Download INTERNAL TEST # 1 Macro Business Environment

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INTERNAL TEST # 1
Macro Business Environment – 12MBA23
SECTION-A
1-The totality of economic factors, such as employment, income, inflation, interest rates, productivity,
and wealth, that influence the buying behavior of consumers and institutions.
Economic Environment are the economic factors that have effects on the working of the business. It
includes system, policies and nature of an economy, trade cycles, economic resources, level of income,
distribution of income and wealth. It is very dynamic and complex in nature and does not remain the
same.
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Low per capita income: before independence there was a decline in Indian economy but as India
is a developing country and five years plans democratic planning structure helped India to
improve its economic structure.
Dominance of agriculture: nearly 2/3rd of India’s population still depends on agriculture.
Mass Poverty: poverty is a problem not in underdeveloped countries but also in developed
countries.
Low standard of living: standard of living is measured by real GDP per capita. Human development
Report states that India is rated as Medium Human Development Index country.
Unequal Income Distribution:
Improper production condition
Technological backwardness
Dualistic economy: two different sectors in the economy i.e; upper class and lower class often
pose challenge for the development of whole nation.
Inadequate capital formation: with the help of five year plans India wanted to improve its capital.
Less Infrastructural Development
3Economic Factors That Influence Businesses
Demand and Supply
The demand and supply are two principal factors that affect the working of any business model. The
demand is the will and ability of consumers to purchase a particular commodity, while supply is the ability
of the business to provide for the demand of consumers. Suppose, a mobile phone infused with latest
technology is introduced in the market, it will have a higher price because of its demand in the market. Its
prices will continue to increase if the supply does not meet the demand.
For instance, in the year 2000, weather played havoc with the sugar crops of Brazil, which is the largest
sugar producer in the world. This led to a decrease in the supply of sugar, which in turn resulted in a steep
rise in the sugar prices. However, after the initial price rise, the market forces came into play and the
demand for sugar became equal to the supplied sugar.
Marginal and Total Utility
Utility is the amount of satisfaction, that is derived by consumers from the consumption of goods. It so
happens that after continuous and successive consumption of units of the same goods, the satisfaction
that is experienced by a consumer starts decreasing. This often results in short-term or long-term fall in
sales. Some organizations prepare for the launch of another brand, before the fall in utility and sales is
experienced. The launch of new brand ensures that the revenue trend of the business does not fall.
Diminishing utility is among the external factors affecting business.
For example, when we buy a pizza, the first few slices give us immense satisfaction. However, there is a
fall in the satisfaction levels, when we are eating the rest. Let's assume, the marginal utility derived on the
consumption of the first slice was 90. However, due to diminishing utility, the second slice had the score
of 80 and the third slice was just 70. The satisfaction derived on consumption will be in a decreasing order.
Money and Banking
Banking facilitates monetary and fiscal policies that affect business and also the customers of the business.
Money in circulation dictates the purchasing power or rather the demand of the consumers. On the other
hand, the banking facility dictates the borrowing capacity of individuals as well as the business. The
banking policies play a decisive role in affecting the prices of goods and interest rates along with
investment and asset prices. The monetary polices of countries also influence the economic activities and
inflation. This whole dynamic process is also known as monetary policy transmission mechanism.
Economic Growth and Development
Economic growth dictates the amount of finances that the society at large is earning and development
indicates the volume of money that is being invested into channels of long-term upgradation. Among all
the economic factors, development is the most important one, as a business has to cater to the demands
of an economically dynamic society. For example, the luxury brands perform well during an economic
upturn, much more than the companies which produce essential offerings.
Income and Employment
Other important aspects of the economy that affects a business operation, are the employment density
and rate of income. The per capita income and density of employment determines the rate of demand,
density of demand, and also the purchasing power of the people. For example, during an economic
upturn, there are employment opportunities which generate income that enables people to possess a
stronger purchasing power. On the contrary, as the employment density and income rate go down during
recession period, the purchasing power of the people also diminishes.
General Price Level
Another very important aspect of the economy that plays a part in the growth of business is the general
price levels of commodities. Costs of raw materials, paying power of people, cost of production, and cost
of transportation are some of the most important components that determine the general price levels
and in turn, lower the profit margin of a business.
For example, an increase in the price will reduce the total revenue generated as there might be a dip in
the demand. Let us assume that we have bought 16 pizzas for the price of $4. However, after an increase
in the price of pizzas, we may get to buy only 8 pizzas even after shelling out $6.
