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30 Jan 2011
Chapter 2 Notes Understanding the Environments of Business
Point to remember: Growth depends on output increasing at a faster rate than
the population itself.
Economic environment: the conditions of the economic system in which business
firms operate
Purpose of an economic system is to produce profits, and make things people want so
people will buy them.
Aggregate output: the growth of business (total amount of products or services given)
in an economic system during a given period of time
Business cycle: the ups and downs in the economic system. Peak Recession 
Trough Recovery
Recession: period of time where the aggregate output is negative
Depression: an extended recession
Aggregate output is positive, the output per capita (i.e. the amount of goods/services
produced per person) goes up, and hence the standard of living goes up as people
benefit from being able to access the quality and quantity of goods that they want.
Standard of living: is defined as the total quantity and quality of goods that the
citizens can buy with the currency in their economy
Aggregate output standard of living
GDP: total $$ value of all goods and services produced by a country domestically in a
GDP economic growth
Countries with the largest GDP in 2010: US, China, Japan
Growing GDP people making more stuff that is wanted, hence more profits, and
+ve growth
Fallling GDP: people making less stuff due to various reasons, e.g. the economy is in
recession, people dont want to spend the money/dont have the money to spend in
factors of production to produce anything, therefore they gain no profit, GDP falls,
economic growth goes ve
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Document Summary

Chapter 2 notes understanding the environments of business. Aka total 593 values of products/services produced by a national economy within a given period no matter where the factors of production are located: gdp per capita: total gdp divided by the total population. Gdp per capita is highest for country"s with low populations and a high productivity rate: real gdp: gdp that is adjusted to account for inflation, or changes in the value of a country"s currency. Inflation: occurs when widespread price increases happen throughout an economic system. Standard of living decreases as a result because inflation decreases the power of your money, economy falls apart: cpi: consumer price index, measures the prices of typical products bought by people in urban areas. This can determine the price increases by inflation, and determine how the basket of products change as the prices change, and the society changes (or modernizes: deflation: opposite of inflation.

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