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Chapter 2

MGTA01H3 Chapter Notes - Chapter 2: Genuine Progress Indicator, Core Competency, Deflation

Management (MGT)
Course Code
Chris Bovaird

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MGTA03H3 F - LEC 01 Monday, September 21. 2009
Chapter 2 - Understanding the Environments of Business
The Economic Environment
- All businesses operate within a larger external environment.
-External Environment – everything outside an organization’s boundaries that
might affect it.
- External environments plays a major role in determining the success/failure of an
organization and so managers must be able to face that environment and
compete within it.
- No single firm controls the environment, and so managers need to be proactive
and influential of their environment.
-Economic environment – conditions of the economic system in which an
organization operates. E.g. McDonald’s Canadian operations are functioning in
an economic environment characterized by moderate growth, moderate
unemployment (most people can afford to eat out but that means McDonalds
must pay higher wages to attract employees) and low inflation (McDonalds pays
constant prices for supplies and thus cannot increase what they charge on
-3 key goals of an economic system: economic growth, economic stability, and
full employment.
Economic Growth
- Today, less than 2.5% of the Canadian population works in agriculture. This
shows that due to devising better ways of producing products and improved
technology, agricultural efficiency has improved and agricultural production has
grown (increase in total output).
The Business Cycle
-Business Cycle – pattern of short-term ups and downs (expansions and
contractions) in an economy. It has 4 phases: peak, recession, trough, recovery
-Recession – period during which aggregate output, as measured by real GDP,
-Depression – particularly severe and long-lasting recession.
- During the late 1990s, the Canadian economy was continuously expanding
particularly with the large amount of people who invested in the high-tech stocks
which later crashed in 2000.

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MGTA03H3 F - LEC 01 Monday, September 21. 2009
Chapter 2 - Understanding the Environments of Business
-4 tools to measure economic growth: aggregate output, standard of living, gross
domestic product, productivity.
Aggregate Output and the Standard of Living
-Aggregate Output – total quantity of goods and services produced by an
economic system during a given period. It is the main measure of growth in the
business cycle.
- When output grows more quickly than the population 2 things follow:
1) Output per capita rises
2) System provides more of the goods/services people want.
- These 2 things result in a higher standard of living.
-Output per Capita – quantity of goods/services per person
-Standard of Living – total quantity and quality of goods and services that a
country’s citizen can purchase with the currency used in their economic system.
-To know how much you standard of living is improving; you need to know how
much your nation’s economic system is growing.
Gross Domestic Product
-Gross Domestic Product (GDP) – total value of all goods and services produced
within a given period by a national economy through domestic factors of
production. Canada’s GDP in 2005 was $1.3 trillion. Profits earned by both
Canadian and foreign firms in Canada are included in the GDP.
-Gross National Product (GNP) – total value of all goods and services produced
with a given period by a national economy regardless of where the factors of
production are located. Includes profits earned by a Canadian company abroad.
-E.g. Profits made by a Canadian manufacturing company in Brazil will be
included in Canada’s GNP and Brazil’s GDP. However if labour belongs to Brazil
and the capital is mostly Canadian, wages paid to Brazilian workers are part of
Brazil’s GNP.
- GDP and GNP allow us to track an economy’s performance over time.

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MGTA03H3 F - LEC 01 Monday, September 21. 2009
Chapter 2 - Understanding the Environments of Business
- An organization called Redefining Progress proposed a more realistic measure to
assess economic activity called the Genuine Progress Indicator (GPI).
-Genuine Progress Indicator (GPI) – treats activities that harm the environment of
our quality of life as costs and gives them negative values.
- The new GPI measure shows that while GDP has been increasing for many
years, GPI has been falling since the 1970s.
oGDP is the preferred method of calculating national income and output
oReal Growth Rate of GDP – growth rate of GDP adjusted for inflation and
changes in value of the country’s currency. This is what counts.
oRemember: growth depends on output increasing at a faster rate than
oGDP per Capita – GDP per person (total GDP ÷ total population)
oBetter measure of the economic well-being of the average person.
oUSA has highest GDP per capita ($33 123) then Ireland ($30 910),
Switzerland ($28 684), Canada ($28 344).
oReal GDP – GDP that has been adjusted and is calculated to account for
changes in currency values and price changes.
oIf it is not adjusted it is nominal GDP.
oNominal GDP – GDP measured in current dollars or with all components
valued at current prices.
oPurchasing Power Parity – principle that exchange rates are set so that
the prices of similar products in different countries are about the same.
oIt gives us a better sense of standards of living around the world.
oLiving standards are stable when purchasing power parity remains stable.
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