Chapter 2 – Understanding the Environments of Business
THE ECONOMIC ENVIRONMENT
-All businesses operate within a larger external environment.
-This external environment, which consists of everything outside an organization’s
boundaries that might affect it, plays a major role in determining the success or failure of
- Managers should not react to changes in the environment; they should be proactive and
at least try to influence their environment.
-The economic environment refers to the conditions of the economic system in which an
-Goals of the Canadian economic system: economic growth, economic stability, and full
-Tools we use to measure economic growth are: aggregate output, standard of living,
gross domestic product, and productivity.
-Threats to economic stability: inflation and unemployment
-Agricultural efficiency has improved because we devised better ways of producing
products and invented better technology for getting the job done. So the agricultural
production has grown because we have been able to increase total output in the
The Business Cycle
-Business cycle is the pattern of short-term ups and downs (expansions and contractions)
in an economy.
-Four phases: peak, recession, trough and recovery.
-Recession is the period during which aggregate output declines.
-Depression is a long-lasting recession.
Aggregate Output and the Standard of Living
- Main measure of growth in the business cycle is aggregate output.
-Aggregate output is the total quantity of goods and services produced by an economic
system during a given period.
-When output grows more quickly than the population, output per capita goes up and the
system provides relatively more of the goods and services that people want.
-Standard of living , result of high output, is total quantity and quality of goods and
services that a country’s citizens can purchase with the currency used in the economic
Gross Domestic Product
-GDP refers to the total value of all goods and services produced within a given period by
a national economy through domestic factors of production.
-If the GDP is going up, the nation is experiencing economic growth.