Chapter 3.2 Understanding the Economy

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Chapter 3.2  Understanding the Economy Powered By Docstoc
					Chapter 3.2: Understanding the
Economy
What do you think makes up a healthy
economy?
Name characteristics of a
recession? Economic boom?
3 Goals of a Healthy Economy

n   1. Increase Productivity
n   2. Decrease Unemployment
n   3. Maintain Stable Prices
What are the key economic
measurements that nations use to
measure economic strength? (Economic
Indicators)

n   Labor Productivity   n   Standard of Living
n   Gross Domestic       n   Inflation Rate
    Product (GDP)        n   Unemployment Rate
n   Gross National
    Product (GNP)
Economic Indicator - Activity
n   Define the indicator
n   Why is it a good indicator of how our
    economy is doing?

n   How do consumers affect/are affected by
    this indicator?
n   How does the gov’t(regulator)affect this
    indicator?
n   How are global factors affect/affected by this
    indicator?
Labor Productivity
n   Output per worker hour as measured over a
    period of time

n   How can you increase the Labor Productivity?
     – 1. Invest in New Equipment
     – 2. Provide additional training or financial
       incentives
     – 3. Reduce workforce & increase responsibility
     – 4. Specialization & division of labor

n   Higher productivity = More profit
How does specialization increase
productivity?
n   Theoretically, work can be completed
    faster and more efficiently.
Economic Indicators

n   Labor Productivity
n   Gross Domestic Product
n   Gross National Product
n   Standard of Living
n   Inflation Rate
n   Unemployment Rate
Gross Domestic Product (GDP)

n   Output of goods/services produced by
    labor & property within a country

n   Made up of; (pg 63 chart)
    – Private Investment: equip., software, home
      construction
    – Government Spending: Local, State & Fed
    – Personal Spending: Consumer Expenditures
    – Net exports of goods/services
    – Change in business inventories
Which component of GDP is the
smallest? Largest?
n   Private Investment = Smallest
n   Personal Spending = Greatest
Economic Indicators

n   Labor Productivity
n   Gross Domestic Product
n   Gross National Product
n   Standard of Living
n   Inflation Rate
n   Unemployment Rate
Gross National Product (GNP)

n   Total dollar value of goods/services
    produced by a nation, including goods
    produced abroad
Why is consumer confidence so
important to the U.S. GDP?
n   More confidence = More spending
n   More spending = Increase demand
n   Increase demand = Increase production
What is a “Trade Deficit” and
how does it affect GDP?
n   When imports are greater than exports
n   Shrinks GDP
Conversely, expanding
inventories add to GDP
Economic Indicators

n   Labor Productivity
n   Gross Domestic Product
n   Gross National Product
n   Standard of Living
n   Inflation Rate
n   Unemployment Rate
Standard of Living

n   Measurement of the amount & quality of
    goods/services that a nation’s people
    have
n   Also referred to as “quality of life”
Economic Indicators

n   Labor Productivity
n   Gross Domestic Product
n   Gross National Product
n   Standard of Living
n   Inflation Rate
n   Unemployment Rate
Inflation Rate

n   Inflation refers to rising prices

n   As inflation rises, the value of the dollar
    decreases
How can the government control
inflation?

n   Increase Interest Rates = Discourage
    borrowing = Economic slowdown
What is CPI?

n   Consumer Price Index
n   Measures the change in the price of
    some 400 specific retail goods/services
    used by the average urban family over
    a period of time (housing, utilities, food,
    medical expenses)
What is PPI?

n   Producer Price Index
n   Measures the wholesale price levels
n   There is a correlation between CPI and
    PPI
Economic Indicators

n   Labor Productivity
n   Gross Domestic Product
n   Gross National Product
n   Standard of Living
n   Inflation Rate
n   Unemployment Rate
Unemployment Rate

n   Jobless rate

n   Higher unemployment rate = greater
    chance of economic slowdown

n   What is the current Unemployment
    Rate?
Other Indicators (economic)

n   Consumer Confidence Index
n   Consumer Expectations Index
n   Jobs Index
Recurring changes in economic
activity are referred to as what...

n   Business Cycle (chart pg 65)
Phases of the Business Cycle
n   Expansion: prosperity, low unemployment, high
    consumer confidence & spending
     – Peak marks the end
n   Recession: economic slowdown (at least 6 months/2
    qtrs), layoffs, confidence & spending low, production
    slows with demand
     – Depression: prolonged recession, businesses
       shut down, impossible to find jobs
n   Trough: Low point in the business cycle, economy
    stops slowing & shows positive signs
n   Recovery: renewed economic growth, reduced
    unemployment, increase in confidence & spending,
    moderate expansion
Name 3 factors that affect the business
cycle and give examples of each?

n   Businesses - expanding or contracting
    operations
n   Consumers - spending more or less
n   Government - setting interest rates

n   Business cycles are affected by actions of
    business, consumers and government and
    vice versa
How can the government
improve a depressed economy?
n   Lower interest rates
n   Cut taxes
n   Institute Federally funded programs
MAIN IDEA

n   Aspects of an economy such as
    consumers, government and
    businesses affect each other and the
    economy.
n   Companies need current economic
    information to make good marketing
    decisions.
CASE STUDY – Putting a Price on
             Water
n   Scenario: You are a well owner. Your
    competitors did not invest enough in their
    wells and have to shut them down. You are
    selling 3x’s the water that you used to. Your
    profits are up. You decide to modernize the
    well. You must decide if you will pass on
    100% of the cost to your customers or only a
    fraction.
n   Explain your rationale. What will the
    consequences of your decision be for
    businesses in your area.

				
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