Chapter 6 - Understanding & Measuring the New Business Environment

Question 1

The limitations of gross domestic product as a measure

of economic performance

Answer 1

• GDP cells us something important about an economy: its size.
• Size is important. The USA produces
  roughly one-quarter of all the world’s goods and services by value. So, when the USA attends an international trade negotiation, its views carry great influence,
• GDP tells us nothing about an
  economic system’s growth (whether it is growing or declining), about the relative wealth of a
  country’s citizens (whether they are poor or rich), about employment opportunity, or about wealth distribution.
• GDP does not tell us whether all of the resources in a country are being equally busy and productive. There can be regions garnering more output and other regions that producing less

Question 2

How does GDP growth measure a country’s progress in producing more goods and services?

Answer 2

• GDP growth is measured by the percentage change. from one period to the next.
• A growing GDP suggests that more businesses are hiring more people, to produce more of the goods and
  services that people need and want. It suggests that more is available to be bought and sold.
• Canada’s 2.4% GDP growth and Canada’s annual population increase has been just 1% - less than half the growth rate of GDP. - This means that there are many more goods and services to go around, for everyone.

Question 3

What is a recession? How recessions are

measured? How these events affect a country’s prosperity?

Answer 3

• A recession is when two consecutive quarters (two periods of three months each) experience
  GDP shrinkage.
• When GDP falls, a number of things might have happened. Perhaps fewer workers will have been employed. Alternatively, Canadians worked shorter hours. Factories may have worked fewer shifts. Offices
  may have closed earlier. When GDP falls, it suggests that Canada’s businesses aren’t as busy producing
  the goods and services that people want.

Question 4

What is employment and what is unemployment?

Answer 4

• Having paid work is employment.
• We call people who have paid work, or are looking for paid work, the labor farce. Statistics Canada defines the labor force as people aged 15 and over, who have a job or a business, and those who are
  without work, but actively seeking work
• The labor force includes both those who are working, and those “actively seeking work”. If a person is
  actively looking for a job and can’t find one, they are unemployed.

Question 5

Is Canada’s employment high or low? Why is this so?

Answer 5

• For the past 20 years, Canada’s unemployment rate has hovered within a fairly narrow range between
  5% and 9% of the labor force.
• While the long-term trend
  in the unemployment rate is down (see the trend line in the chart) it is still too high!
• One possible reason for the difficulty in reducing Canada’s unemployment rate is the country’s vast size. People in the highest unemployed province, Newfoundland cannot access jobs in the lowest unemployed province, Manitoba
• Another factor which is a possible contributor to Canada’s unemployment is the harsh climate. Canada’s
  long, cold winters make many types of outdoor work impossible,. Farm workers, foresters, and construction workers may find significantly less work opportunities during the cold winter months than during
  the summer,.

Question 6

Why are measures of economic performance important?

Answer 6

• Shows whether an economic system |s performing as it should, whether it large or small, growing or shrinking, rich or poor, and whether it creating the opportunity, the wealth, and the standard of living
  that it should.

Question 7

Why are measures of economic performance important?

Answer 7

• Shows whether an economic system |s performing as it should, whether it large or small, growing or shrinking, rich or poor, and whether it creating the opportunity, the wealth, and the standard of living
  that it should.
• No one measure can tell us everything about a society, its people or its economic
  performance. However, each separate measure can tells us something.
• GDP tells us about an economy’s size.
• GDP Growth tells us whether more is being produced, through
  time.
• GDP per capita gives us an indication of the prosperity of the “average” citizen.
• Unemployment
  rates tell us how well an economic system is using the human resources at its disposal.
• The data used to construct Lorenz Curves helps us to visualize the distribution of income within a population.
  -Taken together, these measures help business people to understand the environment in which they operate.

Question 8

Which country has the largest GDP? Why?

Answer 8

• The largest GDP is the United States of America
• The United States is, of course, a huge country. It is the fourth largest in the world by area and the third largest in the world by population.
• The United States is blessed with abundant natural resources like good farm land, huge forests, lots of
  minerals and metals and abundant supplies of oil

Question 9

What does GDP indicate about Canada’s economy?

