n Chapter 4 Global Economies

Marketing Essentials nChapter 4Global Economies Section 4.2 Understanding the Economy

SECTION 4.2 Understanding the Economy What You'll Learn • The goals of an economy • The various measurements used to analyze an economy • The four phases of the business cycle

SECTION 4.2 Understanding the Economy Why It's Important Soon you will be voting and you may also decide to invest in the stock market. These decisions can impact your financial well being, so it is essential that you understand how an economy is measured and what factors contribute to a strong or weak economy. It is important to know how you, businesses, and the government influence the economy. That way you will know how to invest your money and cast your ballots.

SECTION 4.2 Understanding the Economy Key Terms • productivity • gross domestic product (GDP) • inflation • Consumer Price Index (CPI) • Producer Price Index (PPI) • business cycle • prosperity (expansion) • recession • depression • recovery

SECTION 4.2 Understanding the Economy When Is an Economy Successful? • It is the goal of all economies to: • increase productivity • decrease unemployment • maintain stable prices

SECTION 4.2 Understanding the Economy Economic Measurements • Accurate economic measurements help determine a nation's economic strength. • employee productivity • Gross Domestic Product (GDP) • inflation • unemployment

SECTION 4.2 Understanding the Economy Employee Productivity • Productivity 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.

SECTION 4.2 Understanding the Economy Productivity and 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? Source: Bureau of Economic Analysis, Bureau of Labor Statistics

SECTION 4.2 Understanding the Economy Gross Domestic Product (GDP) • 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.

SECTION 4.2 Understanding the Economy Gross Domestic Product GDP 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? Source: Bureau of Economic Analysis, Bureau of Labor Statistics

SECTION 4.2 Understanding the Economy Inflation Rate • Inflation 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)

SECTION 4.2 Understanding the Economy 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.

SECTION 4.2 Understanding the Economy 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.

SECTION 4.2 Understanding the Economy Inflation Barometers Source: Labor Department Source: Labor Department Source: Labor Department • 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?

SECTION 4.2 Understanding the Economy 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.

SECTION 4.2 Understanding the Economy Jobless Rate Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics 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?

SECTION 4.2 Understanding the Economy 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.

SECTION 4.2 Understanding the Economy Consumer Confidence Source: The Conference Board Source: The Conference Board Source: The Conference Board 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?

SECTION 4.2 Understanding the Economy 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

SECTION 4.2 Understanding the Economy Prosperity 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.

SECTION 4.2 Understanding the Economy 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.

SECTION 4.2 Understanding the Economy 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.

SECTION 4.2 Understanding the Economy 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.

SECTION 4.2 Understanding the Economy Factors that Affect the Business Cycles • 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.

SECTION 4.2 Understanding the Economy Managing the Economy The 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? Source: Federal Reserve, Labor Department

SECTION 4.2 Understanding the Economy 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.

ASSESSMENT 4.2 Reviewing Key Terms and Concepts • 1. What are the goals of any economy? • 2. Name four measurements used to gauge the success of an economy. • 3. Describe in the briefest terms what each of the following stands for: GDP, CPI, PPI, and Core CPI. Slide 1 of 2

ASSESSMENT 4.2 Reviewing Key Terms and Concepts • 4. Describe the four phases of the business cycle. • 5. What stage of the business cycle was the United States in during the year 2000? Slide 2 of 2

ASSESSMENT 4.2 Thinking Critically Assume the economy was growing rapidly and there were increases in the CPI, PPI, as well as in employee wages and spending. What might the government do to reduce the risk of inflation?

Marketing Essentials End of Section 4.2

n Chapter 4 Global Economies