1. “The economic environment of business exercises a strong influence on the non-economic environment.” Discuss this statement with the help of examples.
Solution:
Economic Environment
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 EnvironmentThe 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.
The global economy
The development of the global economy can be traced back many hundreds of years when traders from the east and west came together to exchange goods. However, the growth of the modern global economy is marked by a number of features as follows:
The legacy of mercantilism 1500-1750 The prevalent wisdom was one of nationalism, that is, that one nation prospered at the expense of another. Nations like the UK Netherlands France Germany
World trade Economic progress is linked to world trade and those who preach trade restrictions are denying this fact. Countries like the old communist bloc (Russia East Germany
Another argument concerns whether marketing has relevance to the process of economic development. Less developed countries (LDCs) have traditionally focused on production and domestic income generation. Also, marketing addresses itself to needs and wants and it could be argued that where LDCs' productive capabilities are far less than unsatisfied needs and wants, then marketing is superfluous. However, adopting "marketing" could lead to the more efficient and effective use of productive and marketing resources and it may be able to focus on current needs and find better solutions. For example, techniques developed in the West for optimising transport resources could well be transferred to effect. Similarly, adopting new methods of marketing may give better results. A good example is the Cold Storage Company of Zimbabwe (CSC). By changing from the current system of marketing cattle (the CSC takes in cattle, at fixed prices and slaughters) to an auction system by description, all actors in the system could benefit.
Decisions in product, price, communications and merchandising can stimulate economic development. Changing from fixed price systems to market based pricing could lead to the faster achievement of development objectives (for example "higher incomes"). In current drought conditions in Africa , governments could well benefit from advertising other forms of nutritious food, for example, fish, rather than let the populace be left uninformed and disgruntled about the lack of maize.
Composition of world trade Agriculture, minerals, fuels and manufactured goods figure most in world trade. However shifts are occurring
Shift in commodity trade - % of world trade | Product | 1980 | 1985% | 1988% |
| Agriculture | 22.5 | 1 | 14 |
| Minerals | 14 | -5 | 14 |
| Fuel | 41 | -3.5 | 1 |
| Manufactures | 17 | 4.5 | 1 |
Interestingly enough, those economies which have divested themselves of agriculture (or made it more efficient) and invested in manufacturing are those which have shown spectacular growth. Table 2.2 compares Zimbabwe
Patterns of trade Most industrialised nations trade with each other. This had led to their continued domination. particularly the USA Western Europe and Japan Zimbabwe China
| | Distribution of | |||||||||
| Country | | Agriculture | Industry | Manufacturing | Services | |||||
| 1970 | 1992 | 1970 | 1992 | 1970 | 1992 | 1970 | 1992 | 1970 | 1992 | |
| | 1415 | 5350 | 15 | 22 | 36 | 35 | 21 | 30 | 49 | 43 |
| | 7087 | 110337 | 26 | 12 | 25 | 39 | 16 | 28 | 49 | 49 |
Comparative costs - comparative advantage
As discussed in chapter one, price has been called the immediate basis for international trade - cheaper prices based on different cost structures, especially labour. Countries trade because they produce and export goods in which they enjoy a greater comparative advantage and import goods in which they have a least comparative advantage. A further refinement of this is the international product cycle discussed fully in chapter one.
Balance of payments This is the measure of all economic transactions between one nation and another. The balance of payments is made up of the current account, showing trade in goods and services; and the capital account, which shows financial transactions. In 1989, after official transfers, the USA Japan Tanzania Zimbabwe
The balance of payments account helps marketers select the location of supply for foreign markets and the selection of markets. The capital account may show the nations which have control restrictions and hence be difficult to deal with. In this regard, African nations are generally disadvantaged.
Government policy This refers to the government measures and regulations which have a bearing on trade - tariffs, quotas, exchange controls and invisible tariffs. These can cause formidable barriers to marketers and will be dealt with at length later.
World Institutions Institutions like GATT and the United Nations Conference on Trade and Development (UNCTAD) have been of help to countries in their development. GATT had over 120 members and associated and accounted for 80% of world trade. Its intention was to create a general system of preferences and negotiate tariffs for members' products on a nondiscriminant basis and provide a forum for consultation. The Kennedy Round of the 1960s was superseded by the Tokyo Uruguay
UNCTAD furthers the development of emerging nations. It seeks to improve the prices of primary goods exports through commodity agreements. It also established a tariff preference system favouring developing nations. Regionalism
Regionalism is a major and important trade development. Some regional groupings have either market (EU) or command (China Mauritius Eastern Europe . Of these blocs, the EU (reporting 33% of world trade) and EFTA are very important. To counteract the growing power of the EU, the USA Canada Mexico
These blocs are of various form, power, influence and success. ASEAN is a collaboration of industry and agriculture, PTA in tariffs. SADC and PTA have had historically little impact but are now beginning to grow in importance in view of the normalisation of South Africa
The development of trading blocs can bring headaches and advantages to trade. It is worth comparing the European Union, a relatively well developed bloc, with SADC and the PTA which are well developed. SADC and PTA are described in a little detail in appendix one and two of this chapter.
The international financial system Global financing operations based on the gold standard gave rise to instability, so Bretton Woods, post World War II, saw the nascence of the International Monetary Fund (IMF) and World Bank.
The IMF deals with the International Monetary System. Involved countries joined IMF to establish a par value for other countries in terms of the US dollar and maintain it with +/- one percent of that value. The system fell down because large corporations were holding more funds than banks and so a "float" set in. IMF began to fade somewhat. However it still lends, on a short term basis, to countries with payment problems to help them continue trading.
The World Bank, or International Bank for Reconstruction and Development (IBRD) deals with international capital. It provides long term capital to aid economic development. Currently it has about US$ 22 billion annually for this operation. The role of the World Bank has often been criticised especially on its conditionalities for loans to Africa in funding structural adjustment and trade liberalisation programmes. However many developing countries require institutional funding to help them with trade and balance payment problems.
Other major lenders include the EU and bilateral donors and agencies who have provided money for developmental projects. A principal donor is the United States Agency for International Development (USAID).
The nature of economy More than money makes up an economy's economic environment. Natural resources -raw materials now and in the future are important. If synthetic gold or tobacco were developed or, in the case of the latter, became unfashionable, Zimbabwe
Topography may produce two, three or more submarkets in a country. Zambia
Extremes of climate - like the Southern African drought in 1992 can devastate economies and derail any economic development plans and exports. Simply, products are not available to export, because they are being consumed by the domestic economy.
The nature of economic activity Economic activity is often correlated to the type of economic activity. Various methods have been derived to classify economies. These are:
Stages of market development
Global markets are at different stages of development which can be divided into five categories based on the criterion of gross national product per capita.
i) Preindustrial countries - incomes less than US$ 400 GNP per capita. Limited industrialisation, low literacy rates, high birth rates, heavy reliance on foreign aid, political instability. Parts of Sub-Saharan Africa . Little market potential.
ii) Less developed countries - per capita between US$ 401 and US$ 1,635. Early stages of industrialisation, growing domestic market, mature product markets, increasing competitive threat.
iii) Developing countries - per capita income between US$ 1,636 and US $ 5,500. Decrease in percentage of agricultural workers, industrialisation, rising wages, high literacy rates, lower wage rates than developed countries, formidable competitors.
iv) Industrialised countries - per capita income between US$ 5,501 and US$ 10,000. Moving towards post industrialisation, high standard of living.
v) Advanced countries - per capita income in excess of US$ 10,000. Post industrialisation, information processors, knowledge based, less machine based. Product opportunities are in new products, innovations and raw materials plus fresh foods.
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