eco env of business gdb

8/7/2019 ECO ENV OF BUSINESS GDB

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ECONOMICECONOMIC

ENVIORNMENTENVIORNMENTOF BUSINESSOF BUSINESS


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Environment: a ComplexEnvironment: a Complex

PhenomenonPhenomenon

AAclose/direct relationship betweenclose/direct relationship between Eco.environmentEco.environment

and Business environment: close interlock.and Business environment: close interlock.

a. Business Managers Basic Function: Makinga. Business Managers Basic Function: Making

Decisions.Decisions.

b. Decisionb. Decision--making: selecting alternativesmaking: selecting alternatives--choice ofchoice ofone among available.one among available.

c. Basis for selection: concepts, tools techniquesc. Basis for selection: concepts, tools techniques

derived from economics.derived from economics.


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Problems involved:Problems involved:

complex environmental factorscomplex environmental factors..

IdentificationIdentification

DescriptionDescription

Explanation andExplanation and

PredictionPrediction


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Environmental factors:Environmental factors:

DynamicDynamic

Difficult toDifficult to

Quantify the proportionQuantify the proportion

Identify direction of changeIdentify direction of change

ConceptualiseConceptualise


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ClassificationClassification

Space: Local, regional, national andSpace: Local, regional, national and

international environment.international environment.

Time: Past, Present and Future.Time: Past, Present and Future.

Term: Short, Medium, Long andTerm: Short, Medium, Long and

Secular.Secular.

Forces: Market and NonForces: Market and Non--marketmarketEnvironment.Environment.

Factors: Economic and NonFactors: Economic and Non--

economic environment.economic environment.


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ClassificationClassification

MicroMicro--economic factorseconomic factors

MacroMacro--economic factorseconomic factors

Endogenous factorEndogenous factor

Exogenous factorExogenous factor


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Interdependence of factors:Interdependence of factors:

Concept of Interaction Matrix.Concept of Interaction Matrix.

Illustration: Matrix 7x5 MatrixIllustration: Matrix 7x5 Matrix

Economic environment and nonEconomic environment and non--economic environment.economic environment.


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National Economic environmentNational Economic environment

and National nonand National non--economiceconomic

environment.environment.


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Present and Future EconomicPresent and Future Economic

environment and Present andenvironment and Present and

Future nonFuture non--economic environmenteconomic environment..


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ECONOMIC SYSTEMSECONOMIC SYSTEMS


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ECONOMIC SYSTEMS:ECONOMIC SYSTEMS:

FunctioningFunctioning


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EXPLANATIONEXPLANATION

ClassicalClassical KeynesKeynes KeynesianKeynesian MonetanistMonetanist NeokeynesianNeokeynesian

Classical Economists Explanation and Policy ImplicationsClassical Economists Explanation and Policy Implications

ExplanationExplanation Flexible priceFlexible priceWage policiesWage policies

A.A. Says Law of MarketSays Law of MarketSupply creates its own demandSupply creates its own demand

No rigidities.No rigidities.

BB.. ArthurArthur LafferLaffer::

Concept ofConcept of LafferLaffer CurveCurve

Proposition: A sizeable proportionProposition: A sizeable proportionof tax cut will result in aof tax cut will result in a

significant flow back intosignificant flow back into Flexible tax policiesFlexible tax policiesthe Treasury via indirect taxthe Treasury via indirect tax

-- rise in saving & capitalrise in saving & capital

accumulation and creates growthaccumulation and creates growth

through stimulating demandthrough stimulating demand


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Keynes ExplanationKeynes Explanation

ExplanationExplanation

Keynes Explanation effective demand is the key toKeynes Explanation effective demand is the key toattain growth of outputattain growth of output--income andincome and employment.employment.

PolicyPolicy

Absolute faith inAbsolute faith in Fiscal policies for promotingFiscal policies for promotinginvestmentinvestment or additional public Investmentor additional public Investment


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MonetaristsMonetarists

Monetarists ExplanationMonetarists Explanation Absolute faith inAbsolute faith in

Through variation in aggregateThrough variation in aggregate Monetary PolicyMonetary Policy

Demand for money and interestDemand for money and interest

Rate, attain growth and stabilityRate, attain growth and stability


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New Keynes ExplanationNew Keynes Explanation

Implies structural adjustment policies.Implies structural adjustment policies.

