1. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-1 Chapter 3 – Part 3 Economic Challenges Facing Global and Domestic Business Evaluating Economic Performance

2. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-2 “All Dollars are not Created Equal” Exercise ●Exercise A Which would you do? 1.buy a much-need alarm clock at a local store for $100 or 2.drive 20 minutes and buy the identical clock for $70 ●Exercise B Which would you do? 1.buy a new TV set at a local store for $2500 or 2.drive 20 minutes and buys the same TV for $2470?

3. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-3 ●Four Stages of the Business Cycle

4. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-4 Evaluating Economic Performance –Economies flow through various stages of a business cycle –Recession—cyclical economic contraction that lasts for six months or longer (two quarters). Real GDP is negative.

5. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-5 National Output ●Gross domestic product (GDP) —the sum of all goods and services produced within a nation’s boundaries each year. ●Productivity—relationship between the goods and services produced in a nation each year and the inputs needed to produce them. Output (goods and services produced) Input (human/natural resources, capital) Productivity =

6. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Inflation ●Stranded on an island exercise. 1-6

7. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-7 Price - Level Changes ●Inflation—rising prices caused by a combination of excess consumer demand and increases in the costs of raw materials, human resources, and other factors of production. –Hyperinflation—economic situation characterized by soaring prices –What would you do if you faced hyperinflation?

8. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-8 Price-Level Changes ●Demand-pull inflation Excess consumer demand ●Cost-push inflation Generated by rises in costs of factors of production

9. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-9 Measuring Price Level Changes ●Consumer Price Index (CPI)—measures the monthly average change in prices of goods and services –Market Basket—compilation of the goods and services most commonly purchased by urban consumers – about 88,000 items ●Producer Price Index (PPI) –For Finished Goods –For Intermediate Goods

10. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-10 ●Contents of the CPI Market Basket

11. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-11 Employment Levels ●Unemployment rate— an indicator of a nation’s economic health ●Types of unemployment –Frictional –Seasonal –Structural –Cyclical

12. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-12 ●Four Types of Unemployment

13. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-13 Managing the Economy’s Performance ●Monetary Policy— government actions to increase or decrease the money supply and change banking requirements and interest rates to influence banker’s willingness to make loans.

14. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-14 Managing the Economy’s Performance ●Fiscal Policy— government spending and taxation decisions designed to control inflations, reduce unemployment, improve the general welfare of citizens, and encourage economic growth.

15. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-15 Fiscal Policy ●Budget—organization’s plan for how it will raise and spend money during a given period of time. ●Budget deficit—funding shortfall that results when the government spends more than the amount of money it raises through taxes and fees ●National debt ●Budget surplus ●Balanced budget

16. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-16 Macroeconomics ●What are the effects of: 1.increasing business taxes 2.a tax rebate? 3.high unemployment? ●What is the effect of inflation on GDP? ●What is the effect of increased productivity on GDP? ●Should the government own businesses? If so, which ones and why?