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Chapter 2

MGTA01H3 Chapter Notes - Chapter 2: Genuine Progress Indicator, Gross National Product, Purchasing Power Parity


Department
Management (MGT)
Course Code
MGTA01H3
Professor
Chris Bovaird
Chapter
2

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MGTA03 Business, Volume 1
R. Griffin, R. Ebert, F. Starke
Chapter 2 Understanding the Environments of Business
The Economic Environment
All businesses operate within a larger external environment (which includes
everything outside an organizations boundaries that might affect it; strong
determinant of the success or failure of an organization)
Managers must strive to operate and compete within the environment facing
their company; they should not just react to changes, but be proactive and try
influencing the environment
Economic environment: conditions of the economic system in which an
organization operates
Goals of the Canadian economic system: economic growth, economic stability,
and full employment
Economic Growth
oThe Business Cycle: pattern of short-term ups and downs in an
economy
4 phases: peak, recession (period when aggregate output
declines; prolonged recession = depression), trough, and recovery
oAggregate Output and the Standard of Living
Aggregate output: main measure of growth; total quantity of
goods & services produced by an economic system in a given
period
Increase in aggregate output = economic growth
When output grows faster than the population, output per capita
increases and the system provides relatively more of the goods
and services people want; a higher standard of living also results
Standard of living: total quantity and quality of goods and
services that individuals can purchase
oGross Domestic Product (GDP)
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GDP: total value of all goods and services produced within a
given period by a national economy through domestic factors of
production
Increase in GDP = 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 factors of production are located
i.e. GNP would include the profits of a Canadian company
earned abroad, but the GDP would not
GDP and GNP allow a nation to track an economy’s performance
Genuine progress indicator (GPI): measure of economic activity;
more realistic than GDP/GNP; gives negative values to activities
that harm the environment or quality of life
Real Growth Rates: growth rate of GDP adjusted for inflation
and changes in the value of the countrys currency
GDP is preferred when calculating national income and
output
GDP per capita = total GDP/total population of a country
Measure of economic well-being of the average person
Real GDP = adjusted GDP that accounts for currency changes
and price changes
Nominal GDP: GDP measured in current dollars or with
all components valued at current prices
Purchasing Power Parity: principle that exchange rates are
set so prices of similar products in different countries are about
the same
Provides a better sense of standards of living around the
world
oProductivity: measure of economic growth that compares how much a
system produces with the resources needed to produce it
Standard of living improves through increases in productivity
Balance of Trade: a countrys exports minus its imports
Positive balance of trade = country exports more than
imports
Negative balance of trade = country imports more than
exports
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