1. Political and Economic Analysis Chapter 3

2. Government Economy People Politics Chapter 3

3. Chapter Objectives Define the concept of an economy List the factors of production Explain the concept of scarcity Discuss how traditional, market, command and mixed economies answer the three basic economic questions. Cite examples of various economic systems List the goals of a healthy economy Explain how an economy is measured Analyze the key phases of a business cycle

4. Chapter 3.1 What is an Economy? Objectives Define the concept of an economy List the factors of production Explain the concept of scarcity Discuss how traditional, market, command and mixed economies answer the three basic economic questions. Cite examples of various economic systems

5. Chapter 3.1 – Key Terms Economy Factors of Production Resources Infrastructure Entrepreneurship Scarcity Traditional Economy Market Economy Command Economy

6. Economy What words come to mind when you see the word Economy?

7. Do you think economic decisions affect your daily life? How?

8. The Main Idea: An economy is how a nation makes economic choices that involve how the nation will use its resources to produce and distribute goods and services to meet the needs of its population. The Main Idea: An economy is how a nation makes economic choices that involve how the nation will use its resources to produce and distribute goods and services to meet the needs of its population.

9. Economic Systems An organized way a nation provides for the needs and wants of its people Economy All the things used in producing goods and services Resources Land, Labor, Capital, and Entrepreneurship Economists uses this term when they talk about resources Factors of Production

10. Includes everything contained in the earth or found in the seas. Examples are coal, the lake & everything in it, trees & plants. Land Refers to all the people who work Includes full and part-time workers, managers, and professional people in both the public and private sectors Labor Refers to the skills of the people willing to invest their time and money to run a business. Entrepreneurs organize the factors of production to create the goods and services that are part of an economy Entrepreneurship

11. Factors of Production (cont.) Include money to start and operate a business. It also includes goods used in the production process Factories, office buildings, computers and tools are all considered capital resources Infrastructure: The physical development of a country. This includes its road, ports, sanitation facilities, and utilities, especially telecommunications Capital

12. Scarcity The difference between wants and needs and available resources is called scarcity. Different economies have different amounts of resources. The U.S. has an educated labor force, a great deal of capital, an abundance of entrepreneurs, and many natural resources. Most underdeveloped have natural resources to spare but not the capital or the skilled labor to develop them.

13. What goods and services should be produced? 1. What? How should the goods and services be produced? 2. How? For whom should the goods and services be produced? 3. For Whom? How Does an Economy Work? Nations must answer three basic questions when deciding how to use their limited resources:

14. Economic Systems Economists study the way nations answer the three basic economic questions and classify the economic systems into three broad categories. TraditionalMarketCommand

15. Traditional Economies Traditions and rituals answer the basic questions of what, how, and for whom. The answers are often based on cultural or religious practices and ideals that have been passed from one generation to the next. What? There is little choice about what to produce. People produce what they need to survive. They use the natural resources to do this. How? Traditional societies are underdeveloped. They produce what they need with simple handmade tools. People use the technique that has been passed down through generations For Whom? Traditional economies have a sense of community. Any excess is traded among the residents..

16. Market Economies In a pure market economy, there is no government involvement in economic decisions. Individuals and companies own the means of production and businesses compete for consumers.

17. Market Economies (cont) The government lets the market answer the three basic economic questions: What? Consumers decide what should be produced through the purchases that the make How? Businesses decide how to produce goods & services For Whom? The people who have more money are able to buy more goods and services.

18. Command Economies A command economy is a system in which a country’s government makes economic decisions and decides what, when, and how much will be produced and distributed. What? One person decides what products are needed How? The government owns all means of production, it runs all businesses. For Whom? The government decides who will receive what is produced.

19. Mixed Economies No economy is purely a traditional, market, or command economy. Every economy has influences that make it at least somewhat mixed. The U.S. is considered a mixed economy because there is governmental involvement in the laws and regulations that businesses must follow.

