Business Chapter 2 Reading Notes
- This external environment—which consists of everything outside an organizations boundaries
that might affect it—plays a major role in determining the success or failure of any organization.
- The economic environment refers to the conditions of the economic system in which an
- The three key goals of the Canadian economic system: economic growth, economic stability, and
- Tools we use to measure economic growth, including aggregate output, standard of living, gross
domestic product, and productivity.
- Main threats to economic stability—namely, inflation and unemployment.
- Experts call the pattern of short-term ups and downs in an economy the business cycle.
o It has four recognizable phases: peak, recession, trough, and recovery
- Arecession is a period during which aggregate output declines. If a recession lasts for a
prolonged period, it is called a depression.
- Aggregate output: the total quantity of goods and services produced by an economic system
during a given period.
- Standard of living, which refers to the total quantity and quality of goods and services that they
can purchase with the currency used in their economic system.
- The term gross domestic product (GDP) refers to the total value of all goods and services
produced within a given period by a nation^ economy through domestic factors of production.
- Canada's GDP in 2005 was $1.3) trillion.
- Gross national product (GNP), which refers to the total value of all goods and services produced
by a national economy within a given period regardless of where the factors of production are
- E.g. Canadian owned manufacturing plant in Brazil
o The labour, for example, will be mostly Brazilian but the capital mostly Canadian. Thus,
wages paid to Brazilian workers are part of Brazil's GNP even though profits are not.
- GPI treats activities that harm the environment or our quality of life as costs and gives them
o For example, the Exxon Valdez oil spill in 1986 increased GDP because the activities
required to clean up the mess were included in traditional measurements of economic
growth. But the oil spill was not a good thing.
1 - GDP per capita means GDP per person. We get this figure by dividing total GDP by the total
population of a country.
- GDP per capita is a better measure than GDP. The United States has the highest GDP per capita of
any country ($33 123), followed by Ireland ($30 910), Switzerland ($28 684), and Canada ($28
- 1000 pizza 2005 $10, 2006 $11
o Has the economy grown? No. Since 1000 pizzas were produced in both y€ ars, aggre¬
gate output remained the same. The point is that we should not be misled into believing
that an economy is doing better than it is. If it is not adjust¬ ed, GDP for 2006 is nominal
GDP, that is, GDP measured in current dol¬ lars or with all components valued at current
- Purchasing power parity—the principles that exchange rates are set so that the prices of similar
products in different countries are about the same.
- Productivity, which is a measure of economic growth that compares how much a system produces
with the resources needed to produce it.
- In fact, standard of living improves only through increases in productivity.9 Real [growth in GDP
reflects growth in productivity.
- The balance of trade is the economic value of all the products that a country exports minus the
economic value of its imported products.
o Apositive balance of trade results when a country exports (sells to other countries) more
than it imports (buys from other countries). Apositive balance of trade helps economic
o Anegative balance of trade results when a country imports more than it exports. A
negative balance of trade inhibits economic growth.
- Anegative balance of trade is commonly called a trade deficit. Canada usually has a positive
balance of trade.
o It is therefore a creditor nation rather than a debtor nation.
o In 2005, for example, Canada received $66.6 billion more for exports than it spent on
o By contrast; the United States usually has a negative balance of trade. In 2005, for
example, it spent $725 billion more on imports than it received for exports. It is therefore
a debtor nation rather than a creditor nation.
- Acountry’s national debt is the amount of money that the government owes its creditors.
- Budget deficits; that is, the government spent more money each year than it took in.
2 o From Confederation (1867) to 1981, the total accumulated debt was only $85.7 billion,
but in the period 1981-94, annual deficits were in the $20- to $40-billion range.(Canada)
o Now, Canada is the only highly industrialized country in the world that continues to have
a budget surplus.
o In 2005, government revenues were $234.9 billion and expenditures were $219.8 billion.
- Living standards are stable when purchasing power parity remains stable.
- Stability: a condition in which the amount of money available in an economic system and the
quantity of goods and services produced in it are growing at about the same rate.
- Inflation occurs when there are widespread price increases throughout an economic system.
o Inflation occurs when the amount of money injected into an economy