Trade Cycles
A trade cycle plays a part in fluctuating the costs of goods and commodities in an economy. Prosperity,
recession, depression, and recovery are the phases of a business cycle that affect the demand and supply
of all goods. Also, trade cycles often affect the general price levels of essential and non-essential
commodities.
Inflation
Inflation is a phenomenon that occurs when there is too much supply of money in the economy that is
not supported by the output of goods and services. As there is a lot of money floating around, the prices
of goods also increase in order to sustain the businesses, resulting in the increase of costs of raw materials
which are needed for production. A hike in the prices of raw materials, thus, also increases the cost of a
product.
In simple words, the buying capacity of people decreases, when their incomes remain constant but the
prices of products and services increase. This affects the demand for the goods. For example, in 2008,
Zimbabwe faced the worst case of inflation, which proved disastrous for its economy and led to the
abandonment of its currency.
Recession
During recession, companies face a decrease in sales revenues and profits. To curtail cost, they resort to
cutting back on hiring new employees, making capital expenditure, marketing and advertising
expenditures, research and development activities, etc. This not only affects large organizations, but also
the small ones which act as vendors to these big companies.
Smaller organizations may find it difficult to survive in recession due to lack of financial funds or availability
of loans. Also, people may shift their preferences to slightly affordable products during recession or may
not spend on luxury items at all. This will also have a negative impact on the demand for these products.
Factors like falling stocks, lack of dividends, below par quality, employee lay-offs, bankruptcy, etc. during
recession may also affect the business adversely. For example, in 2007, when the banking industry was
unable to face the meltdown of the mortgage market, it inadvertently led to a free fall of the stock market
and a decrease in consumer spending. It also set into motion a chain of events that resulted into a global
recession within a year.
Exchange Rate
When a company buys certain goods from a US-based organization, it will have to convert its currency
into US dollars for making the payment. If the currency of the buyer is stronger than the US dollar, it will
be beneficial for the company. However, if it is weak, the company will have to shell out more money.
This was an example of an export business. A similar logic will also be applicable to the import business.
Moreover, price competition in the international market often leads to fluctuating prices. This is because
a foreign company in the US market may increase or decrease its prices depending on the changes in the
exchange rate.
Suppose some time ago, 1 pound was 1.5 US$. However, today, it may decrease to 1.3 US$ if the value of
dollar appreciates. This will cause the imported goods from UK to become cheaper for the consumers in
the US. However, this will not be a good news for US exporters as UK consumers will find that they are
getting lesser returns for a pound's worth.
Rate of Interest
The rate of interest has a direct impact on the loans that business take to sustain or propel their growth.
The higher the interest rates, businesses find it difficult to commit to projects that require investment. On
the contrary, lower rates make it easier for people to borrow money in order to buy cars and houses. Low
loan rates also provide an opportunity to people to spend more on other things, thus creating a demand
for various goods and services, and thereby spurring the growth of economy.
Government Regulations
There are several government agencies that regulate businesses for the safety of humans, animals, and
environment. Some industries are heavily regulated and introduction of new laws discourage uncontrolled
growth of factories and plants. For example, a coal-powered power plant may be asked to be shut down
because of an environmental threat it poses. This may affect a business drastically.
Every changing factors in an economy affect the working of businesses. Hence, companies need to have
a foolproof strategy and contingency revenue reserves to cope with such dynamic changes. It is best to
take calculated risks and expand a business when the rates of interest are low and the demand is high.
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Non Economic factors:
Political- Legal
Socio- cultural
Demographic
Techno-logical
Natural
SECTION-B
1-Foreign direct investment ( FDI ) is direct investment by a company in production located in another
country either by buying a company in the country or by expanding operations of an existing business in
the country.
Foreign direct investment (FDI) refers to Cross-border investment made by a resident in one economy
(the direct investor) With the objective of establishing a lasting interest in an enterprise (the direct
investment enterprise) that is Resident in a country other than that of the direct investor
Automatic Route
Under delegated powers exercised by RBI
FDI upto 100% for new and existing companies , JVs,firms is permitted under automatic route for all items
except for those where approval from SEBI or FIPB is required.
Approval by FIPB
Under Foreign Investment Promotion Board.
Required for the projects that do not qualify for automatic approval route.
A proposal to be made to FIPB which studies the project and conveys it’s decision within 30 days of
submitting application.
Preference is given to projects in high priority industries.
2- Functions of WTO
The former GATT was not really an organisation; it was merely a legal arrangement. On the other hand,
the WTO is a new international organisation set up as a permanent body. It is designed to play the role of
a watchdog in the spheres of trade in goods, trade in services, foreign investment, intellectual property
rights, etc. Article III has set out the following five functions of WTO;
(i) The WTO shall facilitate the implementation, administration and operation and further the objec-tives
of this Agreement and of the Multilateral Trade Agreements, and shall also provide the frame work for
the implementation, administration and operation of the plurilateral Trade Agreements.
