Textbook Notes (362,929)
Canada (158,105)
Management (796)
MGM101H5 (354)
Chapter 5

Chapter 5.docx

9 Pages
Unlock Document

University of Toronto Mississauga
Gill Parveen

Chapter 5 The Canadian Economic Environment Canada & Its Economic System  As a current member of the g7/8 Canada possesses one of the most fully developed economic systems in the world  G7/8: a quasi-organization comprising the world’s major fully developed economies. The G7 consists of the United States, Japan, Germany, Great Britain, France, Italy, and Canada. In 2006, the G7 transitioned to the G7/8 with the inclusion of Russia into its membership. Heads of G7/8 with the inclusion of Russia into its membership. Heads of G7/8 countries meet at least once annually to discuss major economic, political, and societal issues challenging the global marketplace. Recent meeting trends have also resulted in representatives of major developing economies (such as China) attending at least part or all of such summit meetings.  Productivity gains, strong business investment, technological innovation, moderate wage increases, and a favorable currency exchange rate are all key factors that are deemed to be critical in ensuring that our economy remains resilient and competitive now and in the future.  Our possession of a strong natural resource base results in our having a comparative advantage when it comes to the commodities and energy market sectors  End result is that many companies and investors view Canada as a safe and lucrative place to do business.  Comparative advantage: refers to the ability of a country to produce or supply goods or services at a lower cost than other countries or to possess resources or unique services that are unavailable elsewhere.  Foreign Direct Investment (FDI): occurs when a company or individual from one country makes an investment into a business within another country. This investment can reflect the physical ownership of productive assets of the purchase of a significant interest in the operations of a business.  A core requirement to the stability and growth of any economic system lies in its ability to service and promote both the current and future economic activity taking place The Underlying Economic Model  In addition to these contributing factors to economic factors to economic development, in order for an economic system to develop and grow and to encourage and foster a climate that promotes and rewards economic risk, a balanced relationship also needs to be established among three fundamental market composition principles: 1. The law of supply and demand 2. Allowance for private ownership, entrepreneurship, and wealth creation 3. Extent of government involvement in influencing economic activity and direction LAW OF SUPPLY AND DEMAND  A core fundamental of an open economic environment, the law of supply and demand refers to the ability of the market, independent of external influences, to determine the price for which a product or service will be bought and sold.  Demands can be perceived to be elastic, or inelastic depending on the movement in the quantity demanded for the various price points at which producers are considering offering a product or service to the marketplace.  Inelastic demand results when movement in price does not result in significant changes in demand  Elastic demand reflects situation where the quantity demanded does change significantly due to a change in price  While “demand” reflects the buyer’s position toward a product, “supply” reflects how much of a product or service producers are willing to provide the market at various price points –suppliers need to think about the cost of production versus the revenue that will be received from selling their product, and the change in profit that will be realized at different points on the schedule.  Supply and demand =quantity demanded and quantity supplied  Law of Supply and Demand: refers to the ability of the market, independent of external influences, to determine the price for which a product or service will be bought and sold. GOVERNMENT INVOLVEMENT IN INFLUENCING ECONOMIC ACTIVITY AND DIRECTION  Government involving in the economy relates to the varying roles government can play within ongoing day-to-day economic activities  Government can act as a customer via the purchasing of goods and services; as a regulator, restricting access or defining competitive protocols within particular economic sectors; as a manager via powers granted to Crown organizations, such as the Bank of Canada; as a taxation agent; as an economic stimulation agent via grant and subsidy programs, infrastructure development programs and specific industry or company bailout programs;; and as a competitor (providing services in direct competition for private –sector businesses)  Open System: refers to an economic system that adheres to the principles of economic freedom: the law of supply and demand, full and open access to the principles of private ownership, entrepreneurship, and wealth creation, and an absence of regulation on the part of government.  Open systems are also interpreted as being systems where foreign trade and movements in labour and capital are largely unrestricted  Controlled System: refers to an economic system where the fundamentals of the law of supply and demand, private ownership, entrepreneurship, and wealth create on are largely restricted or absent, and the government fully controls the economic direction and activity. –operates without or experience minimal external trade  Mixed Economic System: refers to an economic system that contains components of both open and controlled systems. It includes the core principles of economic freedom, with some degree of centralized economic planning and government regulation and involvement. The Economy in Simple Terms  Productivity and its resulting economic activity will be predicated on the basis of 4 fundamental factors: 1. Expenditures: The purchases you make in support of your day-to-day economic activity that are deemed to be of value in meeting substance needs and in improving your overall quality of life. Clothing, food, housing and transportation would be examples of expenditures 2. Savings: Dollars you set aside today that will support economic activity and wealth creation in/for the future. Placing money in an RRSP (Registered Retirement Savings Plan) or purchasing GICs (guaranteed investment certificate) are examples. Your savings are then lent to others with the intent of stimulating their economic activity in the hopes of enhancing their wealth and private ownership levels. 