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CHAPTER 2: Understanding the Environment of Business
Introduce key measures of economic performance:
Gross domestic product (GDP)
GDP / capita
gross national product (GNP)
External Environment: everything outVLGHDQRUJDQL]DWLRQ¶VERXQGDULHVWKDWPLJKWDIIHFWLW
Economic environment: conditions of the economic system in which an organization operates
ÆMacDonald: function in moderate unemployment (most ppl can eat out but pay higher wages)
Evaluating Economic Systems
Purpose of an economic system:
x Assemble and organize resources;
x Make things that people want;
x So people will buy them;
x Creating profits for suppliers;
x So everyone will be better off.
How to measure whether economy is functioning well?
1. Is economy producing things people want?
2. Is it producing things quickly and efficiently?
3. At reasonable prices?
4. Using the resources at its disposal?
Business Cycle: patterns of short term ups and downs in an economy (Peak, recession, trough, and
Recession: period during which aggregated output declines
Depression: particularly severe and long-lasting recession
Aggregate Output: total quantity of G+S produced by an economy during a given period
- main measure of growth in business cycle
- increase in AO is economic growth
- output growth faster than population :
1) output per capita (quantity of G+S) increase
2) system provides more G+S Æ higher standard of living
Standard of Living WRWDOTXDQWLW\RITXDOLW\RI*6WKDWDFRXQWU\¶VFLWL]HQV can purchase with
the currency used in their economic system
Is economy producing things people want?
Gross domestic product (GDP): Value of all things produced in Canada in one year
through domestic factors of production
Æ higher GDP = economy growing
Gross National Product: total value of all G+S produced by a national economy within a
given period regardless of where the factors of production are located
- profits earned by Canada company abroad are included in GNP not GDP
-earned by foreign firms included in GDP
Canada's GDP (2004): approx $ 1 trillion, 11th largest economy [2% of world GDP]
- our largest competitors/players in GDP are the large European countries
GDP - Largest Economic Systems 2004
World $ 55,500,000,000,000
1 United States $ 11,750,000,000,000
2 China $ 7,262,000,000,000
3 Japan $ 3,745,000,000,000
4 India $ 3,319,000,000,000
5 Germany $ 2,362,000,000,000
6 United Kingdom $ 1,782,000,000,000
7 France $ 1,737,000,000,000
8 Italy $ 1,609,000,000,000
9 Brazil $ 1,492,000,000,000
10 Russia $ 1,408,000,000,000
11 Canada $ 1,023,000,000,000
12 Mexico $ 1,006,000,000,000
13 Spain $ 937,600,000,000
Growing GDP: more people making more stuff.
Falling GDP: fewer people buying less stuff.
2007 GDP = 2.7% more than 2006
GDP - % Increase, last 12 Months 
* [EXAM] 1 or 2countries that will become lot more wealthier, in the west although
we started with lots of wealth we are not growing a lot, explain the important of GDP