Presentation on theme: "Political & Economic Analysis"— Presentation transcript:
1 Political & Economic Analysis Define the concept of an economyList the factors of productionExplain the concept of scarcityDiscuss how traditional, market, command, and mixed economies answer the three basic economic questionsCite examples of various economic systemsList the goals of a healthy economyExplain how an economy is measuredAnalyze the key phases of the business cycle
2 Market TalkWhy would a weak economy in some countries affect other countries’ economies?The stock exchange is one place to take an economy’s pulse. When investors are optimistic about the economy, they may buy more stocks. This is a way to own a small part of a company and share in its profits. Investors and consumers usually react to economic and political news and adjust their spending or investing accordingly.Buying and selling take place not only within a country but between and among countries. Economic problems in one place can affect all countries that buy or sell to it. These ripple effects can tough many other countries, affecting the world economy.
3 Why is it Important?Why is/was the price of gas so high? Why are houses not selling as fast as they once did? What is the unemployment rate, and how does it effect me? The answers to these questions is why the study of economics is so important.
4 What does all of this mean? You need to have an understanding of global economics to understand what all of these economic indicators mean. Understanding a country’s economy helps you understand how that country uses its resources and how it functions in the marketplace. Government and consumers both have a role in the economy.
5 What Is an Economy?The way a nation provides for the needs and wants of its people.The choices that must be made involve how the nation will use its resources to produce and distribute goods and services.Countries with different economic systmes have different approaches when making these choices. A coutry’s resources determine economic activities such as manufacturing, buying, selling, transporting and investing. These broad categories of resources are common to all nations and affect how business is done across the world.
6 Resources All things used in producing goods and services. “Factors of production”LandLaborCapitalEntrepreneurshipThe technical term economists use for resources is factors of production. Economists also attach special meanings to the four categories that comprise the factors of production: land, labor, capital and entrepreneurship.
7 LandRefers to everything on the earth that is in its natural state, or the Earth’s natural resources.Everything contained in the earth or found in the seasCoal and crude oil are natural resources, and so is a lake and all of the living things in the lake.
8 Labor All the people who work in the economy Full- & part-time workers in both the private and public sectors
9 Capital Money needed to start and operate a business Goods used in the production processAt a national level, capital includes infrastructure, such as roads, ports, sanitation facilities, and utilitiesFactories, office buildings, computers, and tools are all considered capital resources. Raw materials that have been processed into a more useful form (such as lumber or steel) are also considered capital.
10 EntrepreneurshipSkills of people who are willing to risk their time and money to run a businessOrganize the other factors of production to create the goods and services desired in an economy
11 The Factors of Production LaborCapitalLandEntrepreneurshipProductHave students practice identifying factors of production:You and a friend want to start a small business for the summer. ENTREPRENEURSHIPYou plan to make and sell custom skateboards. ENTREPRENEURSHIPBoth you and your friend have taken woodworking and metalworking classes in school. LABORYour skateboards will be unique because you will finish them with a heavy clear varnish. LABORYou will decorate the boards by suspending dried herbs and leaves in the varnish. LANDYou have been able to buy materials for making fifteen boards. CAPITALYou will work out of your friend’s garage. CAPITAL
12 ScarcityThe difference between wants and needs and available resources.Example: Most underdeveloped nations have natural resources, but do not have capital or skilled labor to develop them.Different economies have different amounts of resources. The US has an educated labor force, a great deal of capital, an abundance of entrepreneurs, and many natural resources. Most underdeveloped nations are not that fortunate. They might have natural resources to spare but not the capital or the skilled labor to develop them.Even the US, with its wealth of resources, cannot meet the needs and wants of all its citizens. Many citizens live below poverty level. Businesses go bankrupt on a regular basis. It is apparent that nations have unlimited wants and needs for growth and development but limited resources to meet them. The difference between wants and needs and available resources is called scarcity.
13 How Does an Economy Work? The way nations answer three basic questions defines their economic systems.1. What goods and services should be produced?2. How should the goods and services be produced?3. For whom should the goods and services be produced?
14 Traditional Economies What? Little choice as to what to produce. If people belong to a community of farmers, they farm for generations.How? Bound by tradition. The potter whose family has made clay pots for generations will continue to follow the practices of his or her ancestors.Traditions and rituals answer the basic questions of what, how, and for whom.Answers often based on cultural or religious practices and ideas that have been passed from one generation to the next.
