Chapter 2: Understanding the Environments of Business
External Environment: everything outside an organization’s boundaries that might affect it.
Economic Environment: condi tions of the economic system in which an organization operates.
Business Cycle: pattern of shor t term ups and downs (expansions and contractions) in an
Four recognizable phases: peak, recession, trough, and recovery
Recession: period during which aggregate output, as measured by real GDP, declines.
Depression: particularly severe and long lasting recession.
Aggregate Output: total quantity of goods and services produced by an economic system during
a given period.
Standard of Living: total quanti ty and quality of goods and services that a coun try’s cit izens can
purchase w ith the cur rency used in their economic system.
Gross Domesti c Product (GDP): total value of all goods and services produced within a given
period by a national economy through domestic factors of production.
Gross National Product (GNP): tot al value of all goods and services produced by a national
economy within a given period regardless of where the factors of production are located.
Nominal GDP: GDP measured in cur rent dollars or with all components valued at cur rent
Real GDP: GDP calculated to account for changes in currency values and price changes.
Purchasing Power Parity: principle that exchange rates are set so that t he 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.
Balance of Trade: the total of countries expor ts (sales to other countries) minus its exports
(purchases from other countries)
National Debt: t he total amount of money that the government owes its creditors.
Budget D eficit: the result of the government spending more in one year than it earns in one year.