Hence, Macroeconomic policies are to gearedHence, Macroeconomic policies are to geared

towards the requirements of:towards the requirements of:

a. Stabilization.a. Stabilization.

b. Structural adjustments.b. Structural adjustments.

c. Growth and development.c. Growth and development.

d. Corporate adjustments and microlends such asd. Corporate adjustments and microlends such asadjustment in production marketing strategies,adjustment in production marketing strategies,

supply chain etc.,supply chain etc.,


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Keynesian ExplanationKeynesian Explanation

Implies a mix of fiscal andImplies a mix of fiscal andmonetary policies.monetary policies.


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Theory of Economic PolicyTheory of Economic Policy


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NATIONAL INCOME (NI)NATIONAL INCOME (NI)

Total value of all final goods andTotal value of all final goods and

services producedservices produced

in a country in a given year.in a country in a given year.


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National Product =National Product =

[[ Value of FinalValue of Final] {] { WagesWages }}[[ goods andgoods and ] = {] = { + Rent+ Rent } =} = National IncomeNational Income..

[[ servicesservices ] {] { + Interest+ Interest}}

{{ + Profit+ Profit }}


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Prof. Hicks:Prof. Hicks: The value of net social productThe value of net social product

of the community and the sum of the incomesof the community and the sum of the incomesof its members are exactly the same.of its members are exactly the same.

[GNP] [Gross National Product][GNP] [Gross National Product]

Total market value of all final goods and servicesTotal market value of all final goods and services

produced by normal residents of a country in a year.produced by normal residents of a country in a year.

Note: It is a monetary measure and physical outputNote: It is a monetary measure and physical output

growthgrowth adjusted price changes. It includes onlyadjusted price changes. It includes only

values of final products, currently produced goodsvalues of final products, currently produced goods

and services. It excludes purchase and sale of assetsand services. It excludes purchase and sale of assets

such as stocks, bonds etc.,such as stocks, bonds etc.,


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Components of NGP:Components of NGP:

C = Consumption of final goods and services.C = Consumption of final goods and services.

I = Gross product investments (New capital goods,I = Gross product investments (New capital goods,

addition to inventories unfinished goods.addition to inventories unfinished goods.

G = value of output of general government.G = value of output of general government.

Net Export (Net Export (XnXn) = Value of Ex) = Value of Ex--Imp.Imp.

Net Factor Income (NFI) = Factor income receivedNet Factor Income (NFI) = Factor income received

from abroadfrom abroad


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Gross Domestic Product (GDP)Gross Domestic Product (GDP)

GDP = GNPGDP = GNP Net Factor IncomeNet Factor Income

earned from abroad (NFA)earned from abroad (NFA)

GNP = GDP+NFAGNP = GDP+NFA

GDP = C+I+G+XnGDP = C+I+G+Xn

Where Xn = (XWhere Xn = (X--M)M)

Illustration 6Illustration 6


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GNP (At Market Price)

Net Factor

Income fromabroad

GDP(MP)

NDP

Gross Private

Investment

(GPI)

GPI Less

Depreciation

NPI

NDP

(at Factor cost)

Net Exports Xn(Export-Import)

Xn Xn Less Indirect Taxes

Government

Purchases (G)

G G Wages

+ Rent

+ Interest

+ Profit

Consumption

Expenditure (C)

C C


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ORGANISED SECTOROF THE INDIAN MONEY MARKET

Sub-markets Institutes Participating Instruments

Call Money Market RBI Treasury Bills

Treasury Bill Market Discount Fin.#. Repos.

Repo-Market Banks Inter-Bank

Commercial/Trade DFIs Call Money

Bills market Investment F.Companies Command

Certificate of Deposits Mutual Funds Trade Bills

Market

Commercial Paper market Commercial papers

Money market mutual

funds

Certificate of Deposits

Participation certificates


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IMPORTANT EVENTS: $IMPORTANT EVENTS: $

FACTORS/DETERMINANTS OF CALLFACTORS/DETERMINANTS OF CALL

MONEY RATESMONEY RATES

>> Advance tax outflows.Advance tax outflows.> Govt. cash balances.> Govt. cash balances.

> Festive season currency demand .> Festive season currency demand .

> Trends in capital flows.> Trends in capital flows.> Currency demand.> Currency demand.

> Changes in CRR/SLR/Report rate.> Changes in CRR/SLR/Report rate.

> Credit demand.> Credit demand.


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During 2006During 2006--07 average call rate: 7.22 percent.07 average call rate: 7.22 percent.

Dec.2006 Hike in CRR 25 + basis point.Dec.2006 Hike in CRR 25 + basis point.

