CH 2 & 4 The Role of Government in Business and Economic Issues Notes on Economic Issues

Dimensions of the External Environment and Organizational Context

• Effective business management requires an understanding of the external environments that influence organizational performance.

• Dimensions of the External Environment:

  • Economic Environment: The condition of the economic system (e.g., inflation, GDP, employment levels) in which an organization operates.

  • Technological Environment: The state of technology and innovation available to businesses.

  • Political-Legal Environment: Laws, regulations, and political stability at all government levels.

  • Socio-cultural Environment: The customs, values, attitudes, and demographic characteristics of the society.

  • Business Environment: The specific conditions for industry competition and cooperation.

  • Global Environment: International trends, trade relations, and geopolitical shifts.

  • These dimensions create emerging challenges and opportunities that businesses must navigate to remain competitive.

Fundamental Economic Systems

• Economic systems are defined by who controls the five factors of production: Land, Labour, Capital, Entrepreneurship, and Knowledge.

• Capitalism:

  • Defined as a system where individuals seeking profits produce goods and services.

  • These are sold in a free market to those with the ability to pay.

  • Private ownership of property and businesses is the core pillar.

• Communism:

  • The government (state) makes all decisions regarding production and consumption.

  • Factors of production are centrally controlled.

• Socialism:

  • A system characterized by a combination of free-market activity and government allocation of resources.

  • Certain key industries may be state-controlled while others remain private.

• Mixed Economy:

  • Most modern countries, including Canada, operate under a mixed economy where the market makes some resource allocations and the government makes others.

The Economic Environment and Business Cycles

• The Economic Environment represents the conditions of the system in which an organization operates. Three key economic goals include:

  • Economic Growth.

  • Economic Stability.

  • Full Employment.

• The Business Cycle:

  • This represents the typical pattern of short-term ups and downs in an economy.

  • Peak/Boom: Periods of economic boom characterized by job creation, growth, and prosperity.

  • Recession: Defined as two or more consecutive quarters of decline in the Gross Domestic Product ($GDP$).

  • Trough: The lowest point of the cycle before recovery begins.

  • Recovery: The phase where the economy begins to grow again following a recession.

Measuring Economic Growth

• Aggregate Output: A measure of economic growth representing the total quantity of goods and services produced by an economic system during a specific period.

• Standard of Living: The total quantity and quality of goods and services that citizens can purchase with their currency (e.g., comparing the cost of living and availability of services in Vancouver vs. Calgary).

• Gross Domestic Product ($GDP$):

  • The value of all goods and services produced by a national economy within a given period through domestic factors of production (production located strictly within the country).

  • Canadian GDP Trends: Statistics Canada reported that Canada's real $GDP$ grew $3.8\%$ in $2022$, following a $5.3\%$ increase in $2021$. This growth was driven by household spending, inventory accumulation, and exports.

• Gross National Product ($GNP$):

  • The value of all goods and services produced by a national economy within a given period regardless of production location (includes international operations of domestic companies).

Economic Stability and Price Management

• Economic Stability: A condition where the amount of money available and the quantity of goods/services produced grow at approximately the same rate.

• Threats to Economic Stability:

  • Inflation: Occurs when there are widespread price increases across the economic system.

  • Deflation: A period of generally falling prices.

• Consumer Price In dex ($CPI$): A monthly statistic used to measure the pace of inflation or deflation by tracking price changes of a weighted basket of goods.

• Case Study: Bank of Canada Outlook ($2024$):

  • Former Bank of Canada officials anticipate interest rate cuts starting in roughly $6$ months (around June or July $2024$) if inflation pressures ease.

  • Governor Tiff Macklem kept the benchmark overnight rate at $5\%$ as of early $2024$.

  • A major challenge is inflation expectations becoming "stuck" at an elevated level ($3\%$). Former official Beaudry noted that bank officials may need to "attack" such levels if citizens become accustomed to them.

Employment and Joblessness

• Unemployment: The level of joblessness among people actively seeking work.

• Types of Unemployment:

  • Frictional: People who are temporarily between jobs or looking for their first job.

  • Seasonal: Unemployment due to the seasonal nature of certain industries (e.g., farming or tourism).

  • Cyclical: Job loss caused by a downturn in the business cycle/recession.

  • Structural: A mismatch between the skills of the workforce and the requirements of available jobs.

Management of the Canadian Economy: Stabilization Policies

• The government manages economic fluctuations through two primary types of stabilization policies:

  • Fiscal Policies: Managing the economy through government spending and taxation levels.

  • Monetary Policies: Managing the economy through the Bank of Canada's control of the money supply and interest rates.

The Seven Categories of Government Activity in Business

1. Crown Corporations:

   • Companies owned by federal or provincial governments.

   • Purposes: To provide services businesses would not provide (e.g., Air Canada in the $1930s$), to bail out struggling major industries (e.g., Canadian National Railway in $1919$), or to provide special services (e.g., Bank of Canada).

   • Privatization: Since the $1990s$, governments have sold publicly-owned corporations (Teleglobe Canada, Air Canada, CNR) to reduce the state's economic role.

   • Selected Federal Crown Corporation Revenues ($2017$):

     • Canada Pension Plan Investment Board ($CPPIB$): $36.273$ billion.

     • Public Sector Pension Investment Board: $15.913$ billion.

     • Canada Mortgage and Housing Corporation ($CMHC$): $9.159$ billion.

     • Canada Post Corporation: $7.891$ billion.

     • Canadian Commercial Corporation: $2.657$ billion.

     • Export Development Canada: $2.072$ billion.

2. Laws and Regulations:

   • Created by elected politicians; political parties in power significantly influence the business environment.

   • Jurisdictions: Businesses must navigate $14$ different jurisdictions ($10$ provinces, $3$ territories, and the federal government).

3. The Bank of Canada ($BoC$):

   • Canada’s central bank and a federal Crown corporation.

   • Acts as a financial institution on behalf of the federal government but does not provide retail banking services to the public.

4. Taxation and Financial Policies:

   • Federal Revenue: Relies on income tax and other tax revenue.

   • Provincial Revenue: Relies on income tax and sales tax.

   • Municipal Revenue: Relies on property taxes.

   • All business taxes are eventually passed to consumers through higher prices.

5. Government Expenditures:

   • Funds directed toward depressed regions, education, health, roads, ports, waterways, and airports.

   • These expenditures benefit both consumers and the infrastructure required by businesses.

6. Purchasing Policies:

   • Governments are the largest buyers of goods and services in Canada.

   • Policies often favor Canadian businesses to support the domestic economy, even if their bids are higher than non-Canadian competitors.

7. Services:

   • Consumer Protection: The Canada Deposit Insurance Corporation ($CDIC$) insures deposits in financial institutions up to $100,000$ (raised from $60,000$).

   • Stock Regulation: Provincial governments set rules for public companies and stock exchanges.

   • Municipal Services: Zoning regulations, building inspections, business licensing, and fee structures (water, parking).

Political-Legal Challenges: Barriers and Externalities

• Interprovincial Trade Barriers: Despite being one country, provinces often have trade wars. For example, in $2018$, Alberta targeted Ontario over unfair trade barriers on alcohol. While Alberta lists $745$ Ontario alcoholic beverages, Ontario only lists approximately $20$ Alberta products despite having a market three times larger.

• International Sensitivity: Canadian businesses are affected by global political friction. In $2018$, Canada Goose delayed its first store opening in China due to a boycott sparked by the arrest of a Huawei executive in Canada. This demonstrates how luxury brands (dependent on Chinese customers who account for over one-third of global luxury spending) are vulnerable to political-legal shifts.