Explain the critical elements of economic environment.
The macro-economic environment has certain critical elements which are as follows:
- Economic system.
- Nature of the economy.
- Anatomy of the economy.
- Functioning of the economy.
- Economic planning and programs.
- Economic policy statements and proposals.
- Economic controls and regulations.
- Economic legislation’s.
- Economic trends and structure.
- Economic problems and prospects.
The institutional framework of the environment system is economic system. The philosophy and practice of an economic system capitalist, socialist and mixed is highlighted by the role and responsibility of private sector, public sector, joint sector etc., planning and pricing are the two major points of mixed economic system.
Physical framework of the environment is defined by the level of economic development and the structure of the economy. The level of growth and development is indicated by the level and composition of per capita income.
The significance of agriculture, industry and service sectors in the national economy are bring out by the structure of national output, distribution of labor force, pattern of foreign trade, structure of savings, investment and capital formation, pattern of income distribution and degree of, urbanization. In terms of physical anatomy, the national economy is a combination of household sector, corporate business sector, Government administration, capital market, foreign sector. The national income and social accounting approach help us to suggest the physical anatomy.
Functioning of economic environment defines that flow of consumption, investment, saving, income and output are affected by transaction of money, which affects the price level of all macro-economic variables. There arises a question: Does money matters? Which has different answers like firstly, classical theory is money does not matter at all.
Secondly, Keynesian theory says money matters least and thirdly, monetarist says money matters most. But this theoretical debate provides a further insight into the role of centralized plannings in the present context, administered price system as well as free market pricing, and central banking.
Economic planning helps to direct the changes in the environment. Economic planning is through the system of perspective planning, five year planning and annual planning through which the economies try to overcome the constraints of environment and optimize their achievements over a period of time.
Economic policy statements and legislation’s contains the formulation of plans and programs followed by proper implementation. Apart from having general policies, fiscal-cum-budgetary policies are also executed by the government. Legislation’s are sometimes necessary for effective implementation of price control, trade control and exchange control.
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., reflects the functioning of an economy. Only the efficient national economic management can analyze the problems like inflation, unemployment, recession etc. So, we should make the national economic management efficient and strong.