Economic Environment: Concepts, Systems, Types

What is Economic Environment?

Economic environment refers to all those economic factors which have a bearing on the functioning of a business unit. Business depends on the economic environment for all the needed inputs. It also depends on the economic environment to sell the finished goods. Naturally, the dependence of business on the economic environment is total and it is not surprising because, as it is rightly said, business is one unit of the total economy.

It is difficult to be precise about the factors which constitute the economic environment of a country. But still, there are some factors that have considerable influence. These factors are:-

  • Growth strategy
  • Economic system
  • Economic planning
  • Industry
  • Agriculture
  • Infrastructure
  • Financial and fiscal sector
  • Removal of regional imbalances
  • Price and distribution control
  • Economic Reforms

Out of the above-said factors, two are of most importance:

  • Economic system
  • Economic Reforms

Economic Systems

The role of economic systems is to manage our resources to produce the goods and services that societies need and to improve human well-being. And the scope of a private business and the extent of government regulation of economic activities depend to a very large extent on the nature of the economic system, which is an important part of the business environment.

The economic system is part of the Economic environment. The economic environment includes the type of economic system that exists in the economy, the nature and structure of the economy, the phase of the business cycle (for example, the conditions of boom or recession), the fiscal and monetary policies of the Government, foreign trade and foreign investment policies of the government. These economic policies of the government present both opportunities as well as threats (i.e. restrictions) for the business firms.

Types of Economic System

The types of economic systems are divided into three groups. Which are given below:

  1. Capitalism
  2. Socialism
  3. Communism


The system of capitalism stresses the thinking of individualism believing in private ownership of all agents of production, in private sharing of distribution processes that determine the functions and rewards of each participant, or an individual expression of consumer choice through a free marketplace.

In its political manifestation, capitalism may fall in a range between extreme individualism and anarchism (no government) and the acceptance of some state sanctions. The capitalist system is also called a free enterprise economy and market economy.

capitalism may be distinguished into two categories:

Laissez-fair Capitalism

The old, laissez-fair capitalism, where government intervention in the economy is absent or negligible;

Mixed Capitalism

The modern, regulated or mixed capitalism, where there is a substantial amount of government intervention.


Under socialism, the tools of production are to be managed, organized, and owned by the government, for the benefit of the public. A strong public sector, agrarian reforms, control over private wealth and investment, and national self-reliance are the other planks of socialism. Socialism does not involve an equal division of existing wealth among the people but advocates the egalitarian principle.

It believes in providing employment to all and emphasizes suitable rewards for the efforts put in by every worker. Also known as Fabian socialism, this philosophy is followed in our country and the other social-democratic countries in the world.


Communism goes further to abolish all private property and property rights to income. The state would own and direct all instruments of production. Sharing in the distributive process would have no relationship to private property since this right would not exist. Alternatively called maxism, communism was followed in China, Russia, and East European Countries.

Mixed Economic System

In a mixed economy, there is a compromise between the pure capitalistic and socialistic economic principles. This sort of compromise has led to the growth of both public and private sectors simultaneously.

The Indian economy is a mixed economy because there is the co-existence of the public and private sectors along with the expanding activities of economic planning in the Indian economy since independence. Thus, the distinct features of the Indian economy being a mixed economy are as follows:

  • Co-existence of Public and Private Sectors
  • Role of Market Mechanism
  • Public Sector Participation in Giant Industries
  • Government Control and Regulation of the Private Sector
  • Economic Planning
  • Control of Monopoly
  • Reduction of Economic Inequalities

Concept of Economic Reforms

Economic reforms broadly indicate structural adjustments of a country to the trends and events in the global environment. While making such adjustments, requires, firstly, a reduction of the country’s spending to the level parallel to its income and thereby reducing its fiscal deficit considerably.

Secondly, it requires a market-oriented structural change in order to make the economy more efficient and flexible and also for using both domestic and external resources in a most appropriate manner.

The concept of economic reforms is as follows:

  1. Liberalization
  2. Privatization
  3. Globalization


Liberalization means unshackling the economy from bureaucratic cobwebs to make it more competitive. Following are its important features:

  • To do away with the necessity of having a license for most the industries
  • Freedom in determining the scale of business activities
  • Removing restrictions on the movement of goods and services from one place to another
  • Freedom to fix the prices of goods and services
  • Reduction in the rate of taxes
  • Freedom from unnecessary control over the economy
  • Simplifying import-export procedure
  • Simplifying the process of attracting foreign capital and technology.


Privatization means the following:

  • The transfer of ownership of property or businesses from a government to a privately owned entity.
  • The transition from a publicly traded and owned company to a company that is privately owned and no longer trades publicly on a stock exchange.


Globalization means integrating the economy with the rest of the world. Following are its chief features:

  • Free flow of goods and services in all the countries
  • Free flow of capital in all countries
  • Free flow of information and technology in all countries
  • Uniformity of conflict-solving techniques in all countries.