1. Political and economic analysis
CHAPTER 3

2. What is an Economy?
Economy or economic system is the way a nation provides for the needs and wants of its people.
Countries with different economic systems have different approaches when making choices.
Countries economic resources determine economic activities
Economic resources are all the things used in producing G/S.
Factors of Production: resources of land, labor, capital, and entrepreneurship

3. ECONOMIC RESOURCES FACTORS OF PRODUCTION LAND : LABOR: CAPITAL:
everything found in the earth or seas
LABOR:
all the people who work
CAPITAL:
money to start and operate a business.
goods used in the production process
Infrastructure: physical development of country, roads, ports, sanitation facilities, and utilities
ENTREPRENEURSHIP:
The skills of people who are willing to invest their time and money to run a business.
The employers of a population

4. ECONOMIC RESOURCES resources wants and needs SCARCITY:
The difference between unlimited wants and needs and available resources.
Forces nations to make economic choices.
Different economies have different amounts of economic resources.
Based on a Nation’s Economic System impacts how they use their limited resources
resources
wants and needs

5. Types of Economic Systems
Nations answer 3 basic economic questions
WHAT goods and services should be produced?
HOW should the goods and services be produced?
FOR WHOM should the goods and services be produced and distributed?
Economists have classified a Nation based on how they answers those 3 questions: Traditional, Market, and Command Economies
No economy is pure and simple, many are MIXED

6. Types of Economic Systems
TRADITIONAL ECONOMY:
habits, traditions and rituals answer the basic questions
Answers are based on culture or religion
Subsistence farming, animal gathering, tool making
MARKET ECONOMY:
No government involvement
Individuals and companies own the means of production and businesses compete for consumers
COMMAND ECONOMY:
Government makes all decisions and controls resources
MIXED ECONOMY:
No economy is 100% pure they are all MIXED

7. Types of Economic Systems
Traditional
Market
Command
WHAT
People produce what the need to survive
Consumers decide through purchases they make
Dictator or central government
HOW
Under developed, use simple tools, and their ingenuity, use techniques from ancestors
Businesses decide knowing they must produce quality products
Government owns the means of production, it runs all businesses
FOR WHOM
Sense of community, excess food or other items are traded among residents
The people who have more money exchange it to buy more
Government decides who receives what is produced. In principle wealth is shared equally

8. POLITICAL and ECONOMIC PHILOSOPHIES
All economies in the world today are mixed.
A meaningful economic classification depends on their type of political system
The 3 political philosophies that have shaped world economies are:
Capitalism
Communism
Socialism

9. POLITICAL and ECONOMIC PHILOSOPHIES
CAPITALISM: marketplace competition and private ownership of businesses.
Free Enterprise or Private Enterprise
Advantage successful employers and employees prosper
Characteristics
Government is concerned about its people and cares for those who cannot care for themselves.
Some Social Programs
Government involvement in free market with laws and regulations
Political system is Democratic
People are free to elect their leaders
U.S. and Japan are classified as capitalists and democratic

10. POLITICAL and ECONOMIC PHILOSOPHIES
COMMUNISM: government is authoritarian, controls the resources.
No private ownership of property or capital. Goods owned in common are available to a classless society on an as-needed basis.
Characteristics:
All people available to work are assigned jobs
There is no unemployment, if you don’t go to work you are still paid
Gov’t decides schooling, housing and medical care is free
No financial incentive to increase productivity
Cuba and North Korea.
China, Vietnam and Laos are allowing more free enterprise

11. POLITICAL and ECONOMIC PHILOSOPHIES
SOCIALISM: increased government involvement in economy
Goal is to meet basic needs for all and provide employment
Characteristics:
Have more Social Services to ensure a certain
standard of living for everyone.
Systems for pensions and elderly care
Individuals and businesses pay much higher
taxes to finance government services.
State controlled, noncompetitive companies are in industries such as telecommunications, natural resources, transportation, and banking.
Canada, Germany, and Sweden

12. POLITICAL and ECONOMIC PHILOSOPHIES
ECONOMIES IN TRANSITION:
Former Soviet Union making the change from command to market economies.
Most Eastern European countries that were once communist moved towards global market economies and democratic form of gov’t.

