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What is an Economic Environment?

By Osmand Vitez
Updated May 16, 2024
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An economic environment is the total number of economic factors that make up the economy of the nation. Economic factors are broken down into two separate environments: microeconomic and macroeconomic. The microeconomic environment includes information relating to the economic situations of individuals in society. The macroeconomic environment includes economic factors relating to the aggregate economic information of business industries, sectors or other particular groups of individuals and businesses. A country’s fiscal, monetary or economic policy can have great implications on the nation’s entire economic environment.

An important economic factor is the inflation or deflation that alters the purchasing power of the nation’s currency. While it is impossible to determine what really causes inflation and deflation, the business cycles found in a free market economy are often considered the main reason for inflation or deflation outside of political intervention. As the purchasing power of money changes in the economic environment, consumers often change their spending behaviors and businesses missing invest less money in their operations. Current political systems usually change the monetary and fiscal policy of the nation in order to correct these changes by consumers and businesses.

Monetary and fiscal policy in an economic environment attempts to maintain full employment, price stability and economic growth. Government intervention may not always have a positive effect on the nation’s economic environment. Under free market principles, governments should be restricted from significantly altering the market’s monetary or fiscal policy since political solutions often create more problems when correcting economic situations. Two other significant areas of the nation’s economic environment include interest rates for borrowing and exchange rates of goods among countries.

Interest rates are the cost of borrowing money usually set by nation’s central bank. These interest rates attempt to create a smooth flow of money between businesses, banks and individuals. These groups typically need copious amounts of money for purchasing big ticket items are making otherwise large economic investments. Interest rates, also called the cost of money, can also have major implications on the ability for banks to extend credit to businesses and individuals. Decreases in business investments may limit the number of imports or exports found in the economic environment.

Government agencies are usually responsible for setting the terms of importing and exporting goods in the economic marketplace. These policies help companies determine if they should import or export economic inputs or resources when producing are selling goods in the global economic marketplace. Failing to encourage a strong import and export economic environment can severely impact the amount of capital found in a nation’s economy.

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Discussion Comments
By mutsy — On Jan 21, 2011

Suntan12-Well said. The problem with the Obama administration is that he has no experience of ever running a business, not even a lemonade stand.

As a matter of fact, no one in his cabinet has a business background which is unheard of.

The economic and general business environments are tied together. The only way to have economic prosperity is to provide tax breaks for all including the wealthy that are permanent.

This would take some uncertainty away from businesses, but the problem with Obama is that the minute businesses think that they dodged a bullet, they face yet another threat.

His social justice agenda is ruining corporate America and many economists say that the millions of jobs lost may never return because many companies have sought to hire employees in other countries.

When businesses are offered lower taxes they expand their business by hiring additional workers, this raises the standard of living for the hired employees who tend to spend more now that they have a job.

Businesses are the lifeblood of the American economy and when taxes and regulations go up so does unemployment.

By suntan12 — On Jan 20, 2011

Icecream17-Many companies go around these healthcare bill regulations by hiring contract workers or even sending jobs overseas.

The only way to have true economic growth is to stop following this Keynesian economic model and move towards a supply side economic model.

You just have to look at history as a guide because the worst periods of economic misery in the United States all followed Keynesian economics.

Those periods were the Great Depression under the FDR administration, the stagflation of the 1970’s during the Carter administration, and our current economic environment of 2009 with the Obama administration.

The periods of highest economic growth was in the 80's under the Reagan administration. He created business and economic environment that lead to the creation of 25 million jobs by lowering tax rates from 70% to 24%.

By icecream17 — On Jan 17, 2011

The economic business environment is directly related to the current economic environment of 2009.

Under the Obama administration many businesses have laid off employees which spiked the unemployment rate to the highest rates within the last forty years.

This difficult economic environment developed because of tighter lending standards that were brought on by the additional financial regulations created on by the federal government.

In addition, the uncertainty with respect to taxes and additional business regulations is putting many business owners in a position to lay off even more employees and some have even filed for bankruptcy.

For example, the socialized Healthcare bill forces companies to forgo hiring additional employees because they face higher fines if they do not comply with these additional regulations. Economic growth vs the environment also adds another layer of regulation that is strangling American businesses.

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