The economic environment is an amalgamation of various economic factors, such as total employment, productivity, income, wealth, inflation and interest rates. These factors influence the spending patterns of individuals and firms.
Components of the Economic Environment
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
The economic environment can be classified into:
- 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.
Over the course of the twentieth century, the focus has shifted from cities and countries to the global economy being the chief economic unit.
Factors Affecting the Economic Environment
The economic environment of a nation as well as the world is impacted by:
- 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 political, social and technological factors. These include a change in government and the development of new technology and business tools.