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Chapter 2

Chapter 2 notes

Management (MGT)
Course Code
Chris Bovaird

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Ch. 2: Understanding the Environment of Business
External environment everything outside an organizations boundaries
Managers must understand this environment if the business is to compete wi
thin it
Economic environment conditions of economic system the organization op
erates within
o Eg: low inflation, moderate growth, moderate unemployment
Low inflation: cost of supplies is constant but organization cant increase
Business cycle: patter of short
term up/downs in an economy (expansions and
Recession: aggregate (grossed, combined) output, measured by real GDP, de
Depression: severe/long lasting recession
Aggregate output: total quantity of goods/services produced by economic sy
stem in a
given period.
o Increase in Aggregate output signifies an economic expansion
A higher standard of living results when aggregate output grows faster th
population (increased output per capita and more services people want).
Standard of living: total quantity/quality of the goods and services that ca
be purchased by a countrys citizen with the currency used in their economic
Gross Domestic Product (GDP): total value of all goods/services produced
within given
period of time by national economy through domestic factors of production.
o Going up: growth
Gross National Product (GNP): same, but regardless of where the factors
of production are located.
Eg: includes profit earned abroad by a Canadian company. Conversely, those
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are included in the abroad countrys GDP, not GNP
Eg: wages paid to Brazilian workers are part of Brazils GNP even though
profits are not.
GPI: Genuine Progress Indicator: treats activities that harm our enviro
nment/quality of life
as costs, Eg: even if an oil spill creates jobs to clean up, it is assigned a negati
ve value.
Real GDP: Real growth rate of GDP (the preferred method of calculating nat
income/output) is adjusted for inflation and change in countrys currency valu
e. This is
what counts.
Growth depends on output increasing at faster rate than population.
Therefore, standard of living improves.
GDP per Capita: divide GDP by the population.
Real GDP (definition above): GDP has been adjusted. NO ADJUSTMEN
T=Nominal GDP:
measured in current dollars OR with all components valued at current prices.
Purchasing power parity: exchange rates set so that prices of similar prod
ucts in different
countries are about the same. It gives a better sense of standards of living wo
Productivity: Measure of economic growth
o compares how much a system produces to the factors of production used
Value of Output/Value of Input.
Prices in productive industries go down, because less factors of production are
Therefore, standard of living increases.
o Standard of living improves only through increases in productivity
o Real growth in GDP reflects productivity growth.
Balance of Trade Countrys exports its imports
o Positive balance helps economic growth
o Negative balance of trade inhibits economic growth. A.K.A. trade deficit:
Creditor nation has positive
Debtor nation money that flows out of a country cant be used to invest in
productive enterprises either at home or overseas
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