QNo.

8)

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).

Macroeconomics and microeconomics, and their wide array of underlying concepts, have been
the subject of a great deal of writings. The field of study is vast; so here is a brief summary of
what each covers. Microeconomics is generally the study of individuals and business decisions,
while macroeconomics looks at higher up country and government decisions.

Microeconomics is the study of decisions that people and businesses make regarding
the allocation of resources and prices of goods and services. This means also taking
into account taxes and regulations created by governments. Microeconomics focuses
on supply and demand and other forces that determine the price levels seen in the
economy. For example, microeconomics would look at how a specific company could
maximize its production and capacity, so that it could lower prices and better compete in
its industry. Microeconomics' rules flow from a set of compatible laws and theorems,
rather than beginning with empirical study.

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)

Macroeconomics, on the other hand, is the field of economics that studies the behavior
of the economy as a whole, not just of specific companies, but entire industries and
economies. It looks at economy-wide phenomena, such as Gross Domestic
Product (GDP) and how it is affected by changes in unemployment, national income,
rate of growth, and price levels. For example, macroeconomics would look at how an
increase/decrease in net exports would affect a nation's capital account or how GDP
would be affected by the unemployment rate. John Maynard Keynes is often credited
with founding macroeconomics, when he initiated the use of monetary aggregates to
study broad phenomena. Some economists reject his theory and many of those who
use it disagree on how to interpret it.

Macro factors include:

 Employment/unemployment
 Income
 Inflation
 Interest rates
 Tax rates
 Currency exchange rate
 Saving rates
 Consumer confidence levels
 Recessions

While these two studies of economics appear to be different, they are actually
interdependent and complement one another since there are many overlapping issues
between the two fields. For example, increased inflation (macro effect) would cause the
price of raw materials to increase for companies and in turn affect the end product's
price charged to the public.

Microeconomics takes what is referred to as a bottoms-up approach to analyzing the

economy while macroeconomics takes a top-down approach. In other words,
microeconomics tries to understand human choices and resource allocation,
while macroeconomics tries to answer such questions as "What should the rate of
inflation be?" or "What stimulates economic growth?"

Regardless, both micro- and macroeconomics provide fundamental tools for any finance
professional and should be studied together in order to fully understand how companies
operate and earn revenues and thus, how an entire economy is managed and
sustained.

Q.No.6)

Though the credit and debit are written balanced in the balance of payment account, it
may not remain balanced always. Very often, debit exceeds credit or the credit exceeds
debit causing an imbalance in the balance of payment account. Such an imbalance is
called the disequilibrium. Disequilibrium may take place either in the form of deficit or in
the form of surplus.

Disequilibrium of Deficit arises when our receipts from the foreigners fall below our
payment to foreigners. It arises when the effective demand for foreign exchange of the
country exceeds its supply at a given rate of exchange. This is called an 'unfavourable
balance'.

Disequilibrium of Surplus arises when the receipts of the country exceed its payments.
Such a situation arises when the effective demand for foreign exchange is less than its
supply. Such a surplus disequilibrium is termed as 'favourable balance'.

Sustained or prolonged deficit has to be settled by short term loans or depletion of

capital reserve of foreign exchange and gold.

Following remedial measures are recommended:

(i) Export promotion:
Exports should be encouraged by granting various bounties to manufacturers and
exporters. At the same time, imports should be discouraged by undertaking import
substitution and imposing reasonable tariffs.

(ii) Import:
Restrictions and Import Substitution are other measures of correcting disequilibrium.

(iii) Reducing inflation:

Inflation (continuous rise in prices) discourages exports and encourages imports.
Therefore, government should check inflation and lower the prices in the country.

(iv) Exchange control:

Government should control foreign exchange by ordering all exporters to surrender their
foreign exchange to the central bank and then ration out among licensed importers.

(v) Devaluation of domestic currency:

It means fall in the external (exchange) value of domestic currency in terms of a unit of
foreign exchange which makes domestic goods cheaper for the foreigners. Devaluation
is done by a government order when a country has adopted a fixed exchange rate
system. Care should be taken that devaluation should not cause rise in internal price
level.

(vi) Depreciation:
Like devaluation, depreciation leads to fall in external purchasing power of home
currency. Depreciation occurs in a free market system wherein demand for foreign
exchange far exceeds the supply of foreign exchange in foreign exchange market of a
country (Mind, devaluation is done in fixed exchange rate system.)