UNIT II

ECONOMIC ENVIRONMENT
 Economic dimensions of an economy
• Refers facets of economy of country
• Reflect economic development of country
• These are:
Economic dimension
Socio-economic dimension
Industrial and agricultural dimension
Economic development dimension
 1. Economic dimension
• Indicates economic performance of country
• Classified as:
1. Internal economic performance: includes
GDP, Income distribution, poverty level,
personal consumption, saving, debt and
credit availability, budget position, inflation,
interest rate, fiscal and monetary policy
2. External economic performance: reflected by
balance of payment, exchange rate, foreign
trade volume
 2. socio-economic dimension
• Indicates demographic features affecting the
economy directly and indirectly
• Composed of quantity as well as characteristics of
people
• Determined by number of people as well as their
purchasing pattern and capacity
• Size, distribution, density, growth, age and gender
mix, urbanization and migration
 3. Industrial and agricultural
dimension
• Related to production of goods and services
• Agriculture is primary sector of economy
• Reflects potential to supply goods and service
to consumer and raw materials to industrial
unit
 4. Economic development dimension
• Depends on system of national planning
• Portray development policies and strategies
along with allocation of resources in different
sectors of the economy
 Analysis of dimensions and their
impact on business
• GDP (gross domestic product): represents
monetary value of all goods and services
produced within a nation over a specified
period of time
• Main indicators used to measure performance
of country’s economy
• Measured in terms of size and growth rate
• 3 approaches used to determine GDP
1. PRODUCTION: Value added at each stage of
production
2. EXPENDITURE: adds up value of purchases
made by final users
3. INCOME: sums the income generated by
production. Eg: compensation received
• GDP per capita income:
Country’s economic output per person
Average income per person
Calculated dividing a country’s GDP by total
population
Determine relative purchasing power of the
people
• Income distribution:
Distribution of total GDP of a country amongst
its population
Extent to which income is distributed in an
uneven manner among population
Gap between poor and rich has further
widened
Difference in rural and urban; terai, hilly and
himalayas
• Exchange rate:
Rate between two currencies at which one is
exchanged for another
Two systems:
Fixed: currency value is fixed with another
single currency. China and U.S.; Also called
pegged exchange rate where weaker currency
tied up with strong currency (India and Nepal)
Floating: currency price is set by FOREX
market and is changing
• Unemployment rate:
Measures number of people looking for work
as a percentage of total labor force
Lower employment rate depicts the economic
soundness of a country
High rate; consumers have less money to
spend affecting the economy adversely
• Consumer Price Index (Inflation)
 reflects cost of living, or inflation
Calculating by measuring the costs of essential
goods and services
Determined by average increased cost of total
baskets of goods over a period of time
Increasing trend in current scenario of Nepal
• Poverty
Inability to attain a minimum standard of
living
Condition of people who are not able to meet
the basic necessities such as food, health,
education, shelter, etc.
Leads to unavailability of skilled labour
Low employee productivity due to lack of
proper training and education
• Interest rate:
Amount that a lender charges to individual or
business on lending
Higher interest rate result in higher total
business expenses
Reduce consumer spending
• Credit availability
Access of business sector in credit
Higher savings by the people in financial
institutions results in easy credit availability at
favorable terms and conditions to businesses
• Business cycle
Fluctuations in aggregate economic activities
such as output, employment, demand, etc.
 affect operation of business firm
4 phases:
Depression: economic activities below normal
Recovery: slowly improve
Prosperity: increase rapidly, peak
Recession: fall in output, income, price,
demand, and profit
• Taxes:
Increases price of products
Low- higher profit

• Monetary policy:
Formulated and implemented by central bank
Management of money supply and interest
rate
Achieve price stability, economic growth,
balance of payment
• Fiscal policy
Determine countries economic direction
Related to level of taxation, government
spending's
Influence economy to adjust revenue and
spending
Can influence inflation, employment and flow
of money
 Overview of latest economic
development plan (14th)
• Formulated by NPC(National Planning Commission)
• Based on which government will frame development
policies and programs
• Focus on:
 Reducing poverty
 Sharing economic prosperity
 Post earthquake reconstruction and rehabilitation
 Development of physical infrastructure and good
governance
• Vision:
Independent, prosperous and socialism
oriented national economy and prosperous
Nepal
Goal:
To reach the level of middle income country
by being welfare state with social justice
 objectives
• To focus on productive job
• To acquire high economic rate with justifiable
distribution
• To rapidly decrease poverty
• To transform the country economically and
socially
 strategies
• Increase output via transformation of agricultural
sector and expansion of tourism, industries as
well as small and middle business
• Building infrastructures for development of
energy, road and air transportation, information
and communication, rural-urban and tri-country
interconnection
• Promote high and sustainable human
development by emphasizing social
development and security
• Promote good governance by economic, social
and governance reforms, efficient and
accountable finance, fair, transparent and
people centric public service, and protecting
and promoting human rights
• Gender equality, inclusiveness, environmental
protection, utmost utilization of science and
technology and enhancement of institutional
capacity
 Indicators of analyzing economic
environment
• All the indicators studied in economic
dimension previously
• GDP, PER CAPITA INCOME, INCOME
DISTRIBUTION, EXCHANGE RATE,
UNEMPLOYMENT RATE, INFLATION, POVERTY,
INTEREST RATE, CREDIT AVAILABILITY,
BUSINESS CYCLE, TAXES, MONETARY POLICY,
FISCAL POLICY,
 Social indicators of Nepal
• Population:
Influencing socio-economic element
Affects business firm
2011 population: 26,494,504
Growth rate: 1.35 %
• Population density:
Number of people per unit of area, quoted
per square kilometer
50.2% in Terai, 43.1 in hilly and 6.7 in
himalayas according to census 2011
Affect business sector
Concentration of business activities in urban
areas
Lack of agricultural workers in rural areas
• Age and sex structure:
Base of market segmentation to formulate
marketing and other strategies
4.4% more than 65 years, 61% 15-64 and
34.6% less than 14
Female median age group: 22.5 years
Male median age group: 20.7 years
Dependency ratio: 76; 76 persons were
dependents out for every 100 working
persons