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.