(Reading) Week #3 | Chapter 2
1 | Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system.
THE ECONOMIC ENVIRONMENT
Purpose of an Economic System
- Assemble / organise resources;
- Make things people want;
- So people will buy them;
- Creating profits for businesses;
- So everyone will be better off.
- external environment
- Everything outside an organization’s boundaries that might affect it.
- economic environment
- Conditions of the economic system in which an organization operates.
The Business Cycle
- business cycle
- Pattern of short-term ups and downs (expansions and contractions) in an economy.
- the business cycle has four phases: peak, recession, trough, and recovery
- Period during which aggregate output, as measured by real GDP, declines.
- Particularly severe and long-lasting recession.
- periods of expansion and contraction can vary from several months to several years
Aggregate Output and the Standard of Living
- aggregate output
- Total quantity of goods and services produced by an economic system during a given period.
- an increase in aggregate output is growth (or economic growth)
- when output grows more quickly than the population, two things usually follow: output per capita—the quantity of goods and services per person—goes up and the system
provides relatively more of the goods and services that people want, resulting in people living in an economic system to benefit from a higher standard of living
- standard of living
- Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system.
Gross Domestic Product
- The larger the GDP:
- more workers, using more resources,
- are producing more things of value.
- Growing GDP:
- more people making more stuff.
- Falling GDP:
- fewer people making less stuff.
- Falling GDP: called ―recession‖
GDP Growth – Long Term
- Canada: 1 - 4%
- US, UK, Germany, France: 1 - 4%
- China and India: 8 – 10%
- Small, poor countries have greatest capacity for growth, starting from a low base
- GDP = total size of an economy
- gross domestic product (GDP)
- Total value of all goods and services produced within a given period by a national economy through domestic factors of production.
- if GDP is going up, the nation is experiencing economic growth
- gross national product (GNP)
- Total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located.
- the profits earned by a Canadian company abroad are included in the GNP, but not in GDP
- profits earned by foreign firms in Canada are included in GDP
- an organization called Redefining Progress has proposed a more realistic measure to assess economic activity—the Genuine Progress Indicator (GPI), which treats activities that
harm the environment or our quality of life as costs and gives them negative values Real Growth Rates
- GDP and GNP usually differ slightly, but GDP is the preferred method of calculating national income and output
- the real growth rate of GDP—the growth rate of GDP adjusted for inflation and changes in the value of the country’s currency—is what counts
- growth depends on output increasing at a faster rate than population
- if the growth rate of GDP exceeds the rate of population growth, then our standard of living should be improving
GDP per Capita
- GDP per capita means GDP per person
- we get this figure by dividing total GDP by the total population of a country
- as a measure of economic well-being of the average person, GDP per capita is a better measure than GDP
- relative wealth
- ―Real‖ volume of production is same
- ―Real‖ GDP discounts inflation
- ―real GDP‖ means that GDP has been adjusted
- if it is not adjusted, GDP is nominal GDP
- nominal GDP
- GDP measured in current dollars or with all components valued at current prices.
Purchasing Power Parity
- real GDP
- GDP calculated to account for changes in currency values and price changes.
- when we make the adjustment to calculate real GDP, we account for both GDP and purchasing power parity
- purchasing power parity
- Principle that exchange rates are set so that the prices of similar products in different countries are about the same.
- Productivity = outputs (products/services)/ inputs (people, $$$)
- High productivity (i.e. wealth) is produced by:
- Better educated, better trained labour
- More $$$ better technology
- More and cheaper natural resources
- Measure of economic growth that compares how much a system produces with the resources needed to produce it.
- if more products are being produced with fewer factors of production, the prices of these products go down
- as a consumer, therefore, you would need less of your currency to purchase the same quantity of these products
- standard of living improves only through increases in productivity
- real growth in GDP reflects growth in productivity
Balance of Trade
- balance of trade
- The total of a country’s exports (sales to other countries) minus its imports (purchases from other countries).
- a positive balance of trade results when a country exports (sells to other countries) more than it imports (buys from other countries)
- a negative balance of trade results when a country imports more than it exports; commonly called a trade deficit
- Canada usually has a positive balance of trade, which is therefore a creditor nation rather than a debtor nation
- by contrast, the United States usually has a negative balance of trade, which is therefore a debtor nation rather than a creditor nation
- a trade deficit negatively affects economic growth because the money that flows out of a country can’t be used to invest in productive enterprises, either at home or overseas
- national debt
- The total amount of money that the government owes its creditors.
- the government takes in revenues (primarily in the form of taxes) and has expenses (military spending, social programs, and so forth)
- budget deficit
- The result of the government spending more in one year than it takes in during that year.
- these accumulated annual deficits have created a huge national debt—the amount of money that Canada owes its creditors
- Canada is the only highly industrialized country in the world that continues to have a budget surplus
- while taxes are the most o