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Chapter 2

Chapter 2 Notes

Management (MGT)
Course Code
Chris Bovaird

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Chapter 2 Understanding the Environments of Business Notes
The Economic Environment
x external environment : everything outside an organization’s boundaries that might affect it
x managers must therefore have an accurate understanding of the environment facing the company, and then strive to operate and
compete within in, they should also be proactive and at least try to influence the environment
x economic environment : conditions of the economic system in which an organization operates
Economic Growth
The Business Cycle
x business cycle : pattern of short-term ups and downs (expansions and contractions) in an economy
x it has four recognizable phases: peak, recession, trough, and recovery
x recession : period during which aggregate output, as measured by real GDP, declines
x depression : particularly severe and long-lasting recession
x periods of expansion and contraction can vary from several months to several years
Aggregate Output and the Standard of Living
x aggregate output : total quantity of goods and services produced by an economic system during a given period
x an increase in aggregate output is growth (or economic growth)
x when output grows more quickly than the population, two things usually follow: output per capita—the quantity of goods and
services per person—goes up and the system provides relatively more of the goods and services that people want
x 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
x 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
x gross national product (GNP) : total value of all goods and services produced by a national economy within a given period
regardless of where the factors of production are located
x GDP and GNP are useful measures of economic growth because they allow us to track an economy’s performance over time
x an organization called Redefining Progress has proposed a more realistic measure to assess economic activity—the Genuine
Progress Indicator (GPI), which treats activities that harm environment or quality of life as costs and gives them negative values
x the real growth rate of GDP—the growth rate of GDP adjusted for inflation and changes in the value of the country’s currency—
is what counts as growth depends on output increasing at a faster rate than population
x if growth rate of GDP exceeds the rate of population growth, then standard of living should be improving
x GDP per capita means GDP/person, which as measure of economic well-being of average person, is better measure than GDP
x real GDP” means that GDP has been adjusted
x nominal GDP : GDP measured in current dollars or with all components valued at current prices
x real GDP : GDP calculated to account for changes in currency values and price changes
x when this adjustment is made, both GDP and purchasing power parity (PPP) are accounted for
x PPP : principle that exchange rates are set so that prices of similar products in different countries are about same
x PPP gives much better idea of what people can actually buy with the financial resources allocated to them by their respective
economic systems, or, in other words, it gives better sense of standards of living around the world
x productivity : measure of economic growth that compares how much a system produces with the resources needed to produce it
x standard of living improves only through increases in productivity
x real GD reflects growth in productivity
x balance of trade (BT) : total of a country’s exports (sales to other countries) minus its imports (purchases from other countries)
x positive BT results when country exports more than its imports; + BT helps economic growth; country called creditor nation
x a negative BT results when a country imports more than its exports; negative BT inhibits economic growth; called trade deficit;
country called debtor nation
x trade deficit negatively affects economic growth because the money that flows out of a country can’t be used to invest in
productive enterprises, either at hoe or overseas
x national debt : the total amount of money that the government owes its creditors
x budget deficit : the result of the government spending more in one year than it takes in during that year
x more money government borrows, less money is available for private borrowing and investment that increases productivity
Economic Stability
x stability : condition in an economic system in which the amount of money available and the quantity of goods and services
produced are growing at about the same rate
x inflation : occurrence of widespread price increases throughout an economic system
x inflation occurs when the amount of money injected into an economy outstrips the increase in actual output
x inflation decreases the purchasing power of your money
x consumer price index (CPI) : measure of the prices of typical products purchased by consumers living in urban areas
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