13. POLITICAL and ECONOMIC PHILOSOPHIES
PRIVATIZATION vs NATIONALIZATION
Privatization: the process of governments selling government owned businesses to private individuals
Gov’t generates much needed revenue
Shows commitment to making the transition to market system
Great Britain sold its national phone, national steel, national sugar and several other national companies.
Nationalization is the opposite of privatization.
Occurs when Gov't takes over a privately-held company
Transition of ownership may be due to economic crisis, political upheaval or a change in Gov't policy
Cuba 1960 nationalized all foreign businesses.

14. POLITICAL and ECONOMIC PHILOSOPHIES
DEVELOPING ECONOMIES:
Are mostly poor countries with little industrialization
Trying to become more prosperous and develop their infrastructure
Most of their success depends on improving their education levels of their labor force
Directing and using foreign investments efficiently will contribute to their success.
Chad, Africa is a developing economy
Traditional economy based on agriculture and livestock farming .
Foreign investment has developed their oil field and pipeline projects
Oil revenue helping to pay for education and infrastructure

15. Understanding the Economy
1. The Economy and Marketing
A. Goals of a Healthy Economy
Increase Productivity
Decrease Unemployment
Maintain Stable Prices
B. Economic Measurements
Essential to determine whether economy is meeting its goals
Economic Measurements are used to analyze an economy’s economic strength: labor productivity, gross domestic product, standard of living, inflation rate, and unemployment rate

16. Labor Productivity
Productivity is the output per worker hour that is measured over a define period of time, such as a week, month or year.
To increase productivity
Invest in new equipment or facilities increases worker efficiency
Provide additional training or financial incentives
Reduce work force increase the responsibilities of remaining workers
Higher productivity increases a company’s profit
Specialization and division of labor – each part of the finished product is completed by a specialized person on an assembly line

17. Gross Domestic Product (GDP)
Output of goods and services produced by labor and property located within a country
GDP includes:
Private investment: business’s spending for equipment and software, and home construction
Government spending
Personal consumer spending
Net exports of G/S
Change in business inventories

18. Standard of Living
Measurement of the amount of quality of goods and services that a nation’s people have
It’s a number that reflects their quality of life
To calculate it, divide the GDP by
the total population. (Rates measured per person are also known as per capita measurements)
GDP______ = per capita
POPULATION

19. Inflation Rate Inflation refers to rising prices
Low inflation- 1% to 5% per year is good and stable
Double-digit inflation – 10% + hurts economy and money loses its value/spending power
Controlling inflation is one of government’s major goals
government regulates interest rates to control inflation
Consumer Price Index (CPI) – measure the
change in price over a period of time of 400
specific retail goods and services used by the
average urban household
Producer Price Index (PPI) – measures
wholesale price levels.
Increases/decreases are usually passed on to consumers

20. Unemployment Rate Nations chart unemployment or jobless rates
High unemployment = economic slowdown

21. Business Cycle
Throughout history economies have followed a pattern of expansion and contraction called the Business Cycle
The length and intensity of each of the phases depends on many factors such as wars, natural disasters, and industrial innovation.
4 Phases in the Business Cycle:
Expansion
Recession
Trough
Recovery

22. Business Cycle
Expansion: unemployment is low and consumer confidence and spending are high. Businesses develop new products and conduct research.
Recession: the economy slows. Businesses layoff workers. Consumer confidence and spending are low, little demand so production of G/S decreases. Businesses have little money to invest. A depression is a deep long lasting recession.
Recovery: The economy grows again. Jobs are created and consumers begin to spend. There is more demand, so production of G/S increases. This phase may last a long time.
Trough: low point in the business cycle. It’s the transition between recession and recovery. The economy stops slowing and may show signs that a recovery is near

23. Factors That Affect Business Cycle
The business cycle is affect by the actions of government, consumers, and businesses.
Business
Consumers
Government
Expansion
Invest in properties, equipment, inventory, and hire more employees
Buy luxury items
Monitor spending may increase interest rates/taxes
Recession
Layoffs, reduce inventories, low demand
Low consumer confidence, less spending
Reduce interest rates, lower taxes
Trough
Cautiously optimistic
Confidence may improve, may start spending
Increase spending, tax rebates
Recovery
Higher demand, production increases
Optimistic, more spending
May increase interest and taxes