The Economy and Marketing Understanding the Economy

Objectives List the goals of a healthy economy Explain how an economy is measured Analyze the key phases of the business cycle Objectives

Economics Standard 9 – Explain how the following economic indicators are used in a market economy for business analysis and marketing decisions: GDP, standard of living, inflation rates, interest rates, unemployment rate, productivity rates, stock market reports, and CPI. Standard

Goals of a Healthy Economy Increase Productivity Decrease Unemployment Maintain Stable Prices Government & business analyze labor productivity, GDP, GNP Government analyzes unemployment & standard of living Government monitors inflation, CPI, PPI All nations analyze their economies to keep track of how well they are meeting these goals

Unemployment Rate Gross Domestic Product (GDP) Standard of Living Economic Measurements Labor Productivity Inflation Rate Nations routinely use economic measurements to analyze their economic strength

Labor Productivity Businesses can increase productivity by: Investing in new equipment/facilities to increase efficiency Provide additional training to employees Reduce workforce and increase number of responsibilities of the workers who remain High productivity improves a company’s profit Labor Productivity

Specialization & division of labor are key to increasing productivity Assembly lines are an example of specialization & division of labor Each part of a finished product is completed by a different person who specializes in one aspect of manufacturing Work can be completed faster and more efficiently, it also makes it easier to identify issues with products Labor Productivity

Gross Domestic Product (GDP) The principal way of measuring a nation’s production output in a given year Made up of private investment, government spending, personal spending, net exports of goods & services, and change in business inventories Private investment – spending by businesses for equipment & software, also home construction Government spending – money spent by federal, state, and local gov’ts Social services & construction projects Gross Domestic Product (GDP)

Gross Domestic Product (GDP) Expanding inventories show that businesses are producing goods/services that are being stored in warehouses – this adds to GDP Shrinking inventories means people are purchasing more goods/services than what was produced – this is subtracted from GDP Gross Domestic Product (GDP)

Gross Domestic Product (GDP) GDP = C + I + G + (X – M) C = Personal Consumption: all spending by households I = Gross Investment: money spent on all purchases of machinery by businesses, construction of capital, & change in inventories G = Government spending X = Exports M = Imports Gross Domestic Product (GDP)

In 1991, the US started using GDP as its primary measurement of productivity Before 1991, it used GNP (gross national product) Total dollar value of goods & services produced by a nation including goods and services produced abroad by US citizens and companies GDP vs GNP

When comparing GDP and GNP, location of production is important EX: FORD is a US corporation and has a plant in England The portion of production that takes place in England is counted in the US GNP but NOT in the GDP The portion of production that takes place in England is counted in England’s GDP but not the GNP GDP vs GNP

Measurement of a country’s amount and quality of goods and services that a nation’s people have Reflects a quality of life Standard of living = GDP / population OR GNP / population This gives you an amount of GDP or GNP per person (per capita) Most industrialized nations have a higher standard of living because they have a high level of production Standard of Living

Some countries provide more social services for their citizens Free education and health care provided by the government The number of households per 1,000 inhabitants with durable goods (washing machines, refrigerators, dishwashers, vehicles) can be included in the analysis High levels of social services & durable goods means a country has a high standard of living Standard of Living

Inflation refers to a rise in prices of goods and services A low inflation rate (1-5% each year) is good because it shows that the economy is stable Double Digit inflation (10% or higher) hurts an economy When inflation is this high, money LOSES its value People who live on a fixed income (ex: Social Security) are hurt by high inflation Inflation Rate

Controlling inflation is one of the governments major goals When inflation rises, the gov’t increases interest rates to discourage borrowing money The result is slower economic growth, which helps bring inflation down Two measures of inflation in the US Consumer Price Index (CPI) aka Cost of Living Index Producer Price Index (PPI) Inflation Rate

Inflation Rate CPI measures the change in price over a period of time Examines the price of 400 specific retail goods & services used by the average household (referred to as a basket of goods) and how the price of this basket has changed Food, housing, utilities, transportation, and medical care are a few components Inflation Rate

Inflation Rate PPI measures wholesale price levels in the economy Producer prices generally get passed along to the consumer When there is a drop in the PPI, it is generally followed by a drop in the CPI Inflation Rate

All nations chart the unemployment rate (jobless rate) The higher the unemployment rate, the greater the chances are of slow economic times The lower the unemployment rate, the greater the chances are of an economic expansion When more people work, there are more people spending money and paying taxes Unemployment Rate

Unemployment Rate 3 types of unemployment: Frictional Structural Workers are searching for jobs or waiting to take jobs Structural Any worker who becomes unemployed due to a lack of skill with a new technology introduced by his or her employer Cyclical Results from the normal fluctuations of the business cycle – caused by a decline in total spending in the economy Unemployment Rate

An unemployed person is anyone who is willing and able to work but does not have a job Not included in the unemployment rate is anyone under the age of 16 and or discouraged workers (those not seeking employment) Part-time workers are considered EMPLOYED! 4-5% of the labor force can be unemployed and we can still be considered at full employment Unemployment Rate

Business Cycle Peak Peak Expansion (Recovery) Expansion (Recovery) Contraction Contraction Trough Business Cycle

Factors that Affect Business Cycles Business cycles are affected by the actions of businesses, consumers, and the government In turn, all three of these groups are affected by the business cycle Factors that Affect Business Cycles

Factors that Affect Business Cycles Businesses: Expansion/Recovery: Expand their operations Invest in new properties, equipment, inventories & hire more employees Recession/Depression: Cut back operations Lay off employees Cut back inventories to match lowered demand Factors that Affect Business Cycles

Factors that Affect Business Cycles Consumers: Recession: Biggest fears are losing jobs and decreased wages This reduces consumer spending Reduced consumer spending causes businesses to reduce their operations in response to lower demand Prosperity & Recovery: Consumers are optimistic Spend more money on material goods & luxury items Businesses respond by producing more goods **Consumer spending accounts for more than two-thirds of the US GDP Factors that Affect Business Cycles

Factors that Affect Business Cycles Government: Policies & programs Taxation has a strong effect When the government requires more money to run programs, higher taxes are needed When taxes are raised, businesses & consumers have less money to fuel the economy When the economy needs a boost, the gov’t may cut taxes or lower interest rates This gives businesses & consumers more money to spend and invest In 2008, the government issued tax rebates to taxpayers to encourage consumer spending Factors that Affect Business Cycles