Deck 6: Section 1: Does It Matter: Society, Ethics and Business

Question 1

What factors are important for achieving the goal of economic growth for Canada's economic system?

Answer 1

The Business Cycle
The business cycle refers to the rise and fall of economic activity over time. Although the economy will grow over the long term, economic growth is usually unstable. Business cycles or economic fluctuations vary in length and severity. Some periods of fluctuation are difficult and long; others are short and mild. Generally, the economy in the long run has an upward slope with ups and downs of varying degrees The five stages of the business cycle are expansionary, peak, contraction, trough, and recovery).
The expansionary phase is a period when economic activity is rising. Goods are being produced and sold, the workforce is expanding (that is, jobs are being created), demand for goods is increasing, and the price of goods is rising. Typically, this is a positive period for business. Profits are rising, cash flow is steady, and there is an opportunity for some risk taking. The expansionary period can experience a sudden economic boom or slow and steady growth. The economy needs to be expanding in order for economic growth to occur. Once the economy has reached its highest point, it can be said to have peaked. A peak marks the end of the expansionary phase and the beginning of the contraction phase. A contraction phase is characterized by declining economic activity and falling profits. During this phase, managers usually reduce costs, lay off workers, and halt any plans to invest in the company. A recession is realized when there are two or more consecutive quarter periods of negative or falling economic activity. A depression is an extreme recession that is characterized by longer economic periods of declining economic activity, high unemployment, and high levels of personal and commercial bankruptcies.
Productivity
Productivity is also an important factor to achieve economic growth. Productivity measures the level of output versus the level of input in an organization. An input, for example, can include materials, labour, or overhead, whereas an output is often a finished unit of product (or service) ready to be sold. An organization is said to have improved its productivity when it can produce more outputs with the same number of inputs. Alternatively, an organization can produce the same number of outputs with a reduced number of inputs. When costs are reduced and spread over the total number of units produced, an improvement in productivity has been achieved.
Balance of trade
The balance of trade is the value of all the goods and services a country exports minus the value of all the goods and services a country imports. While most trade with Canada involves goods, services have been an important component to the economy. Ideally, Canada would like to have a trade surplus instead of a trade deficit. A trade surplus occurs when a country exports more goods than it imports. This indicates a positive balance of trade and encourages economic growth. A trade deficit exists when a country imports more goods than it exports. A trade deficit is problematic because it results in a negative balance of trade, which means more money is leaving the country than is entering the country.
Exchange rates
One factor that can affect the cost of trade is exchange rates. In today's competitive marketplace, more firms are doing business outside of their home country-that is, buying and selling goods in different markets and currencies. When transactions begin in one
currency and settle in another, businesses must deal with exchange rates. An exchange rate or currency rate is the value of a foreign currency compared to a home currency or, in other words, the amount of domestic currency that must be given up to obtain an equivalent unit of the foreign currency. Global companies deal with exchange rates every day because their transactions occur between multiple countries. The most common type of currency transaction for businesses is the purchase and sale of goods and services across borders. A second type of transaction involving multiple currencies is the purchase and sale of investments. A third example of a currency transaction is through financial statement translation.
National debt
A low national debt means the government will not have to spend a lot of tax revenues on interest and can spend money appropriately on important services. Debt is borrowed money that must be repaid, usually with interest. Unlike consumer debt, which is debt individuals have accumulated from the purchase of goods and services, national debt, also known as federal debt , is debt accumulated by the government. All local, regional, or national governments can have debt, but a large national debt can be especially problematic for individuals and businesses because this debt can affect the economy as a whole.

Question 2

Explain the four different types of economic systems, and provide one example of a country for each.

