Answer to Question #132557 in Microeconomics for Neba

Question

What does it mean by an economic environment? How this makes foreign trade different from domestic trade?

Answer 1

An economic environment relates to those factors that affect the behavior of buyers and sellers. These include factors such as demand, supply, inflation, interest rate, employment, and income levels. Experts have it that there exist interdependence between consumers’ buying behavior and the commercial habits of firms. The forces of demand and supply, for example, regulate enterprises’ ability to adjust prices.

There are two categories of economic environments. The microeconomic one relates to factors that affect a single entity rather than the industry. They include demand, competitors, suppliers, and market size. The macroeconomic environment is those factors whose impact goes beyond one company to affect the whole economy. They include inflation, unemployment, taxes, and interest rates.

Domestic trade is where commercial activities are defined within the boundaries of a given economy. International trade, on the other hand, includes business activities conducted between countries. In international trade, the economic environment entails factors from all the countries involved. For example, the buyers’ behavior differs from one country to the other due to their socio-cultural beliefs. Secondly, competition is big with international companies as compared to domestic ones. In conclusion, domestic and international trade differs from the extent of their external economic environments. International trade exhibits an expansive external environment, while domestic trade exhibits a smaller one.