15 Traditional Economies For Whom? Tradition regulates who buys and sells and where an how the exchange takes place.Traditions and rituals answer the basic questions of what, how, and for whom.Answers often based on cultural or religious practices and ideas that have been passed from one generation to the next.Bhutan, one of the world’s smallest and least developed countries, has a traditional economic system based on agriculture and forestry. However, it has expanded its tourism industry, which brings in elements of a market economy. How might a shift to a market economy affect the Bhutanese people?
16 Market EconomiesIn a pure market economy there is no government involvement in economic decisions. The government lets the market answer the following three basic economic questions:1. What? Consumers decide what should be produced in a market economy through the purchases they make.
17 Market Economies2. How? Production is left entirely up to businesses. Businesses must be competitive in such an economy and produce quality products at lower prices than their competitors.3. For whom? In a market economy, the people who have more money are able to buy more goods and services.
18 Command EconomiesIn a command economy the government answers the three basic economic questions.1. What? A dictator or a central planning committee decides what products are needed.2. How? Since the government owns all means of production in a command economy, it decides how goods and services will be produced.
19 Command Economies3. For whom? The government decides who will get what is produced in a command economy.
20 Mixed EconomiesAll economies in the world today are mixed. There is some government involvement in the economy.Example: The United States government is involved in the economy through laws and regulations governing businesses, and provides socialistic programs, such as welfare, Medicaid, and Medicare.
21 Continuum of Economic Systems When studying different economic systems, it is best to view them on a continuum, as depicted here. Where on the continuum would you place the United States? Canada? North Korea? What do you think is the most effective economic system?
22 CapitalismCapitalism features private ownership of businesses and marketplace competition. It is the same as a free enterprise system.The political system most frequently associated with capitalism is democracy.Capitalism is a political and economic philosophy characterized by marketplace competition and private ownership of businesses. It is the same as free enterprise. Government in a capitalist society is also concerned about its people and cares for those who cannot care for themselves. The number of social services, however, does not match that of a socialist country.The political system most frequently associated with capitalism is democracy. Nations that practice democracy believe that political power should be in the hands of the people. There is usually more than one political party from which to choose representative to run the government in a democratic country. People in a democracy are free to elect those candidates who agree with their philosophy on how the government and the economy should be run. The US and Japan are tow examples of countries that are classified as capitalist and have a democratic form or government.
23 SocialismThe main goal of socialism is to keep prices low for all people and to provide employment for many. The government runs key industries, generally in telecommunications, mining, transportation, and banking. Socialist countries tend to have more social services.Socialism is a term that originally referred to a system on its way to the communist ideal of classless society. Today, most countries are defined as a socialist have democratic political institutions. They differ from capitalist nations in the increased amount of government involvement in the economy. The main goal is to meet basic needs for all and to provide employment for many.Socialist countries tend to have more social services to ensure a certain standard of living for everyone. Medical care is free or low cost, as is education. These countries have systems for pensions and elderly care. Businesses and individuals pay much higher taxes than those in capitalist countries, so all contribute to financing government services.The government runs keys industries and makes economic decisions. State-controlled, noncompetitive companies are often found in industries such as telecommunications, natural resources such as gas, water and power, transportation, and banking. Canada, Germany, and Sweden are generally characterized as having socialist elements in their economies.
24 CommunismCommunist countries have a totalitarian form of government; this means that the government runs everything and makes all decisions.Theoretically, there is no unemployment in communist countries.The government decides the type of schooling people will receive and also tells them where to live.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. The theory behind these practices is that goods owned in common (by the government representing the community as a whole) are available to all as needed and society is classless.In a community country all people who are able to work are assigned jobs. Theoretically, there is no unemployment. Employees who do not go to work continue to get paid under this system. The government decides the type of schooling people will receive and also tells them where to live. Housing accommodations are assigned according to need. Food and housing subsidies keep prices low, so everyone has a place to live and food to eat. Medical care is free, however, there is a little or no economic freedom associated with communism. In this system there is no financial incentive for people to increase their productivity.There are very few communist countries left in the world today. The economies of such countries have collapsed in recent years. The few countries that can still be classified as communist include Cuba and North Korea. China, which is still politically dominated by a communist party, is allowing more and more free enterprise practices. Vietnam and Laos are also following that path.
