Chapter 2: Understanding the Environments of Business
The Economic Environment
External Environment: everything outside an organization’s boundaries that might affect it. Plays a major
role in determining the success or failure of any organization.
Economic Environment: the conditions of the economic system in which an organization operates. (e.g.: Mc-
Donald’s: operates under the conditions of moderate growth, moderate unemployment, and low inflation)
Three key goals of the Canadian Economic System:
Business Cycle; 4 phases: peak, recession, trough, and recovery.
Recession - period during which aggregate output declines. If prolonged recession, then = depression.
-periods can vary from several months to several years
The total quantity of goods and services produced by an economic system during a given period
- main measure of growth
- an increase in aggregate output: growth
when output grows quickly, two things follow:
1) output per capita: the quantity of goods and services per person - goes up
2) system provides relatively more of the goods/services people want
when these two things occur, people benefit from a higher standard of living (total quantity and quality of
goods/services that they can purchase with the currency used in their economic system) Therefore, to know
how much your standard of living is improving, you need to know how much your nation’s economic system
Gross Domestic Product:
The total value of ALL goods and services produced within a given period by a national economy via domes-
tic factors of production.
-if GDP goes up, then the nation is experiencing economic growth
-GDP of Canada in 2005: $1.3trillion
- GNP: Gross national product - total value of 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 GNP, not in GDP.
*GDP is the preferred method of calculating national income and output.
Real GDP: Growth rate of GDP adjusted for inflation + changes in value of country’s currency
GDP per capita: GDP per person. (divide total GDP by total population of a country)
Nominal GDP: GDP measured in current dollars (not adjusted for inflation)
PPP (Purchasing Power Parity): principle that exchange rates are set so that the prices of similar products in
different countries are about the same
Productivity: a measure of economic growth that compares how much a system produces with the resources
needed to produce it. But if more products are produced with fewer factors of production, the prices of the
products go down Chapter 2: Understanding the Environments of Business
-Your standard of living improves only via increases in productivity
Balance of Trade: economic value of all the products that a country exports minus economic value of its im-
-Positive balance of trade is when a country exports more than it imports (helps economic growth)
-Negative balance of trade is when a country imports more than it exports (inhibits economic growth) aka
-Canada usually has a positive balance of trade, and therefore it is a creditor nation instead of a debtor na-
National Debt: amount of money the go