Collateralised ShortCollateralised Short--term borrowing and lending:term borrowing and lending:

through sale/purchase operations.through sale/purchase operations.

Repo: Holder sell securities with agreement toRepo: Holder sell securities with agreement to

repurchase.repurchase.

Reverse Repos => Securities are purchased with anReverse Repos => Securities are purchased with an

agreement to sell.agreement to sell.


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Important events in Call Money.Important events in Call Money.

1980s1980s -- C. rates administeredC. rates administered Fixed at 10%Fixed at 10%by IBA.by IBA.

LIC/UTI were allowed to lendLIC/UTI were allowed to lend not tonot to

borrow.borrow. Vaghul Committee recommended.Vaghul Committee recommended.

July 1988 DFHI. SetJuly 1988 DFHI. Set--up. Vaghul Committeeup. Vaghul Committee

Ceiling on Call Money Rate withdrawnCeiling on Call Money Rate withdrawn 19891989

1990s. IDBI, AFI allowed to participate.1990s. IDBI, AFI allowed to participate.


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Determinants of Call Money RatesDeterminants of Call Money Rates

Advance tax outflows.Advance tax outflows.

Govt. cash balances.Govt. cash balances.

Festive season currency demand.Festive season currency demand. Trends in Capital Flows.Trends in Capital Flows.

Currency Demand.Currency Demand.

Changes CRR/SLR/Repo rates.Changes CRR/SLR/Repo rates.


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It could be seen from the figure during Nov.It could be seen from the figure during Nov.

Dec. Jan ranging between 17 to 18 percent.Dec. Jan ranging between 17 to 18 percent.The call rate high: Attributed to Advance Tax,The call rate high: Attributed to Advance Tax,

Govt. Cash Balances following HeavyGovt. Cash Balances following Heavy

spending. Festive season at average ratespending. Festive season at average rate

around 7%.around 7%.

LIQUIDITY ADJUSTMENT FACILITY (LAF)LIQUIDITY ADJUSTMENT FACILITY (LAF)

LAF: Collateralised Segments of the money market.LAF: Collateralised Segments of the money market.

It accounts for 70% of the total volume in the callIt accounts for 70% of the total volume in the call

money market.money market.


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CASE.CASE.

Case Analysis of Collapse/Case Analysis of Collapse/

Debacle of Investment Banks.Debacle of Investment Banks.

Is it due to Wrong Business Model ?Is it due to Wrong Business Model ?(borrowing short funds(borrowing short funds Lend Long)Lend Long)

Is it due to abnormally high Leveraging?Is it due to abnormally high Leveraging?

[Leverging upto 30[Leverging upto 30--40 times their equity]40 times their equity]=> Lehman Brothers et al and Bear Stearns.=> Lehman Brothers et al and Bear Stearns.

$ 600 bn worth of assets on the equity base of$ 600 bn worth of assets on the equity base of$ 26 bn.$ 26 bn.

Is Rating Agencies at fault?Is Rating Agencies at fault?

Is it because ignorance/ indifference / looseIs it because ignorance/ indifference / loosesupervision of Regulatory Authorities.supervision of Regulatory Authorities.

ECONOMIC ENVIORNMENTOF BUSINESS


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ECONOMIC ENVIORNMENTOF BUSINESS

Project Work for Internal Test.-2009 Semester II.

S.N. Topics for Class Projects Sources of material for quick reference.

1 Debacle of Investment Banking

2 Keynesian solution to the problem of Crisis. Business Line. December 1, 2008.

3 Fiscal measures to revive Economic Times 24th October, 2008

9th December, 2008.

The Financial Express 15th December, 2008

4 Global Fiscal Crisis Business Standard 25th November, 2008

5 Globalisation, Regulations and Recent Crisis. Economist. September 2, 2008

6 India Policy response to Economic Slow-down The Economic Times 8th December, 2008

7 Anatomy of A Recent Global Crisis The Economic Times 15th December, 2008

Business Line: 15/12/2008

8 Restructuring Financial Rules Business Standard. 17/11/2008

9 Implications of Globalisation Entrepreneurship, Growth and economicIntegration A Linkage.

10 Indian Balance of Payments Successive issues of Trend and Progress of

Banking. Reserve Bank of India.

11 Critical Issues in Long-Term Debt Market. RBI Annual Reports and Business

Standard 11th August, 2008.

12 The Recent Credit Crisis Economic and Political Weekly. December

6, 2008. pages 33-41.

eco env of business gdb

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