Textbook Notes (363,381)
Canada (158,358)
RSM219H1 (136)
Chapter 2

Chapter 2.pdf

8 Pages
Unlock Document

University of Toronto St. George
Rotman Commerce
Bill Mc Conkey

Chapter 2: Understanding the Environments of Business ECONOMIC ENVIRONMENT - regardless of their size, location, or mission, operates within a larger External environment—everything outside an organization’s boundaries that might affect it—plays a major role in the success and failure of any organization. - Manager, therefore, require an understanding of the environment facing the company and then strive to operate and compete w/in it - can’t control environment but need to be proactive and at least try to influence their environment Economic environment: conditions of the economic system in which an organization operates. - eg McDonald’s operating in a Cdn. Environment of moderate growth and employment and low inflation - Moderate unemployment means most ppl can eat out, but it also means the company must pay higher wages to attract employees. - Low inflation means the company pays constant prices for supplies, but also means they can’t charge its consumers increased prices. 3 GOALS of the Canadian ECONOMIC SYSTEM: - ECONOMIC GROWTH - ECONOMIC STABILITY - FULL EMPLOYMENT TOOLS used to measure ECONOMIC GROWTH: - aggregate output - standard of living - GDP - productivity Economic Growth • Business Cycle : Pattern of short-term ups and downs (expansions and contractions) in an economy o 4 RECOGNIZABLE PHASES: peak, recession, trough, and recovery. ▯ Recession is a period during which the aggregate (total) output (as measured by real GDP) declines ▯ Depression - particularly severe and long-lasting recession • Aggregate Output and the Standard of Living: • Aggregate output: the total quantity of goods and services produced by an economic system during a given period. o the main measure of growth in the business cycle isAGGREGATE OUTPUT*** o an increase in aggregate output is growth (or economic growth) o when output grows more rapidly than the population ▯ Output per capita—the quantity of goods and services per person –goes up and the system provides relatively more of the goods and services that people want. ▯ results is ppl benefiting in a higher Standard of Living –total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system. ▯ to know how much your STANDARD of LIVING is improving, need to know how much your nation’s economic system is growing** • Gross Domestic Product : refers to the total value of all goods and services produced within a given period by a national economy through domestic means of production. o if GDP is up, then the nation is experiencing growth o GDP is the preferred method of calculating national income and output o GNP(Gross national product): 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. ▯ profits by a Canadian company abroad are included in the GNP but not GDP ▯ profits earned by foreign firms in Canada are included in GDP o GDP and GNP are useful measures of economic growth bc allow us to track an economy’s performance over time o GPI (Genuine Progress Indicator) - proposed by organization called Redefining Progress as a more realistic measure to assess economic activity ▯ It treats activities that harm the environment or our quality of life as costs and gives them negative values ▯ It shows while GDP has been rising, GPI has been falling since the 70s. • eg Oil Spill will show increase in GDP (bc activities req’d to clean mess) o Real Growth Rates  GDP and GNP usually differ slightly, GDP is the preferred method of calculating national income and output  The real growth rate of GDP (adjusted for inflation and changes in the value of the country’s currency) is what counts *** • GROWTH DEPENDS ON OUTPUT INCREASINGATAFASTER RATE THAN POPULATION***  if the growth of GDP exceeds the rate of population growth, then our standard of living is improving. o GDPper Capita: GDP per person (total GDP/ total pop. of a country)  GDP per capita is a better measure of economic well-being of the average person vs GDP • USA($33 123), Ireland ($30 910), Switzerland ($28 684) and Canada ($28 344) o Real GDP: “Real GDP” means that the GDP has been adjusted to accounts for changes in currency values and price changes  Consider this. Apizza costs $10 in 2005 and $11 in 2006. In both years 1000 pizza had been sold. Has the economy grown? No because the aggregate output (1000 pizzas) remained the same over both years.  adjustment allows us to account for both GDP and PURCHASING POWER PARITY  If the GDP is not adjusted, the GDP for 2006 in the example is NOMINAL GDP- the GDP is measured in current dollars or with all components valued at current prices. o Purchasing Power Parity – the principle that exchange rates are set so that the prices of similar products in different countries are about the same.  gives us a better idea of what ppl can actually buy w/ the financial resources allocated to them by their respective economic systems  It gives us a better of standards of living around the world • Productivity: a measure of economic growth that compares how much a system produces with the resources needed to produce it. o eg compare two factors of production labour and capital in saying that $1 to make 10 soccer balls with 1 worker vs $1.2 to make 10 balls and 1.2 workers ▯ thus prior is more PRODUCTIVE o If more products are being produced with fewer factors of production, the prices go down. ▯ thus as a consumer req less currency to purchase same quantity of products Therefore, the standard of living improves. ▯ if entire economic system increases its productivity than your OVERALL standard of living improves ▯ Standard of living improves only through increases in productivity**** ▯ Real growth in GDP reflects growth in productivity ▯ There are several factors that can help or hinder the growth of an economy. Two of them: balance of trade and the national debt. • Balance of Trade: the total of a country’s exports (sales to other countries) minus its imports (purchases frm other countries) o A positive balance of trade = a country exports more than it imports.  It helps economic growth.  The nation is a creditor nation. o Anegative balance of trade results when a country imports more than it exports. aka TRADE DEFICIT  It inhibits economic growth (trade deficit)  The nation is a debtor nation. It negatively affects growth since money that flows out of a country can’t be used to invest.  trade deficit -vly affect economic growth bc the money that flows out of a country can’t be used to invest in productive enterprises either at home or overseas • National Debt: total money that the government owes its creditors. o like a business the gov takes in revenues (mainly taxes) and has expenses (military, social spending etc) o Therefore a country incurs an annual budget deficit—the result of the government spending more in one year than it takes in during that year.  accumulated annual deficits have created a huge national debt (amt of $ Can owes its creditors)  However, CANADAis the only highly industrialized country in the world that continues to have a budget surplus o How does national debt affect economic growth?  taxes most obvious way the gov raises money  but also can sell BONDS - securities though which it promises to pay buyers certain amts of money by specific future dates (money you lend the gov)  gov sells bonds to indiv’s, households, banks, incurance companies etc  bonds are attractive investments bc they are extremely safe • CDN gov will not default on them (fail to make payments when due)  offer a decent return by paying interest at a competitive rate  When the gov’t borrows more money, there is less money for private borrowing and investment that increase
More Less

Related notes for RSM219H1

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.