UNDERSTANDING THE ECONOMY Lesson 3-2

Understanding the Economy Objectives List the goals of a healthy economy Explain how an economy is measured Analyze the four key phases of the business cycle Key Terms productivity gross domestic product (GDP) gross national product (GNP) inflation consumer price index (CPI) producer price index (PPI) business cycle expansion recession depression recovery Marketing Essentials Chapter 3, Section 3.2

Understanding the Economy Study Organizer Use the chart like this one and use it to take notes about economic measurements. Marketing Essentials Chapter 3, Section 3.2

The Economy and Marketing To have a useful SWOT analysis, you need to consider the economic factors that will influence your marketing planning: Economy Consumers Businesses Government Marketing Essentials Chapter 3, Section 3.2

When Is an Economy Successful? A healthy economy has three goals: Increase productivity Decrease unemployment Maintain stable prices Marketing Essentials Chapter 3, Section 3.2

When Is an Economy Successful? Six Key economic measurements Purpose: used to determine economic strength: Labor productivity Gross domestic product (GDP) Gross national product (GNP) Standard of living Inflation rate Unemployment rate Marketing Essentials Chapter 3, Section 3.2

Labor Productivity  output per worker hour that is measured over a defined period of time, such as a week, month, or a year Businesses can increase productivity by: Investing in new equipment or facilities for higher efficiency Providing additional training or financial incentives for workers Reduce their work force and increase the responsibilities of those who remain Labor Productivity:

Two key concepts related to increasing productivity are: Specialization Division of labor Through Specialization: when individual workers focus on single tasks each worker is more efficient and productive Through Division of labor divides the production process into separate tasks workers specialize in specific tasks the group as a whole becomes more productive Labor Productivity Marketing Essentials Chapter 3, Section 3.2

Gross domestic product (GDP)  is the output of goods and services produced by labor and property located within a country. The GDP is made up of: Private investment Government spending Personal spending Net exports of goods and services Change in business inventories Gross Domestic Product

Gross national product (GNP)  is the total dollar value of goods and services produced by a nation, including the goods and services produced abroad by U.S. citizens and companies GNP, it is not where the production takes place but who is responsible for it U.S. switched to using the GDP to measure its economy in 1991 Gross National Product

Honda has a plant in the U.S. Is the output of this plant included in the GNP or the GDP of the U.S.? - GDP Honda is owned by Japan, is this included in the GNP of the U.S.? -no as it is not owned by the U.S. Ford has a plant in Mexico Are cars produced in Mexico included in the GDP or the GNP or both for the U.S.? –GNP

Standard of living is a measurement of the amount and quality of goods and services that a nation’s people have Figure that reflects their quality of life To calculate the standard of living: Divide the a country’s GDP or GNP by its population to get the per capita GDP or GNP Standard of Living Marketing Essentials Chapter 3, Section 3.2

Inflation  refers to a period of rising prices on goods & services VideoVideo: What Causes Inflation? When a country prints more money than what is justified by their wealth What happens to the value of the dollar when this occurs? It goes down What is the target amount of inflation increase by banks? 2 %– 3 % Inflation

Inflation  refers to a period of rising prices on goods & services Low inflation rate (1 - 5 percent) shows that an economy is stable Double-digit inflation rate devastates an economy country’s money losses its value During high inflation: Prices increase and buying power goes down People on fixed incomes especially hurt (elderly) To combat inflation: governments raise interest rates to discourage borrowing money and slow economic growth Inflation

Two measure of inflation used in the U.S 1. Consumer price index (CPI)  measures the change in price (of consumer goods & services) over a period of time of some 400 specific retail goods and services used by the average urban household It is also called the cost of living index 2. Producer price index (PPI)  measures wholesale price levels in the economy It is often a trendsetter, as producer prices generally get passed along to the consumer Inflation

Unemployment Rate: Jobless rate Higher unemployment = greater chance of economic slowdown Lower the rate = greater chances of economic expansion Unemployment Rate

The Conference Board: is a private business research organization made up of businesses who work together to assess the economy They have three additional indicators to measure the economy: Consumer confidence index Consumer expectations index Jobs index Wages and Payroll jobs Other Economic Indicators and Trends Marketing Essentials Chapter 3, Section 3.2

The cycle of economic growth and decline is called the business cycle Business cycle  Recurring changes in economic activity, such as the expansion (growth) and contraction (slow down/decline) of an economy Consists of four Stages: Expansion Recession Trough Recovery The Business Cycle Expansion

Expansion  is a time when the economy is flourishing Characterized by: Low unemployment High output of goods and services High consumer spending Good time to open new businesses Will peak at the end and a recession period begins Expansion

Recession  is a period of economic slowdown that lasts for at least six months. Characterized by: Reduced workforces and higher unemployment R&D cut back, expansion on hold Lower consumer spending Low production of goods and services Recession Expansion

A depression  is a period of prolonged recession Characterized by: Businesses shut down Impossible to find jobs Unemployment very high Consumer spending is very low Production of goods and services is down significantly Depression

Trough  when the economy reaches its lowest point in a recession, then begins to rise Trough Expansion

Recovery  is the term used to signify a period of renewed economic growth following a recession or depression. This time is characterized by: Increasing GDP Increasing Sales Reduced unemployment Increased consumer spending Moderate expansion of busineses recovery A period of renewed economic growth following a recession or depression. The Business Cycle Marketing Essentials Chapter 3, Section 3.2

The business cycle can be affected by the actions of: Businesses Consumers Government These things are, in turn, affected by the business cycle The Business Cycle Marketing Essentials Chapter 3, Section 3.2

Understanding the Economy Identifying Economic Measurements Section 3.2

CHAPTER 1 REVIEWSECTION 3.2 REVIEW