3. Capital Asset Investments: investments you are making today to further expand your capacity to conduct and expand your productivity and overall economic capacity. If your business requires an additional truck in order to expand, the purchase of this truck would be considered an investment focused on expanding your productivity and economic activity. Investments in real estate with the purpose of building future equity via wealth appreciation are an additional example 4. Credit: the borrowing of dollars to support expenditures or investments being made. You may have needed to borrow money to purchase the above-mentioned truck, which you deem necessary to expand your business’s capacity and capabilities or to finance the real estate purchase you made o Economic Activity = Expenditures + Savings + Investment + Credit  Economies move and grow as a result of the activities of everyone (consumers, businesses, and government) in these same areas (expenditures, savings, investment, credit). The Economic Growth Cycle  The total value of a nation’s economy is measured by its gross domestic product, or GDP  GDP (Gross Domestic Product): refers to the total market value of the goods and services (economic output) a nation produces domestically over a period of time (generally one calendar year)  Examples of factors that contribute to economic growth, therefore, the total value of GDP are: o Goods and services produced and purchased domestically for consumption o Business investments within the economy o Goods produced for export purposes o Government spending  Economists track the movement of GDP (upward or downward) over a period of time to determine whether an economy is growing or contracting.  Recession: is a period of time that marks a contraction in the overall economic activity within an economy. A recession is typically believed to occur when an economy experiences two or more quarters of negative GDP movement  The movement of economic activity within an economy can be visualized or sequenced as follows: 1. Growth in the economy via its GDP driver(s) (mainly consumer spending in the United States and Canada) results in an increase in corporate revenue and profits and government tax revenue (increased revenue, GST revenue, provincial tax revenue, etc.) 2. As a result of this increase in profits and tax revenue, both business and government will possess increased capacity to invest in new infrastructure and new product/service offerings for consumers. These investments expand the economic infrastructure to meet the growing needs of the economy and the people within it, and add further stimulation to economic activity. 3. Increased business activity requires more employees, resulting in an expansion of employment opportunities. In Canada, as an example between 2005 and 2008 we realized some of the lowest unemployment numbers ever as a result of strong economic growth and the need for an expanded workforce. 4. With an increase in the need for workers, employers are forced to pay higher wages to attract and retain employees. These higher wages result in additional dollars for workers (consumers) to spend, and therefore, contribute to economic growth (via further spending and/or expanded credit capabilities). As long as this real wage growth outpaces inflationary pressures, true economic growth will occur. With prolonged periods of economic growth, such as that which Canada experienced from 2001 through 2006, the cycle continues to repeat itself and overall economic activity continues to expand. During the period from 2001 to 2006 for example, Canada’s GDP growth averaged between 2.5 5% and 3.5% annually.  Chartered Banks: are financial institutions regulated under the Canada Bank Act. Their primary responsibility is to bring together borrowers and lenders by accepting deposits and lending out money –all in a manner that safeguards the interests of their customers. Managing the Movement in the Economy  Growth needs to be managed in a way that stimulates investment yet maintains control of inflation and other inefficient economic influences –this balance is critical to ensure the growth that is taking place is real growth and not masked by inflation  Inflation is a rise in the level of prices of goods and services within an economy over a period of time Trends Impacting the Canadian Market  Inflation –inflation robs an economy of true growth and psychologically negatively impacts the confidence levels of consumers and business operators alike  Geographic clustering –occurs when regional economies develop into what are considered distinct from one another and separated by significant geographic space where interdependency is minimized  Currency exchange rate impact –the strength in the dollar as assisted in reducing the price of goods and services being imported into the country from other countries –disadvantage is that the stronger the dollar it impacts tourism and manufacturing export sectors, as the price of Canadian goods and services being exported to other countries has risen o Parity: means being equal or equivalent to; specifically the value of one currency being equal to that of another  Branch market impact o PPP (Purchasing Power Parity): a measure that takes into account the relative cost of living and the inflation rates of each country, and adjust the total value of economic activity accordingly o Hostile Takeover: Refers to an attempt by a company to take over another company whose management and board of directors are unwilling to agree to the merger or takeover  Sustainability and green initiatives –will have an increasing emphasis across the business spectrum – this will include an increased emphasis on green products, more environmentally friendly packaging, reduced carbon emissions, and greater sensitivity to the use of finite resources in the development, production and distribution of goods and services to the global community at large  Aging workforce, immigration and multi-culturalism  Long-term competitiveness  Small business emphasis  Globalization Managing in Challenging Times  As managers must be in tune not only with the general directions that are occurring, but also with the opportunities and threats that will develop as a result of such increased economic activity and interdependency.  As managers it is fundamentally important that we understand what is happening in both our domestic economy and within those global economies that influence our overall economic activity and prosperity  Some of the primary economic indicators that we assess on the basis of movement within them are: o Unemployment rate o Inflation rate o Consumer Price Index (CPI) o New housing starts o Manufacturing inventory o Consumer confidence index o Price of crude oil (per barrel basis) o Stock market indexes o Currency exchange rate o Monthly retail sales  Managers will also assess at the macro level the political, social, technological, environmental, and legal changes that are occurring, commonly referred to as a PESTEL analysis  PESTEL Analysis: refers to a macro-level assessment of the political, economic, social, technology, environmental, and legal trends that can or will impact the markets within which an organization competes.  Protectionism: is the outcome of the intent of economic policies that are put in place to protect or improve the competitiveness of domestic industries via impeding or restricting the openness of a market or markets to foreign competitors through the use of tariffs, trade restrictions, quota
More Less

Related notes for MGM101H5

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.