1. The Economy and Marketing
Understanding the Economy

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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)

9. 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)

10. 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)

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

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

23. 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

24. 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

25. 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

26. 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