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MGTA01H3 (583)
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Chapter 2

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Management (MGT)

The Economic Environment External environment- Everything outside an organization’s boundaries that might affect it. Management needs to have a better understanding of the environment facing their company and strive to operate and compete within in. Economic environment- Refers to the conditions of the economic system in which an organization operates. The Canadian economic system has 3 goals: Economic growth, economic stability, and full employment Economic Growth The pattern of short term ups and downs in an economy is called the business cycle. Business Cycle- Pattern of short term ups and downs (expansions and contractions) in an economy. There are 4 stages in this cycle: - Peak, recession, trough, and recovery Recession- Period in which aggregate output as measured by real GDP, declines. Depression- Particularly severe and long-lasting recession Aggregate Output and Standard of Living  Aggregate output- Total quantity of goods and services produced by an economic system during a given period  When output grows quickly than the population two things can follow: - Output per capita goes up - Output per capita- the quantity of goods and services per person goes up - System provides relatively more of the goods and services they want  When these two things happen, people in the economic system can 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- Totally value of all goods and service produced within a given period by a national economy through domestic factors of production. - IF GDP goes up, the nation is experiencing economic growth - Canada’s GDP in 2005 was $1.3 trillion Gross National Product- Total value of all goods and service 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 GNP but not in the GDP. - Profits earned by foreign firms in Canada are included in the GDP - E.g A Canadian owned manufacturing plant is in Brazil. - Profits earned by the factory are included in Canadian GNP but not in the GDP because its output is not produced domestically (not in Canada) - Those profits are included in Brazil’s GDP but not GNP (as it is produced domestically in Brazil) - Redefining Progress, an organization, are proposed a more realistic measure to assess economic activity- the Genuine Progress Indicator (GPI) - GPI treates activities that harm the environment or our quality of life as costs and gives them negative values - E.g in 1968, the Exxon Valdez oil spill increased GDP as costs were incurred to clean up the mess. The new GPI shows that while GDP has been increasing for many years, GPI has been falling since the 1970s. Real Growth Rates GDP is the preferred method of calculating national income and output Real GDP is what counts Real GDP- GDP calculated to account for changes in currency values and prices changes That growth depends on output increasing at a faster rate than the 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 This can be found by dividing the total GDP by the total population of a country The United States has the highest GDP per capita, followed by Ireland, Switzerland, and then Canada. Nominal GDP- GDP measured in current dollars or with all components valued at current prices (GDP measured In current dollars, and is not adjusted) Purchasing Power Parity- Principle that exchanges rates are set so that the prices of similar products in different countries are about the same. This gives us a better understanding of what people can actually buy with the financial resources allocated to them by their respective economic systems. Thus, it gives us a better sense of standards of living around the world. Productivity- Measure of economic growth that compares how much a system produced with the resources needed to produce it. E.g It takes 1.2 Saudi workers to make 10 soccer balls and It takes 1 Canadian worker to make 10 soccer balls. Thus, Canada is more productive in this sense. If more products can be produced using fewer factors of production, this causes the prices of products to decrease. This in turn, improves the standard of living. Thus, standard of living improves only through increases in productivity. Two of the several factors that can help or hinder the growth of an economic system: 1) Balan
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