Understanding the Economy

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1 Understanding the Economy
Lesson 3-2 Understanding the Economy

2 Understanding the Economy
Objectives List the goals of a healthy economy Explain how an economy is measured Analyze the four key phases of the business cycle Marketing Essentials Chapter 3, Section 3.2

3 A healthy economy has three goals: Increase productivity
Goals of an Economy A healthy economy has three goals: Increase productivity Decrease unemployment Maintain stable prices Marketing Essentials Chapter 3, Section 3.2

4 When Is an Economy Successful?
Economic Measurements six measurements used to determine the economic strength of a country Six Measurements: Labor productivity Gross domestic product (GDP) Gross national product (GNP) Standard of living Unemployment rate Inflation rate Marketing Essentials Chapter 3, Section 3.2

5 1. Labor Productivity: 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 year Increased 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. 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.

6 2. Gross Domestic Product
Gross domestic product (GDP) X is the total dollar value of goods and services produced by labor and property located within a country The GDP is made up of: Private investment Government spending Consumer spending Healthcare Largest Sector of the GDP?

7 3. Gross National Product
Gross 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 it U.S. switched to using the GDP to measure its economy in 1991

8 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.? - GDP Honda 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

9 4. Standard of Living Standard of living is a measurement of the amount and quality of goods and services that a nation’s people have Figure that reflects their quality of life based on the level of wealth, comfort, material goods and necessities available to a country’s people In 2013, the the top six countries for quality of living as: Norway, Australia, Switzerland, Netherlands, United States, and Germany Article Marketing Essentials Chapter 3, Section 3.2

10 5. Unemployment Rate Unemployment Rate: the percentage of the total labor force that is unemployed but actively seeking employment and willing to work Higher unemployment = greater chance of economic slowdown Lower the rate = greater chances of economic expansion

11 Inflation Inflation X refers to a period of rising prices on goods & services Play video:

12 Inflation From the video, answer the following questions in your notes: What Causes Inflation? What happens to the value of the dollar when this occurs? What is the target amount of inflation increase by banks?

13 Inflation Low inflation rate (1 - 5 percent)
shows that an economy is stable Double-digit inflation rate devastates an economy country’s money loses its value During high inflation: Prices increase and buying power goes down People on fixed incomes especially hurt (elderly) To combat inflation: governments raise interest rates to discourage borrowing money and slow economic growth

14 The Business Cycle The cycle of economic growth and decline is called the business cycle Business cycle X Recurring changes in economic activity, such as the expansion (growth) and contraction (slow down/decline) of an economy Consists of four Stages: Expansion Recession Trough Recovery

15 Expansion Expansion X is a time when the economy is flourishing
Characterized by: Low unemployment High output of goods and services High consumer spending Good time to open new businesses Will peak at the end and a recession period begins Expansion

16 Recession Recession X is a period of economic slowdown that lasts for at least six months. Characterized by: Reduced workforces and higher unemployment R&D cut back, expansion on hold Lower consumer spending Low production of goods and services Expansion

17 Depression A depression X is a period of prolonged recession
Characterized by: Businesses shut down Impossible to find jobs Unemployment very high Consumer spending is very low Production of goods and services is down significantly

18 Trough TroughX when the economy reaches its lowest point in a recession, then begins to rise Expansion

19 Increased consumer spending Moderate expansion of businesses
The Business Cycle recovery A period of renewed economic growth following a recession or depression. Recovery X is the term used to signify a period of renewed economic growth following a recession or depression. This time is characterized by: Increasing GDP Increasing Sales Reduced unemployment Increased consumer spending Moderate expansion of businesses Marketing Essentials Chapter 3, Section 3.2

20 The business cycle can be affected by the actions of: Businesses
Consumers Government These things are, in turn, affected by the business cycle Marketing Essentials Chapter 3, Section 3.2

21 Understanding the Economy
Section 3.2 Identifying Economic Measurements

22 Understanding the Economy
Study Organizer Use the chart like this one and use it to take notes about economic measurements. Marketing Essentials Chapter 3, Section 3.2

23 CHAPTER 1 REVIEW SECTION 3.2 REVIEW