Answer 9

• Canada’s GDP of $1.8 trillion makes it the 10thh largest economy among the earth’s approximately 200 countries.
• Canadians tend to think that Canada has a
  small population. This is not correct. Canada’s population is larger than that of 80 percent of countries.
• Canada is a country with a medium sized population, but a large economy.
• The conclusion: By this measure Our system appears to serve us well.

Question 10

What is the Great Recession?

Answer 10

• A recession that occurred from 2008 and 2009 was one of the worst periods of declining output in nearly 100 years. - In the United States the growth stalled in the last quarter in 2008. - During each quarter of 2009, fewer workers, working fewer hours, produced fewer goods and services than were produced in the quarter before,
• There was less available for American consumers to buy.
• It happened because millions of Americans borrowed too much money, to buy houses that they couldn’t afford. When the value of those houses
  fell, they couldn’t or wouldn’t pay back their loans, and the banks that lent them the money collapsed.
• Some big banks like Lehman Brothers in the US collapsed (filed for bankruptcy) and people there lost their jobs
• This caused devastating ripple effects where other banks refused to lend money for house buying so businesses in the house building industry collapsed so people lost jobs in these industries
• The increase in unemployment caused overall spending reduce and overall output was reduced i.e GDP growth decreased
• Simply put, the recession was caused in part by the human failing of over confidence wherein too many people borrowing too much money to buy houses that they couldn’t afford

Question 11

What causes recessions?

Answer 11

• The best way to answer that
  question is to remember that business is a human activity.
• People lose confidence in their job security
  or economic well-being for thousands of small reasons. - However, once they do begin to lose confidence,
  they will decide not to spend to buy a new car, not to renovate their kitchen, and not to cake the holiday cruise
  that they had been planning.

Question 12

What is a business cycle?

Answer 12

• Over confidence and loss of confidence are two important contributors to a phenomenon known as the business cycle.
  -The business cycle refers to the expansion and contraction of a nation’s economic activity that happen over a period of years, periodically and with great regularity.
• Periods of economic growth, confidence and prosperity (“booms”) are followed by periods of economic contraction, rising unemployment, and lass of confidence (“busts”)
• Various theories
  and empirical studies put the duration of the business cycle, from peak to peak, at 3 to 5 years, 7 to 1I
  years, 17 to 25 years, and even 45 to 60 years.

Question 13

What is the Great Depression?

Answer 13

-The “Great Depression” from 1929 to 1932 the United States’ total
production of manufactured goods fell by nearly one-third and that the unemployment rate rose to nearly
25%.
- There is no formal or “official” definition of depression, “Depression” is simply the name given to
an unusually long or deep recession.

Question 14

Why do some countries have higher growth rates?

Answer 14

• It is more difficult to raise a country’s GDP that start from a higher base GDP
• In most years, the list of countries with the largest increase in GDP is likely to include countries that are
  extremely poor to begin with, and may include countries whose previous output had been hampered by
  political instability,
  tribal or ethnic clashes or, in some cases, civil war.
• In the past years, there has ben a focus on BRICS countries that are projected to be a source of growth a

Question 15

How do we measure wealth? Who is the wealthiest country and why?

Answer 15

• GDP per capita is calculated by dividing a country’s GDP by its population.
• GDP per capita gives us a rough idea of how much the “average” or “typical’ person in a country produces.
• Luxemborg
• In a small country with a small population, a few anomalies will affect the GDP per capita far more than in a country sixth
  a larger population.

Question 16

What is productivity? Why is it important?

Answer 16

• GDP per capita is a measure of productivity. Productivity is a ratio. Productivity measures how much gets achieved relative to the inputs used to achieve it. By definition, the more we are able to produce (GDP) while using fewer inputs (population), the more “productive” we are.
• With a GDP per capita of $45,000, Canadians are more productive than the citizens of most countries.
• Canada has high productivity because the country has plentiful supplies of high quality factors of production. - Canada is abundantly endowed with many valuable natural resources.

