Chapter 2: Understanding the Environments of Business
- 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
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
Business Cycle : Pattern of short-term ups and downs (expansions and contractions) in an
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***
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
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
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
▯ 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
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
• 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
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
• CDN gov will not default on them (fail to
make payments when due)
offer a decent return by paying interest at a
When the gov’t borrows more money, there is less
money for private borrowing and investment that