25 Economies in Transition Many countries are in transition from either communism or socialism to capitalism.Privatization is a common aspect of transition from a command economy to free enterprise system. Privatization means state-owned industries are sold to private individuals and companies.The breakup of the former Soviet Union probably provides the best example of societies making the difficult change from command to market economies. Most Eastern European communist satellites have moved toward global market economies and more democratic forms of government. This means that the state-owned industries have been privatized in many of these nations. Privatization refers to the process of governments selling government-owned businesses to private individuals or businesses.Great Britain has sold its national phone company, national steel company, national sugar company, and several others. Another example of such a transfer is British Airways. Since its privatization in 1987, the company has been increasing exponentially and has become Europe’s number-one airline. These sales generated approximately $63 billion for Great Britain.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.
26 Developing EconomiesDeveloping 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.Chad, a country in central Africa, is a good example of this situation. It is a traditional economy based on agriculture and farming. Cotton, cattle, and gum arabic are its primary exports. However, with an oil field and pipeline project paid for by foreign investors, Chad has begun to develop its oil reserves for export. This investment will help generate much-needed funds for this poor nation to use to improve its infrastructure and its labor resources.
28 When Is an Economy Successful? It is the goal of all economies to:increase productivitydecrease unemploymentmaintain stable pricesA healthy economy has three goals: increase productivity, decrease unemployment and maintain stable prices. All nations analyze their economies to keep track of how well they are doing. This analysis allows businesses, consumers, and government to make appropriate economic decisions.
29 Economic Measurements Accurate economic measurements help determine a nation's economic strength.employee productivityGross Domestic Product (GDP)inflationunemployment
30 Employee (Labor)Productivity Productivity is output per worker hour. It is usually 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 increase efficiency, providing additional training, and providing financial incentives.
31 Productivity & Standard of Living Answer: The U.S. standard of living has been up and down because productivity has been up and down.Productivity grew 6.6 percent in the non-farm business sector in the second quarter of 2009, and unit labor costs declined 0.5 percent.Productivity is a crucial factor in a country's standard of living. What would you surmise about the United States' standard of living for the last five years depicted on this chart? Why do you think employee productivity is increasing?
32 Gross Domestic Product Gross domestic product is a measure of the goods and services produced using labor and property located in a country.Using GDP, governments track an entire nation's production output.
33 Gross Domestic Product GDP is the total output of goods and services produced in a country. What does this chart tell you about the United States' GDP and its economy in general? How do you think GDP would be affected by a recession?Answer: Since 1991, when the U.S. experienced its last recession, the GDP has been growing. This shows that the economy is strong.Do a simple exercise to demonstrate the high standard of living we enjoy in the U.S. because of employee productivity and the country’s GDP. Have students stant if they have at least one working TV in their home. Tell students to remain standing if they have 2? 3? 4? Ask students if they think households in other parts of the world have that many TV sets? Then have them suggest other indices of country’s productivity and standard of living.
34 Inflation RateInflation refers to rising prices. A low inflation rate (1-5 percent) shows that an economy is stable.Controlling inflation is one of a government's major goals. The United States measures inflation in two ways:Consumer Price Index (CPI)Producer Price Index (PPI)
35 Inflation Rate: Consumer Price Index The Consumer Price Index (CPI), also called the cost-of-living index, measures the change in price of some 400 retail goods and services used by the average urban household, such as food, housing, utilities, transportation, and medical care. The Core CPI excludes food and energy prices, which tend to be unpredictable.
36 Consumer Price Index (CPI) CPI: % in Sep 2007Consumer Price Index (CPI)
37 Inflation Rate; Producer Price Index The Producer Price Index (PPI) measures wholesale price levels in the economy. Wholesale price increases often get passed along to the consumer. The Core PPI excludes food and energy prices, which tend to be volatile. When there is a drop in the PPI, it is generally followed by a drop in the CPI.
38 Producer Price Index (PPI) PPI: %(p) in Sep 2007Producer Price Index (PPI)
39 Inflation BarometersAnswer: According to the charts, inflation in the U.S. has been very low, between 2-3% in the latter part of the 1990s.CPI and PPI are barometers for inflation. The Core CPI and Core PPI take out the volatile food and energy prices from the indexes. Based on these three charts, how would you describe inflation in the United States for the latter part of the 1990s?
40 Unemployment Rate All nations chart unemployment 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.
42 Jobless RateAnswer: the chart shows that the United States is moving in the right direction to reach its goal, because unemployment has shown a continual decline since 1995.One of the goals of an economy is low unemployment. After viewing this chart on the jobless rate, what can be said about the United States' attempt to reach that goal?
