CH2 - The environment of business Flashcards
List the multiple organizational environments that have affect the business organization
PESTLE - Political, Economic, Socio-cultural, Technology, Legal, Environmental
(global business, business, emerging challenged and opportunities)
Define the economic environment
Def : the conditions of the economic system in which an organization operates
- Aggregate Output
- Business Cycle
- GDP
- GDP per capita
- Real GDP
- GNP
- Purchasing Power Parity
- Balance of Trade
- National Debt
- Inflation / Deflation
- CPI
- Unemployment Rate
- Monetary Policy
What is the aggregate output
Def : total quantity of goods and services produced by an economic system during a given period
-> measure of economic growth
What happens when output grows more quickly than the population
The 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
–> higher standard of living
What is the Business Cycle
Definition : The growth (and contraction) pattern of short-term ups and downs in an economy
The 4 phases of the business cycle
- Peak
- Recession : two consecutive quarters when the economy shrinks, starts just after the peak of the business cycle is reached and ends when the trough is reached
- Trough
- Recovery
Depression : occurs when the trough of the business cycle extends two or more years
GDP def
Gross Domestic Product -> total value of all goods and services produced within a given period by a national economy through domestic factors of production (is it rises, a nation experiences economic growth)
-> tracks an economy’s performance over time
GNP def
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
ex. Canada producing/manufacturing products in Mexico - not part of Canada’s GDP but GNP but part of Mexico’s GDP
Real Growth Rate
Growth rate of GDP adjusted for inflation and changes of value of the country’s currency
-> growth rate of GDP > rate of population growth = improvement of standards of living
GDP per capita
GDP per person (GDP/total population)
- measure of the economic well-being of the average person
- better measure than GDP alone
Real GDP
adjusted GDP (for inflation)
- non-adjusted GDP is nominal GDP (measured with current dollars)
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 a better idea of what people can buy / the standard of living across the globe
Balance of Trade
Economic value of all the products that a country exports minus the economic value of its imported products
Effect of a negative trade deficit
negative trade deficit → negatively affects economic growth because the money that flows out of a country can’t be used to invest in productive enterprises, either at home or overseas
National Debt
Amount of money the government owes its creditors
—> the government takes in revenues (e.g., taxes) and has expenses (e.g., military spending, social programs)
—> When the government of Canada sells bonds to individuals and organizations (both at home and overseas), this affects economic growth because the Canadian government competes with every other potential borrower—individuals, households, businesses, and other organizations—for the available supply of loanable money. The more money the government borrows, the less money is available for the private borrowing and investment that increase productivity.
Economic Stability + threatening factors
→ the key goal of an economic system
→ the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate
→ threatening factors : inflation, deflation, unemployment
Inflation + its source
- amount of money injected into an economic system outstrips the increase in actual output
- people have more money to spend but quantity of products available stays the same = competition to buy = prices go up
- eventually, high prices will erase the increase in the amount of money injected into the economy → purchasing power declines
SOURCE : no definite one but a product of multiple factors
How to measure Inflation
Measuring inflation : the Consumer Price Index (CPI)
- measures changes in the cost of a “basket” of goods and services that a typical family buys (the contents change over time, reflecting changes that have occurred in the pattern of consumer purchases)
Deflation
- amount of money injected into an economic system lags behind increases in actual output
- Prices may fall because industrial productivity is increasing and cost savings are being passed on to consumers (this is good) or because consumers have high levels of debt and are therefore unwilling to buy very much (this is bad)
Unemployment (+4 types)
- level of joblessness among people actively seeking work
- various types :
- frictional unemployment → people are out of work temporarily while looking for a new job
- seasonal unemployment → people are out of work because of the seasonal nature of their jobs
- cyclical unemployment → people are out of work because of a downturn in the business cycle
- structural unemployment → people are unemployed because they lack the skills needed to perform available jobs
Fiscal policies
- collection and spending of government revenues
- ex. when the growth rate of the economy is decreasing, tax cuts will normally stimulate renewed economic growth
Monetary policies
- controlling the size of the nation’s money supply (flow of money in the system)
-> the government can influence the ability and willingness of banks throughout the country to lend money
- higher interest rate - more expensive to borrow → reduced spending by companies that produce goods and services + consumers who buy them (tight MP)
- lower interest rate - less expensive to borrow → increase in spending by companies and the consumers (easy MP, usually during financial crisis)
What is the technological environment
Technology generally includes all the ways firms create value for their constituents. It includes : human knowledge, work methods, physical equipment, electronics and telecommunications, and various processing systems that are used to perform business activities
R&D (Research and Development)
Tech improvements + innovation are important contributors to the economic development of a country. Innovation process includes R&D : new ideas for products, services and processes
