Understanding the Economy Ch. 3 Section 3.2

What is a Healthy Economy? 3 Primary Goals: Increase productivity Decrease unemployment Maintain stable prices Nations analyze their economies to keep track of how well they are meeting their goals.

How Do They Analyze? Labor Productivity Gross Domestic Product Standard of Living Inflation Rate Unemployment Rate

Labor Productivity Output per worker hour that is measured over a defined period of time (week, month, year). How can businesses increase productivity? Invest in new equipment Provide additional training or financial incentives (boost productivity) Reduce work force and increase responsibilities of current employees MAIN POINT: High productivity improves a company’s profit.

Gross Domestic Product Most governments study productivity by keeping track of entire nation’s production output. Gross Domestic Product (GDP) is the output of goods and services produced by labor and property located within a country.

What Is The GDP Made Up Of? Private Investment Government Spending Personal Spending

Gross National Product The GNP os the total dollar value of goods and services produced by a nation, including goods and services produced abroad by U.S. citizens and companies.

Standard of Living A measurement of the amount and quality of goods and services that a nation’s people have. Most industrialized nations enjoy a high standard of living because they have high levels of production.

Inflation Rate Rising prices Low inflation is good – shows a stable economy High inflation is bad – hurts an economy (when high, money loses its value) Controlling Inflation Inflation goes up, the government raises interest rates and discourages borrowing Result is slower economic growth and this helps bring inflation down.

How is Inflation Measured? Consumer Price Index: measures the change in price over a period of time of 400 specific items used by the average urban household. Producer Price Index: measures wholesale price levels in the economy.

Unemployment Rate The higher the unemployment rate, the greater the chances are of slow economic times. The lower the unemployment rate, the greater the chances are of an economic expansion.

The Business Cycle Recurring changes in economic activity Expansion – Time when the economy is flourishing Recession – Period of economic slowdown that lasts for at least two quarters of a year, or six months Depression – period of prolonged recession Recovery – period of renewed economic growth following a recession or depression

The Business Cycle Business Cycle ExpansionRecessionTroughRecovery Expansion: unemployment is low, confidence And spending are high. Businesses develop New products and conduct research. Marks Beginning of a recession. Recovery: economy grows again. Jobs Are created and consumers begin to spend. There is more demand, so production Increases. Common to last a while. Recession: the economy slows during this Time. Businesses lay of workers. Consumer Confidence and spending are low. Little Demand, so production decreases. Businesses Have little money to invest. Trough: low point in the cycle. Transition Between a recession and a recovery. The Economy stops slowing and recovery is near.

EXPANSION Period of Prosperity People are spending money It is a good time for new businesses to start up Consumers spend a lot of money which feeds the economy More goods and services are produced and purchased This will continue until it hits a peak

RECESSION Economic slowdown (for 2 quarters of a year/ 6 months) Companies reduce their workforces Consumers have less to spend (less people working) Higher unemployment Producers respond by spending less on production Companies cut back on research and development of new products Future expansion of businesses are put on hold

DEPRESSION Prolonged recession Nearly impossible to find a job Many businesses are forced to shut down Consumer spending is very low Production is down significantly Leads to poverty

RECOVERY Period of renewed economic growth following a recession or depression GDP begins to increase People find jobs Businesses pick up Consumers have more money to spend

What Affects the Business Cycle? Affected by the actions of businesses, consumers, and the government and vice versa. Economists study indicators to help the government and businesses predict the futur so they can make decisions.

Government’s Affect on Business Cycles? The government influences the cycles through their policies and procedures Taxation