Political & 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

Market TalkWhy would a weak economy in some countries affect other countries’ economies?

Why is it Important?

What does

all of this

mean?

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.

ResourcesAll things used in producing goods and services. “Factors of production”

Land Labor CapitalEntrepreneurship

Land

Refers 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 seas

Labor

All the people who work in the economy Full- & part-time workers in both the private and public sectors

Capital

Money needed to start and operate a businessGoods used in the production processAt a national level, capital includes infrastructure, such as roads, ports, sanitation facilities, and utilities

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

The Factors of Production

ProductProduct

LandLandLaborLabor CapitalCapital

EntrepreneurshipEntrepreneurship

Scarcity

The 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.

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?

Traditional Economies

1. What? Little choice as to what to produce. If people belong to a community of farmers, they farm for generations.

2. 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.

Traditional Economies

3. For Whom? Tradition regulates who buys and sells and where an how the exchange takes place.

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.

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.

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.

Command Economies

3. For whom? The government decides who will get what is produced in a command

economy.

Mixed Economies

All 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.

Continuum of Economic Systems

Capitalism• Capitalism 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.

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.

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.

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.

Developing Economies

Understanding the Economy

When Is an Economy Successful?It is the goal of all economies to: • increase

productivity• decrease

unemployment• maintain stable

prices

Economic Measurements

Accurate economic measurements help determine a nation's economic strength.

• employee productivity• Gross Domestic Product (GDP)• inflation• unemployment

Employee (Labor)ProductivityProductivity 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.

Productivity & Standard of Living

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?

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.

Gross Domestic ProductGDP 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?

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)

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.

Consumer Price Index (CPI)

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.

Producer Price Index (PPI)

Inflation Barometers

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?

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.

Jobless Rate

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?

Other Indicators

The 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.

Consumer Confidence

Consumer 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?

The Business Cycle

Sometimes an economy grows, and at other times it slows down. These recurring changes are called the business cycle. The business cycle has four phases:

• prosperity• recession• depression• recovery

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.

Recession

Recession 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.

Depression

Depression 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.

Recovery

Recovery 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.

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.

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?

The Global Economy

A 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.

Political & Economic Analysis

1. Define the concept of an economy2. List the factors of production3. Explain the concept of scarcity4. Discuss how traditional, market, command, and

mixed economies answer the three basic economic questions

5. Cite examples of various economic systems6. List the goals of a healthy economy7. Explain how an economy is measured8. Analyze the key phases of the business cycle

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