling

Perhaps the greatest disadvantage of a socialistic system is its reliance on cooperative

pooling to get things done. In addition, people who are competitive in the community
are viewed in a negative light. The society expects cooperation and not
competitiveness. According to socialism, competitive individuals tend to find ways to
cause social unrest for personal gain.

2. Lack of competitiveness and innovation

Socialism does not reward entrepreneurial ventures or competitiveness. Consequently,

a socialistic system does not encourage innovation as much as capitalism.

Mixed economy: Mixed systems have characteristics of both the command and the
market economic system. For this purpose, the mixed economic systems are also
known as dual economic systems. However, there is no sincere method to determine a
mixed system. Sometimes, the word represents a market system beneath the strict
administrative control in certain sections of the economy.

 Coexistence of all the Sectors

In the Mixed Economy system, all three sectors exist together, that is the
private sector, public sector and joint sector. The government and private
 companies together hold the responsibilities of the respective division. 51% of
the total ownership belongs to the state itself.
 Cooperative Sector
According to the Mixed Economy definition, a cooperative sector exists in a
Mixed Economy. The significance of this sector is vital. In Mixed Economy
countries, the government provides necessary items and financial aids to the
areas involved in cooperative societies like warehousing, dairy industry and
more.
 Freedom and Control
To be precise, in a Mixed Economy, we denote that the individuals have
complete liberty to manufacture goods and items and choose property and
occupation according to their choice. The regulating body maintains control to
avoid all sorts of discrimination and monopolistic issues.
 Economic Planning
In a Mixed Economy, the central planning authority exists. All the sectors of the
firm follow this rule and plan to pursue their goals. The plan is solely observed
with the motive to attain national Economic growth.
 Social Welfare
The significant look out of a Mixed Economy is the social welfare of society. It
focuses on eliminating the unemployment issues from the country. The Mixed
Economy definition further says it enhances social security and public
education facilities.
Mixed Economy Merits

Mixed economies have several strengths, which make them a popular economic model
around the world. Some of the key strengths of mixed economies include:

1. Flexibility: Mixed economies allow for a high degree of flexibility, as they

combine the advantages of both private enterprise and government
intervention. This enables them to respond effectively to changing
economic conditions and social needs.
2. Innovation: Mixed economies can promote innovation and
entrepreneurship, as they provide a supportive environment for private
 enterprise and competition, while also investing in public goods and
services that support innovation and growth.
3. Stability: Mixed economies can provide a stable economic environment,
as they combine market mechanisms with government intervention to
mitigate the risks and uncertainties of the business cycle.
4. Social Welfare: Mixed economies can provide a high level of social
welfare, as they combine market mechanisms with government programs
to ensure that basic needs are met for all members of society.
5. Balanced Growth: Mixed economies can promote balanced economic
growth, as they combine private enterprise with government intervention
to ensure that growth is sustainable and equitable and that benefits are
shared widely across society.

Mixed Economy Demerits

While mixed economies have several strengths, they also face several challenges. Some
of the key challenges of mixed economies include:

1. Balancing Private Enterprise and Government Intervention: One of the biggest

challenges of mixed economies is striking the right balance between private
enterprise and government intervention. Too much government intervention can
stifle private enterprise and innovation, while too little intervention can lead to
market failures and inequality.
2. Political Pressure: Mixed economies are subject to political pressures, as
government policies are often influenced by political considerations rather than
purely economic ones. This can lead to inefficiencies and distortions in the
economy.
3. Coordination: Mixed economies require effective coordination between
government agencies, private enterprises, and other stakeholders to ensure that
economic policies and programs are implemented effectively. This can be
challenging, particularly in large and complex economies.
4. Bureaucracy: Government intervention in mixed economies can lead to
bureaucratic inefficiencies, as government agencies may become overly complex
and bureaucratic in their operations.
 5. Fiscal Sustainability: Mixed economies require significant public investment in
infrastructure, social welfare programs, and other public goods and services.
This can lead to fiscal challenges, particularly if public spending is not matched
by tax revenues.

Differences between Capitalist, Socialist, and Mixed Economies

Parameters Capitalist economy Socialist economy Mixed economy

Ownership of Private ownership Public ownership Both public and private

property ownerships

Price Prices are Prices are Prices are determined by

determination determined by the determined by the the central planning
 market forces of central planning authority, and demand
demand and supply. authority. and supply.

Motive of Profit motive Social welfare Profit motive in the private

production sector and welfare motive
in the public sector

Role of No role Complete role Full role in the public

government sector and limited role in
the private sector

Competition Exists No competition Exists only in the private

sector

Distribution of Very unequal Quite equal Considerable inequalities

income exist