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Chapter 5

CHAPTER 5 - ECONOMIC ENVIRONMENT summary

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Department
Management
Course
MGM101H5
Professor
Dave Swanston
Semester
Fall

Description
Chapter 5 Notes G7/8 is 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 the 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 favourable 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. 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 or 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. In addition to these contributing 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 - 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. Allowance for private ownership, entrepreneurship, and wealth creation: Government involvement in influencing economic activity and direction: The role of the Bank of Canada: 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. Controlled System refers to an economic system where the fundamentals of the law of supply and demand, private ownership, entrepreneurship, and wealth creation are largely restricted or absent, and the government fully controls the economic direction and activity. 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. Canada, like most fully developed economies, is considered to be a mixed economic system. Economic activity will be predicated on the basis of four fundamental factors: 1. Expenditures 2. Savings 3. Capital asset investments 4. Credit Economic Activity = Expenditures + Savings + Investment + Credit 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 and, therefore, the total value of GDP are: · Goods and services produced and purchased domestically for consumption · Business investments within the economy · Goods produced for export purposes · Government spending 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 Economists track the movement of GDP (upward or downward) over a period of time to determine whether an economy is growing or contracting. Economic Cycle: 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 tax 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 a
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