20. Mixed Economies (cont.) Most economies in the world are mixed. An economic classification would depend on how much the government interferes with the free market. Examples of Gov’t involvement in the U.S.: There are regulations that protect our food, water, air. Labor laws determine what age people can start working and the minimum salary. Social programs are provided for those who needs help such as welfare and Medicaid for the poor and Medicare for the elderly

21. Capitalism Marketplace competition Private Ownership Communism Government controls factors of production No private ownership of property or capital Socialism Meet basic needs for all Provide employment for many The Three Political Philosophies

22. Capitalism Political & economic philosophy characterized by marketplace competition and private ownership of businesses It is the same as free enterprise. Political systems associated with capitalism is democracy. Political power is in the hands of the people The government also cares about those who cannot take care of themselves. (Welfare, Medicaid, Medicare) The U.S. and Japan are two examples of countries that are classified as capitalist and have a democratic form of government. Capitalism, Communism & Socialism

23. Communism Is a social, political, and economic philosophy in which the government, usually authoritarian, controls the factors of production. There is no private ownership of property or capital. Theoretically, there is no unemployment The government decides the type of schooling people will receive and also tells them where to live Housing accommodations are assigned according to need. Medical care is free. There is no financial incentive for people to increase their productivity. The few countries that can be classified as communist include Cuba and North Korea. China, Vietnam and Laos is now allowing more free enterprise practices even though they are politically dominated by a communist party. Capitalism, Communism & Socialism

24. Socialism The term that refers to a system on its way to communist ideal of a classless society The main goal is to meet basic needs for all and to provide employment for many and to ensure a certain standard of living for all Medical care is free or low cost, as is education. There are systems for pensions and elderly care. Businesses and individuals pay higher taxes than those in capitalist countries in order to contribute to financing of government services. The government runs key industries and makes economic decisions. Canada, Germany and Sweden are generally characterized as having socialist elements in their economies. Capitalism, Communism & Socialism

25. Economies in Transition Most Eastern European countries that were once communist satellites have moved toward global market economies and more democratic forms of government. Many state owned industries have been privatized in these countries.

26. Privatization Privatization refers to the process of selling government-owned businesses to private individuals. This generates much needed revenue for the governments involved.

27. A Move Toward Privatization Today many socialist countries are selling their state-run businesses to help balance their budgets as the costs of national health care, unemployment, and retirement programs soar. Example: Great Britain sold its national phone company and more. British Airway was privatized. All these sales generated approximately $63 billion for Great Britain.

28. Developing Economies Developing economies are mostly poor countries with little industrialization that are trying to become more prosperous and develop their infrastructure. Much of their success depends on improving the education levels of their labor force and on directing and using foreign investment efficiently.

29. Capitalist Countries United States Japan Communist Countries Cuba North Korea Socialist Countries Germany Canada Sweden Capitalism, Communism & Socialism Examples

30. Review Questions 1. Explain how the infrastructure of a country is related to the factors of production? 2. What three broad categories do economists use to classify all economic systems? 3. In which economic system does the government let the market answer the three basic economic questions?

31. Political and Economic Analysis Chapter 3 Section 2

32. Government Economy People Politics Chapter 3

33. Chapter 3.2 Understanding the Economy? Objectives List the goals of a healthy economy Explain how an economy is measured Analyze the key phases of a business cycle

34. Productivity Gross Domestic Product (GDP) Gross National Product (GNP) Inflation Chapter 3.2 – Key Terms Consumer Price Index (CPI) Producer Price Index (PPI)Business Cycle ExpansionRecessionDepressionRecovery

35. The Main Idea: Aspects of an economy such as consumers, businesses, and governments affect each other and the economy in general. Companies need current economic information to make good marketing decisions. The Main Idea: Aspects of an economy such as consumers, businesses, and governments affect each other and the economy in general. Companies need current economic information to make good marketing decisions.

36. The Economy & Marketing An understanding of how to measure an economy and what factors contribute to economic strength or weakness is essential. It is only then that you can appreciate how the economy, consumers, businesses, and government influence each other.

37. When is an Economy Successful? A healthy economy has three goals: 1. Increase productivity 2. Decrease unemployment 3. Maintain stable prices All nations analyze their economies to keep track of how well they are doing. Based of this analysis, businesses, consumers and governments can make appropriate economic decisions.

38. Economic Measurements The key economic measurements that nations routinely use to determine their economic strength are: 1. Labor productivity 2. Gross domestic product (GDP) 3. Gross national product (GNP) 4. Standard of living 5. Inflation rate 6. Unemployment rate

39. Labor Productivity Productivity is output per worker hour that is measured over a defined period of time, such as a week, month, or year. Businesses can increase their productivity by: Investing in new equipment or facilities that allow their employees to work more efficiently Providing additional training or financial incentive to boost staff productivity Businesses can also reduce their work force and increase the responsibilities of the workers who remain. Specialization and division of labor. Example: An assembly line.