(ii) The WTO shall provide the forum for negotiations among its members concerning their multilateral
trade relations in matters dealt with under the Agreement in the Annexes to this Agreement.
(iii) The WTO shall administer the Understanding on Rules and Procedures Governing the Settlement of
Disputes.
(iv) The WTO shall administer Trade Policy Review Mechanism.
(v) With a view to achieving greater coherence in global economic policy making, the WTO shall cooperate,
as appropriate, with the international Monetary Fund (IMF) and with the International Bank for
Reconstruction and Development (IBRD) and its affiliated agencies.
The structure of the WTO
The structure of the WTO is dominated by its highest authority, the Ministerial Conference, composed of
representatives of all WTO members, which is required to meet at least every two years and which can
take decisions on all matters under any of the multilateral trade agreements.
The day-to-day work of the WTO, however, falls to a number of subsidiary bodies; principally the General
Council, also composed of all WTO members, which is required to report to the Ministerial Conference.
As well as conducting its regular work on behalf of the Ministerial Conference, the General Council
convenes in two particular forms - as the Dispute Settlement Body, to oversee the dispute settlement
procedures and as the Trade Policy Review Body to conduct regular reviews of the trade policies of
individual WTO members.
The General Council delegates responsibility to three other major bodies - namely the Councils for Trade
in Goods, Trade in Services and Trade-Related Aspects of Intellectual Property. The Council for Goods
oversees the implementation and functioning of all the agreements (Annex 1A of the WTO Agreement)
covering trade in goods, though many such agreements have their own specific overseeing bodies. The
latter two Councils have responsibility for their respective WTO agreements (Annexes 1B and 1C) and may
establish their own subsidiary bodies as necessary.
Three other bodies are established by the Ministerial Conference and report to the General Council. The
Committee on Trade and Development is concerned with issues relating to the developing countries and,
especially, to the "least-developed" among them. The Committee on Balance of Payments is responsible
for consultations between WTO members and countries which take trade-restrictive measures, under
Articles XII and XVIII of GATT, in order to cope with balance-of-payments difficulties. Finally, issues relating
to WTO's financing and budget are dealt with by a Committee on Budget.
Each of the four plurilateral agreements of the WTO - those on civil aircraft, government procurement,
dairy products and bovine meat - establish their own management bodies which are required to report to
the General Council.
3- Some of the objectives of foreign trade policy of India are as follows:
Trade propels economic growth and national development. The primary purpose is not the mere earning
of foreign exchange, but the stimulation of greater economic activity. The foreign trade policy of India is
based on two major objectives, they are as follows:
1) To double the percentage share of global merchandise trade within the next five years.
2) To act as an effective instrument of economic growth by giving a thrust to employment generation.
Agriculture and industry has shown remarkable resilience and dynamism in contributing to a healthy
growth in exports. In the last five years the exports witnessed robust growth to reach a level of US$ 168
billion in 2008-09 from US$ 63 billion in 2003-04. Our share of global merchandise trade was 0.83% in
2003; it rose to 1.45% in 2008 as per WTO estimates. Our share of global commercial services export was
1.4% in 2003; it rose to 2.8% in 2008. India’s total share in goods and services trade was 0.92% in 2003; it
increased to 1.64% in 2008. On the employment front, studies have suggested that nearly 14 million jobs
were created directly or indirectly as a result of augmented exports in the last five years.
The short term objective of the policy is to arrest and reverse the declining trend of exports and to provide
additional support especially to those sectors which have been hit badly by recession in the developed
world. The policy is empowered with objective of achieving an annual export growth of 15% with an
annual export target of US$ 200 billion by March 2011. In the remaining three years of this Foreign Trade
Policy i.e. upto 2014, the country should be able to come back on the high export growth path of around
25% per annum. By 2014, policy expects to double India’s exports of goods and services.
The long term objective of policy for the Government is to double India’s share in global trade by 2020. In
order to meet these objectives, the Government would follow a mix of policy measures including fiscal
incentives, institutional changes, procedural rationalization, and enhanced market access across the world
and diversification of export markets. Improvement in infrastructure related to exports; bringing down
transaction costs, and providing full refund of all indirect taxes and levies, would be the three pillars, which
will support us to achieve this target. Endeavour will be made to see that the Goods and Services Tax
rebates all indirect taxes and levies on exports.