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Understanding the EconomyLesson 3-2Understanding the Economy ObjectivesList the goals of a healthy economyExplain how an economy is measuredAnalyze the four key phases of the business cycle Marketing Essentials Chapter 3, Section 3.22Goals of an Economy A healthy economy has three goals:Increase productivityDecrease unemploymentMaintain stable pricesMarketing Essentials Chapter 3, Section 3.2

3When Is an Economy Successful? Economic Measurements six measurements used to determine the economic strength of a countrySix Measurements:Labor productivityGross domestic product (GDP)Gross national product (GNP)Standard of livingUnemployment rateInflation rateMarketing Essentials Chapter 3, Section 3.24AssignmentGo online. Find the definition of each of the 6 Economic Measurements. Enter your definitions in the definition field of your note pagesComplete the CIA Country Comparison Activity (handout provided by your instructor)Labor Productivity X the value of goods and services produced in a period of time, divided by the hours of labor used to produce the goods and services - defined period of time, such as a week, month, or a yearIncreased productivity by a business raises living standards, improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs. 1. Labor Productivity:An increase in output per hour that comes from higher productivity due to better equipment or methods is a good thing for the economy. An increase in output per worker that comes simply from working people longer and harder is not really an increase in productivity and is not beneficial to the economy. 6Gross domestic product (GDP) X is the output of goods and services produced by labor and property located within a country The GDP is made up of:Private investmentGovernment spendingPersonal spendingNet exports of goods and servicesChange in business inventories

Largest Sector of the GDP?

2. Gross Domestic ProductGross national product (GNP) X is the total dollar value of goods and services produced by a nation, including the goods and services produced abroad by U.S. citizens and companies GNP, it is not where the production takes place but who is responsible for itU.S. switched to using the GDP to measure its economy in 19913. Gross National Product

Honda has a plant in the U.S.Is the output of this plant included in the GNP or the GDP of the U.S.?- GDPHonda is owned by Japan, is this included in the GNP of the U.S.?-no as it is not owned by the U.S.

Ford has a plant in Mexico Are cars produced in Mexico included in the GDP or the GNP or both for the U.S.?GNP

Standard of living is a measurement of the amount and quality of goods and services that a nations people have Figure that reflects their quality of lifeTo calculate the standard of living:Divide the a countrys GDP or GNP by its population to get the per capita GDP or GNP4. Standard of LivingMarketing Essentials Chapter 3, Section 3.210Unemployment Rate: Jobless rateHigher unemployment = greater chance of economic slowdownLower the rate = greater chances of economic expansion

5. Unemployment RateInflation X refers to a period of rising prices on goods & servicesPlay video:

Inflation

From the video, answer the following questions in your notes:

What Causes Inflation?When a country prints more money than what is justified by their wealthWhat happens to the value of the dollar when this occurs?It goes downWhat is the target amount of inflation increase by banks?2 % 3 %InflationLow inflation rate (1 - 5 percent) shows that an economy is stable

Double-digit inflation ratedevastates an economycountrys money loses its value

During high inflation:Prices increase and buying power goes downPeople on fixed incomes especially hurt (elderly)To combat inflation: governments raise interest rates to discourage borrowing money and slow economic growthInflationThe cycle of economic growth and decline is called the business cycleBusiness cycle X Recurring changes in economic activity, such as the expansion (growth) and contraction (slow down/decline) of an economyConsists of four Stages:ExpansionRecessionTroughRecoveryThe Business Cycle

Expansion X is a time when the economy is flourishingCharacterized by:Low unemploymentHigh output of goods and servicesHigh consumer spending

Good time to open newbusinessesWill peak at the end and a recession period beginsExpansion

ExpansionExpansionRecession X is a period of economic slowdown that lasts for at least six months. Characterized by:Reduced workforces and higher unemploymentR&D cut back, expansion on holdLower consumer spendingLow production of goods and servicesRecession

ExpansionExpansionA depression X is a period of prolonged recessionCharacterized by:Businesses shut downImpossible to find jobsUnemployment very highConsumer spending is very lowProduction of goods and services is down significantly DepressionTroughX when the economy reaches its lowest point in a recession, then begins to rise

Trough

ExpansionExpansionRecovery X is the term used to signify a period of renewed economic growth following a recession or depression. This time is characterized by:Increasing GDPIncreasing SalesReduced unemploymentIncreased consumer spendingModerate expansion of busineses

recovery A period of renewed economic growth following a recession or depression. The Business Cycle Marketing Essentials Chapter 3, Section 3.2

20The business cycle can be affected by the actions of:BusinessesConsumersGovernment

These things are, in turn, affected by the business cycle The Business Cycle Marketing Essentials Chapter 3, Section 3.221

Understanding the EconomyIdentifying Economic MeasurementsSection 3.2

22Understanding the EconomyStudy OrganizerUse the chart like this one and use it to take notes about economic measurements.

Marketing Essentials Chapter 3, Section 3.223CHAPTER 1 REVIEW

SECTION 3.2 REVIEW24