40. Gross Domestic Product Most governments study productivity by keeping track of an entire nation’s production output. Today, the principal way of measuring that output in the U.S. is gross domestic product. Gross domestic product (GDP) is the output of goods and services produced by labor and property located within a country.

41. Gross Domestic Product (cont.) The GDP is made up of private investment, government spending, personal spending, net exports of goods and services and change in business inventories. Private investment includes spending by businesses for things like equipment & software, as well as home construction. Government spending includes money spent by local, state and federal governments. Personal spending includes all consumer expenditures for goods and services.

42. Gross Domestic Product (cont.) Private Investment Government Spending Personal Spending Trade Surplus / Trade Deficit GDP

43. Gross National Product (GNP) The GNP used to be the measurement used by the US to measure productivity. Gross National Product (GNP) is the total dollar value of foods and services produced abroad by U.S. citizens and companies. The difference between GDP & GNP: The GNP is concerned with who is responsible for the production not where it is done.

44. Standard of Living A country’s standard of living is a measurement of the amount and quality of goods and services that a nation’s people have. It is a figure that reflects their quality of life. To calculate this: GDP or GNP Population Per capita GDP or GNP

45. Inflation Rate Inflation refers to rising prices. A low inflation rate (1-5%) each year is good because it shows that the economy is stable. Double-digit inflation (10% or higher) devastates an economy. When the inflation gets that high, money does not have the same value it did with lower inflation. Controlling inflation is one of the government major goal

46. Inflation Rate (cont.) When inflation starts to go up, many governments raise interest rates to discourage borrowing money. The result is a slow down in economic growth, which helps to bring inflation down. Two measures of inflation used in the U.S. are the consumer price index and the producer price index.

47. Consumer Price Index (CPI) The Consumer Price Index (CPI) measures the change in price 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. Food, housing, utilities, transportation, and medical care are a few of its components. The core CPI excludes food and energy prices, which tend to be unpredictable.

48. Producer Price Index (PPI) Producer Price Index (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

49. Unemployment Rate All nations chart unemployment, or jobless rates. The higher the unemployment rate, the greater the chances of an economic slowdown. The lower the unemployment rate, the greater the chances of an economic expansion. When more people work, there are more people spending money and paying taxes. Businesses and government both take in more money, and the government does not have to provide as many social services.

50. Other Economic Indicators & Trends The Conference Board, a private business research organization that is made up of businesses and individuals who work together to assess the state of the economy. Three Conference Board Indicators are: Consumer Confidence Index Consumer Expectations index Job Index (measures consumer perceptions regarding job availability) Consumers are polled. Retail sales are studied. The rate of housing sales are reviewed, as are sales of trucks and autos. Wages and new payroll jobs also provide information.

51. The Business Cycle

52. During an expansion, unemployment is low and consumer confidence and spending are high. Business develop new products and conduct research. A peak marks the end of this phase and the beginning of recession. Expansion During a recession, the economy slows. Businesses lay off workers. Consumer confidence and spending are low. There is little demand, so production of goods and services decreases. Businesses have little money to invest. A depression is deep and long lasting recession. Recession

53. The Business Cycle (cont.) A trough is the low point in the business cycle. It is the transition between recession and recovery. The economy stops slowing and may show signs that a recovery is near. Trough During a recovery, the economy grows again. Jobs are created and consumers begin to spend. There is more demand, so production of goods and services increases. This phase may last a long time. Recovery

54. Factors Affecting Business Cycle FactorHow Can this factor affect the business Cycle? How can the business cycle affect this factor? BusinessesThey tend to expand during the Recovery phase Recession leads to less consumer spending therefore lose money ConsumersThey spend less the cycle leads to recession Increase in wages during a recovery or expansion GovernmentThe Gov’t might issue rebates to spur spending In a recession, less taxes is paid to the gov’t

55. Questions for Section 3.2 1.During a recession, what is the average person’s greatest fear? 2.How is a depression different from a recession?

56. Assess for Understanding 1.Explain: How are two of the factors of production related? 2.Compare & Contrast: How are the three basic economic questions answered in a traditional economy, in a market economy, and in a command economy? 3.Explain: How are GDP and CPI used in a market economy for analysis and marketing decision?