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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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