Understanding the United States Business System Chapter 2

Evaluating Economic Systems Every economic system has three main goals Stability, full employment, and growth Threat – recession, depression Ways to assess performance of goals Gross Domestic Product (GDP) The total value of all goods and services produced within a country in one year GDP per capita GDP/Total population Inflation Widespread price increases that threaten stability Deflation Decrease in the general level of prices Occurs in periods of recession and depression People have less money to spend on goods and services

The Business Cycle—a movement of the economy from one condition to another Level of Real Output Recession *Prosperity *Prosperity Recovery* Recession Recovery* *Depression *Depression Time

What does it mean? Prosperity-Peak of the business cycle Low unemployment Good wages Growth in GDP Businesses are producing and selling high amounts of goods and services Recession—economic slowdown Demand decreases Businesses lower production Unemployment begins to rise GDP growth slows

What does it mean? Depression—when recession deepens and spreads Prolonged period of high unemployment Weak sales of goods and services Business failures GDP falls rapidly Recovery—move back towards Prosperity Unemployment goes down Demand increases GDP begins to rise

Evaluating Economic Systems Growth Increase in the total output of goods and services produced by a nation’s resources Important in maintaining businesses, jobs, wealth, and a desirable standard of living Unemployment A situation of joblessness among those who are actively seeking work (% based on govt. survey) High unemployment indicates that business is performing poorly (recession, depression) Low unemployment indicates that business is performing well

Inflation Inflation – Increase in the general level of prices. Most harmful on people with fixed incomes. Causes of Inflation When the demand for goods and services is greater than the supply. Large supply of money is spent for goods that are in short supply, prices increase. Wages never tend to increase during inflation because goods and services rise so fast that the wage center cannot catch up.

Other Indicators of Economy Stability Consumer Price Index Compares prices of common goods from one year to the next Examples of CPI Personal Savings Stock Market Debt Government Consumer Business US Economic Indicators

Advantages? What is Absolute Advantage? What is Comparative Advantage? Can produce a good or service at a lower cost Ex: South American Counties=Coffee Ex: Saudi Arabia = Oil What is Comparative Advantage? Country specializes in the production of a good or service at which it is relatively more efficient.

Trade Import (I) Export (E) Balance of Trade A product made abroad, but sold in the US Export (E) A product made in the US, but sold abroad Balance of Trade  Trade Surplus: E > I More money is flowing into the country than is flowing out Trade Deficit: E < I More money is flowing out of the country than is flowing in

Using your cell phone… Find out the top five products that are imported into the U.S. Find out the top five products that are exported to other countries.

International currency Exchange Rate Canada Dollar England Pound Europe Euros What are factors affecting currency values Balance of Payments Economic Conditions Political Stability

International Trade Barriers Restrictions to free trade Quotas Limit on the quantity of a product imported or exported Tariffs Tax on imported products Embargo Blocking the import or export of product

USA Trading Info. Primary trading partners China Mexico Canada North American Free Trade Agreement (NAFTA) Agreement reached by the United States, Canada, and Mexico Reduce tariffs (taxes) and other trade barriers  

Encouraging Free Trade Free Trade Zones Products are imported and stored duty free Common Markets European Union Agreement between European countries similar to NAFTA Developed the Euro currency

International Business Environment Geography Weather, Temperature, and Access to Ports Cultural Influences Language, Religion, Values, Customs, Social relationships Economic Development Advancement or lack of in technology, literacy, agricultural dependency. Political and Legal Concerns Government system, Business regulations, Political stability

Global Market Entry Multinational Company Licensing Franchising Organization that does business in several countries Licensing Selling the rights to use intangible property Franchising Selling rights to name, processes, and product Joint Venture Agreement between two companies to share business projects