Answer 2

A market economy , also referred to as a capitalist economy or a private enterprise system , is a
free market system in which individuals can decide to be employees or owners of their
own business. Individuals who establish businesses are "entrepreneurs" and can freely
choose which products to produce, distribute, and sell; where to sell them; and what prices
to set. In so doing, businesses compete with others in a marketplace where supply and
demand determine which goods and services will be produced and consumed.
Market economies offer entrepreneurs certain rights -for example, the right to own
private property, the right to compete, the right to make their own choices, and the right
to make a profit. The right to make a profit is probably the most significant incentive for
individuals to take the risks involved in establishing a business.
Competition is one of the most important features of a market economy. Different individuals
and groups are able to compete freely for profit. Competition is beneficial for both
consumers and for the overall economy, because it allows different products and services to be
produced at different prices. When there is more than one seller of a given product, producers
are compelled to create a better product or to find a way of lowering costs to satisfy customers.
This rivalry leads to more varied products, lower prices, and more efficient production.
There is a trend today for countries to move toward market economies, but the transition
is not always simple nor is it quickly realized. The availability of money, capital, and
adequate distribution systems can impact the ability of individuals to establish businesses
and to market their products to those who want them.
While Canada and the United States are considered to have some aspects of a market economy, because government is involved with influencing the economy, these two countries are considered to have mixed systems, instead of market systems. Indeed, there is no country that has a true market economy, without any government influence.
Communism
Communism is the economic system that once existed under the Soviet Union. Instead of
individuals freely deciding which products to produce, the government owned essentially all
of the country's resources, and economic decisions were made centrally. The government
decided which goods and services were produced and in what quantities. Communism
tended to limit an individual's choices, such as the ability to change jobs or to relocate.
Although in theory communism was designed to create economic equality by allocating
resources equally to all, the system had many shortcomings.
First, the communist government had to guess which goods to produce, since prices were not set by the market. The government also had to estimate supply and demand. When estimates were inaccurate,
the result was either a surplus or a shortage of goods.
A second shortcoming of communism was that it offered little incentive for people to work hard, to improve goods, or to invent new products. As a result, creativity and innovation, in terms of business, were nonexistent.
The third problem with communism was that the government mainly benefited from
the earnings. Individuals had little incentive to build a business, since the government
took most of the profits. Little business growth meant little to no economic growth.
Today, there are few pure communist economies in the world whereby governments
make all of the economic decisions. Cuba and North Korea are two examples of communist systems.
Socialism
Socialism is an economic system whereby the government has large ownership in or control
over major industries essential to the country's economy. Coal mines, transportation,
steel mills, health care, banking, and utilities are a few examples.
With significant ownership, the state can influence business goals, types of goods
produced, prices, and even workers' rights. How much government ownership is required
for a country to be considered socialist? There is no universal agreement. However, most
socialist nations are otherwise similar to other countries. Socialist systems, for example,
often have democratic governments that protect the rights of citizens.
Although most businesses are privately owned, individuals are heavily taxed so that
the government can redistribute profits among its people. High taxation levels can also be attributed to the high level of services offered by socialist systems, such as health care, education, child care, and unemployment benefits.
One advantage socialists believe their system offers is a higher standard of living and more
economic stability than other systems. While this could be true, taxes and unemployment
are usually higher and levels of innovation lower. Some examples of socialist countries
include France, Denmark, and Sweden.
Mixed Economy
Canada's economy is considered a mixed economy since it uses more than one economic
system. While most industries are the work of private enterprise, the Canadian government
may be considered partly socialist in its control of certain industries such as Canada
Post, utilities (for example, water), and some public lands. In Canada, for example, the
provincial governments control and regulate the health care system. Similarly, the
Ontario government owns and operates the Liquor Control Board of Ontario (LCBO),
which controls the sale of certain types of alcohol.
The government is also involved in taxation and in the allocation of resources for special
purposes, such as the assistance of retired individuals on a fixed income. The Canada
Pension Plan (CPP), for example, is administered by the government and provides pension
income for individuals age 65 and older.
Today, most economies are considered mixed systems since governments usually play some role in managing the economy.