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MGTA01H3 (583)
Chapter 2

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University of Toronto Scarborough
Management (MGT)
Chris Bovaird

Chapter 2 – Understanding environments of business Lecture 4 – Sept 30 External environment: everything outside organization boundaries that might affect it Economic environment: condition of economic system Measures of Economic performance: GDP, GDP Growth, GDP/capita, Productivity, Unemployment, Inflation - Purpose of economic system is to assemble/organize resources, make things people want to earn profit 3 Key goals of Canadian economic system 1. Economic Growth Business Cycle: pattern of short term ups (expansions) and downs (contractions) in economy 4 phases: 1. Peak 2. Recession 3. Trough 4. Recovery - Recession: period during aggregate output (measured by real GDP) declines - Depression: severe and prolonged recession - Aggregate output (main measure of growth): total quantities of goods & services produced by economic system during a period When aggregate output increases, output/capita (quantities of goods & services/# of people) goes up and system provides more goods that are wanted - When these 2 characteristics occur, standard of living increases - Standard of living: total quantities of goods that people can buy with currency - Gross domestic product: total value of goods produced domestically through FOP in given period (biggest: US, CDN, Japan, Germany) - The larger the GDP, the 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 -> aka recession - 2 quarters (6 months) of decrease is considered depression - Gross National Product: total value of all goods produced by a nation regardless of where FOP was located - Genuine Progress Indicator: measurement of growth by giving costs (harming of environment/quality of life) a negative value - Real Growth Rate (of GDP): Growth rate of GDP adjusted for inflation and changes in country’s currency *growth depends on output increasing at faster rate than population growth - GDP/capita (GDP per Capita – GDP per person): formula: GDP / total population; measure of relative wealth of an average citizen - Nominal GDP: GDP measured in current dollars or with all components valued at current prices - 2009: 10 bicycles for 10 dollars; GDP is $100(10*10) - 2010: 10 bicycles for 12 dollars; GDP is $120(12*10) - GDP is higher... but not because of productivity but because of inflation - Supply and demand is not equal here - Real volume of production is the same - Real GDP: adjusted GDP, accounts for changes in currency values and price changes -120 (GDP) /1.2 (inflation rate) = 100 -> real output - Purchasing power party: principle that exchange rates are set so that prices of similar products in different countries are about the same - Productivity: comparison of how much a system produces with the resources needed to produce it - Productivity = Outputs (products/services) ÷ inputs (people, $$$) - Standard of living improves only through increases in productivity - 2 factors that can help/hinder economic growth: - 1. Balance of trade: total exports minus total imports - Positive balance helps growth - Sales to other countries > purchases from - This creates a “creditor nation” - Negative balance = trade deficit; negative effect on economy - This creates “debtor nation” - 2. National debt: total amount of monies owed to creditors - Budget deficit: result of government spending more in a year that it takes in - CDN government sells bonds with competitive interest rates Lecture 5 - Oct 7 2. Economic Stability - Condition in which amount of money is available and quantity of goods produced are growing a
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