Question 17

What is unemployment rate? Why is it important?

Answer 17

• The unemployment rate is the percentage of those in the labor force who can’t find work.
• This is a
  very Important measure of how well a country’s economic system is working
• If the economic system can’t
  produce opportunities for work, it is failing the country in two ways.
• First, it is a waste of the unemployed
  person’s talents and energy.
• Second, by not utilizing a potentially creative and productive factor of production, the country will produce fewer goods and services, and there will be less to go around for everyone.

Question 18

How does Canada’s unemployment rate compare to that of other large, industrialized economies, particularly our neighbor
the United States?

Answer 18

The United States is Canada’s closest neighbor and largest trading partner. The two countries share a
commen language and, largely, a common culture. ‘Yet for most of the past 50 years our unemployment
rate has been noticeably higher than the United States’.

Question 19

What are limitations of unemployment rate?

Answer 19

• As a measure of an economy’s performance, the officially reported rate of unemployment is thought
  to under-report an economy’s ability to fully and effectively utilize its labor force.
• This is attributed
  to both “underemployment” and the “discouraged worker” effect.

Question 20

What are the two types of underemployment?

Answer 20

• Underemployment means that a person is not working at their full potential
• Either they are working
  at part time jobs, or they are working at jobs chat are not fully exploiting their expertise and education
• Examples of under-employment might be a civil engineer driving a taxi, or a pharmacist working as a grocer
  at Wal-Mart
• In these examples, the under-employment comes from over-qualification. They are earning less than they like though official stats say these people have jobs
• This is because it is difficult to measure underemployment due to overqualification as it is based on perspective
• The other farm of under-employment comes when people work part-time, while aspiring for a full crime
  job. People with part-time jobs are employed.
• However, their limited hours may leave them impoverished, or feeling frustrated and under-used,

Question 21

Who are discouraged workers?

Answer 21

People who might normally be looking for a job - and would therefore be
counted as part of the labor force — but have judged their chances of finding employment too remote
to bother trying. Talented people who might be working choose instead to retire, to go back to school,
to travel, or to be full time homemakers, rather than to be unemployed or underemployed. Discouraged
workers have withdrawn themselves, perhaps reluctantly, from the labor farce. They are not actively
looking for work. Therefore they are nor considered to be unemployed.

Question 22

Who are the working poor?

Answer 22

people who have employment, but whose incomes are too low for them to save money or afford all of the necessities of life. For example, a student employed as a grocer who is unable to make rent

Question 23

What are Lorenz curves?

Answer 23

A diagram to plot the distribution of income within an economy. Lorenz proposed that the population be divided into 5 groups or “quintiles”, each representing 20% of
the population. On a graph, Lorenz plotted the income earned by each quintile of the population.

Question 24

How do Lorenz curves showing equal distribution look like?

Answer 24

In a society where everyone has the same income
the line showing the addition of each additional
quintile will be straight and rising on a diagonal.

Question 25

How do Lorenz Curve Showing Unequal Distribution look like?

Answer 25

• In societies where the distribution of income is
  unequal, the bar chart will cake a different shape.
• The low-income earners, the lease paid 20% of
  the population will earn less than the others, and
  less than the average.
• The high-income earners,
  the highest-paid 20% of the population, will carn
  more than the others and more than average.
• In a population with unequal incomes, the income
  distribution takes the shape of a curve, beneath
• The deeper the shape of the
  curve, the greater is the income inequality.

Question 26

What is the Gini coefficient?

Answer 26

• It measures the inequality of income or wealth distribution among a country’s population.
• It is expressed as a decimal value between O and 1, and represents the size of the area between the equal distribution line and the arc formed by the Lorenz curve.
• The larger the value of the Gini coefficient (say 0.99), the more extreme is the gap between rich and poor.
  The smaller the value of the Gini coefficient (say 0.01) the more evenly a country’s wealth is shared.