43 Other IndicatorsThe Consumer Confidence Index (CCI) measures consumer confidence about personal finance, economic conditions, and buying conditions. Retail sales are studied to see if market actions match the CCI. Housing starts, and truck and auto sales are reviewed. These expenditures tend to be affected by the economy and interest rates.
44 Consumer ConfidenceConsumer confidence is another economic indicator that provides a view of how consumers feel about their economic prospects (employment, spending). What conclusions can be drawn from a review of these three charts? What trend is apparent? Why should marketers be concerned with changes in consumer confidence?Answer: There appears to be a correlation among the 3 charts with consumer confidence rising along with expectation and plentiful jobs, all three show an upward trend.
45 The Business CycleSometimes an economy grows, and at other times it slows down. These recurring changes are called the business cycle. The business cycle has four phases:prosperityrecessiondepressionrecovery
46 Prosperity (Expansion) Prosperity is a period of economic growth and expansion. Nationwide there is low unemployment, an increase in the output of goods and services, and high consumer spending.Prosperity or expansion is a time when the economy is flourishing. Nationwide there is low unemployment, and increase in the output of goods and services, and high consumer spending. This is a good time for new businesses to start up or expand their operations. Expansion continues until it reaches a peak. A peak signifies the end of expansion and the beginning of a recession.
47 RecessionRecession is a period of economic slowdown. Unemployment begins to rise, fewer goods and services are produced, and consumer spending decreases. Recessions can end relatively quickly or last for a long period of time.A recession is a significant decline in activity spread across the economy, lasting more than a few months. During a recession, companies reduce their workforces and consumers have less money to spend. Since consumers are spending less, producers make fewer goods and services. Research and development is cut back, and future plans for expanding business operations are generally put on hold. Recessions can end relatively quickly or last for a long time. A recession begins immediately after the economy reaches a peak of activity and ends as the economy reaches its trough. A trough is when the economy reaches its lowest point in a recession, after which economic activity begins to rise.
48 DepressionDepression is a period of prolonged recession. Consumer spending is very low, unemployment is very high, and production of goods and services is down significantly. Poverty results because many people are out of work and cannot afford to buy food, clothing, or shelter. The Great Depression of the early 1930s best illustrates a depression.During a depression, it becomes nearly impossible to find a job, and many businesses are forced to shut down. During a depression, consumer spending is very low, unemployment is very high, and production of goods and services is down significantly. Poverty results because so many people are out of work and cannot afford to buy food, clothing, or shelter. The Great Depression of the early 1930s best illustrates this phase of the business cycle.
49 RecoveryRecovery is a period of renewed economic growth following a recession or depression. Recovery is characterized by reduced unemployment, increased consumer spending, and moderate expansion by businesses. Periods of recovery differ in length and strength.This is where the cycle begins again with economic expansion. The GDP begins to increase. During this stage, business picks up, people find jobs, and the demand for goods increases. Thus, recovery is characterized by reduced unemployment, increased consumer spending, and moderate expansion by businesses. Periods of recovery differ in length and strength.
50 Factors That Affect the Business Cycle A government influences business cycles through its policies and programs. When taxes are raised, businesses and consumers have less money with which to fuel the economy.The government may reduce interest rates, cut taxes, or institute federally funded programs to spark a depressed economy.
51 Managing the EconomyThe federal funds rate (rate banks charge each other for overnight loans) and the discount rate (rate the U.S. Federal Reserve charges banks that borrow money from it) are used to speed up or slow down an economy. From this chart, what do you think the motivation of the Federal Reserve Board was in 1991? In 1999? Would you prefer to start a new business when interest rates are high or low?Answer: Manipulating Rates in 1991 the Fed wanted to speed up the economy, so it lowered rates, In 1999 it wanted to slow down the economy, so it increased rates. Recently, with the economy slowing, what do you think the Federal Reserve Board has done with interest rates?
52 The Global EconomyA global economy makes possible a global recession, because economies of different countries depend on economic stability in other countries and imports or exports from other countries.Example: Thailand devalued its currency in 1997, causing the collapse of other Asian economies and a huge drop in the U.S. stock market.
53 Political & Economic Analysis THE ENDPolitical & Economic AnalysisDefine the concept of an economyList the factors of productionExplain the concept of scarcityDiscuss how traditional, market, command, and mixed economies answer the three basic economic questionsCite examples of various economic systemsList the goals of a healthy economyExplain how an economy is measuredAnalyze the key phases of the business cycle