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Chapter 2

Chapter 2

Management (MGT)
Course Code
Chris Bovaird

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Chapter 2
External environment everything outside an organizations boundaries that might
affect it
no single firm can control the environment, managers should not simply react to
changes; they should be proactive and at least try to influence their environment
Economic environment conditions of the economic system in which an organization
The Business Cycle pattern of short term ups and downs (expansions and contractions)
in an economy
Recession Period, during which aggregate output, as measured by real GDP, declines.
Depression particularly sever and long lasting recession
Aggregate output total quantity of goods and services produced by an economic system
during a given period
an increase in aggregate output is growth
Standard of living total quantity and quality of goods and services that a
countrys citizens can purchase with the currency used in their economic system
Measures of economic performance:
Gross Domestic Product (GDP)
Purpose of an economic system
Assemble/ organize resources; make things people want; so people will buy them; creating
profits for businesses; so everyone will be better off
Gross Domestic Product (GDP) - $$ value of all goods and services produced in a country in one
The larger the GDP: more workers, using more resources, are producing more things of value
Only says whether something is big, not whether its shrinking or growing
If GDP is going up, the nation is experiencing economic growth
GDP Growth
Growing GDP: more people making more stuff
Falling GDP (recession): fewer people making less stuff
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Per capita = per person
GDP = total size of an economy
GDP per capita = relative wealth
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
Real growth rate of GDP the growth rate of GDP adjusted for inflation changes in the value of
the countrys currency
growth depends on output increasing at a faster rate than population
if growth rate of GDP exceeds the rate of population growth, then our standard of living
should be improving
Real GDP GDP calculated to account for changes in currency values and price changes
Nominal GDP GDP measured in current dollars or with all components valued at current prices
Purchasing power parity principle that exchanges rates are set so that the prices of similar
products in different countries are about the same
Productivity measure of economic growth that compares how much a system produces with the
resources needed to produce it
if the entire economic system increase its productivity, then your overall standard of living
real growth in GDP reflects growth in productivity
two things that can hinder or help the growth of an economic system are balance of trade and
the national debt
Balance of trade the total of a countrys exports (sales to other countries) minus its imports
(purchases from other countries)
positive balance = country exports are more than its imports
negative balance = country imports are more than its exports (trade deficit)
National debt the total amount of money that the government owes its creditors
Budget deficit the result of the government spending more in one year than it takes in during the
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
inflation, deflation, and unemployment threaten stability
Inflation occurrence of widespread price increases throughout an economic system
occurs when the amount of money injected into an economy outstrips the increase in actual
when this happens, people will have more money to spend, but there will still be the same
quantity of products available for them to buy
prices go up, as they compete with one another to buy available products
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