Political and economic analysis CHAPTER 3

What is an Economy? Economy or economic system is the way a nation provides for the needs and wants of its people. Countries with different economic systems have different approaches when making choices. Countries economic resources determine economic activities Economic resources are all the things used in producing G/S. Factors of Production: resources of land, labor, capital, and entrepreneurship

ECONOMIC RESOURCES FACTORS OF PRODUCTION LAND : LABOR: CAPITAL: everything found in the earth or seas LABOR: all the people who work CAPITAL: money to start and operate a business. goods used in the production process Infrastructure: physical development of country, roads, ports, sanitation facilities, and utilities ENTREPRENEURSHIP: The skills of people who are willing to invest their time and money to run a business. The employers of a population

ECONOMIC RESOURCES resources wants and needs SCARCITY: The difference between unlimited wants and needs and available resources. Forces nations to make economic choices. Different economies have different amounts of economic resources. Based on a Nation’s Economic System impacts how they use their limited resources resources wants and needs

Types of Economic Systems Nations answer 3 basic economic questions WHAT goods and services should be produced? HOW should the goods and services be produced? FOR WHOM should the goods and services be produced and distributed? Economists have classified a Nation based on how they answers those 3 questions: Traditional, Market, and Command Economies No economy is pure and simple, many are MIXED

Types of Economic Systems TRADITIONAL ECONOMY: habits, traditions and rituals answer the basic questions Answers are based on culture or religion Subsistence farming, animal gathering, tool making MARKET ECONOMY: No government involvement Individuals and companies own the means of production and businesses compete for consumers COMMAND ECONOMY: Government makes all decisions and controls resources MIXED ECONOMY: No economy is 100% pure they are all MIXED

Types of Economic Systems Traditional Market Command WHAT People produce what the need to survive Consumers decide through purchases they make Dictator or central government HOW Under developed, use simple tools, and their ingenuity, use techniques from ancestors Businesses decide knowing they must produce quality products Government owns the means of production, it runs all businesses FOR WHOM Sense of community, excess food or other items are traded among residents The people who have more money exchange it to buy more Government decides who receives what is produced. In principle wealth is shared equally

POLITICAL and ECONOMIC PHILOSOPHIES All economies in the world today are mixed. A meaningful economic classification depends on their type of political system The 3 political philosophies that have shaped world economies are: Capitalism Communism Socialism

POLITICAL and ECONOMIC PHILOSOPHIES CAPITALISM: marketplace competition and private ownership of businesses. Free Enterprise or Private Enterprise Advantage successful employers and employees prosper Characteristics Government is concerned about its people and cares for those who cannot care for themselves. Some Social Programs Government involvement in free market with laws and regulations Political system is Democratic People are free to elect their leaders U.S. and Japan are classified as capitalists and democratic

POLITICAL and ECONOMIC PHILOSOPHIES COMMUNISM: government is authoritarian, controls the resources. No private ownership of property or capital. Goods owned in common are available to a classless society on an as-needed basis. Characteristics: All people available to work are assigned jobs There is no unemployment, if you don’t go to work you are still paid Gov’t decides schooling, housing and medical care is free No financial incentive to increase productivity Cuba and North Korea. China, Vietnam and Laos are allowing more free enterprise

POLITICAL and ECONOMIC PHILOSOPHIES SOCIALISM: increased government involvement in economy Goal is to meet basic needs for all and provide employment Characteristics: Have more Social Services to ensure a certain standard of living for everyone. Systems for pensions and elderly care Individuals and businesses pay much higher taxes to finance government services. State controlled, noncompetitive companies are in industries such as telecommunications, natural resources, transportation, and banking. Canada, Germany, and Sweden

POLITICAL and ECONOMIC PHILOSOPHIES ECONOMIES IN TRANSITION: Former Soviet Union making the change from command to market economies. Most Eastern European countries that were once communist moved towards global market economies and democratic form of gov’t.

POLITICAL and ECONOMIC PHILOSOPHIES PRIVATIZATION vs NATIONALIZATION Privatization: the process of governments selling government owned businesses to private individuals Gov’t generates much needed revenue Shows commitment to making the transition to market system Great Britain sold its national phone, national steel, national sugar and several other national companies. Nationalization is the opposite of privatization. Occurs when Gov't takes over a privately-held company Transition of ownership may be due to economic crisis, political upheaval or a change in Gov't policy Cuba 1960 nationalized all foreign businesses.

POLITICAL and ECONOMIC PHILOSOPHIES DEVELOPING ECONOMIES: Are mostly poor countries with little industrialization Trying to become more prosperous and develop their infrastructure Most of their success depends on improving their education levels of their labor force Directing and using foreign investments efficiently will contribute to their success. Chad, Africa is a developing economy Traditional economy based on agriculture and livestock farming . Foreign investment has developed their oil field and pipeline projects Oil revenue helping to pay for education and infrastructure

Understanding the Economy 1. The Economy and Marketing A. Goals of a Healthy Economy Increase Productivity Decrease Unemployment Maintain Stable Prices B. Economic Measurements Essential to determine whether economy is meeting its goals Economic Measurements are used to analyze an economy’s economic strength: labor productivity, gross domestic product, standard of living, inflation rate, and unemployment rate

Labor Productivity Productivity is the output per worker hour that is measured over a define period of time, such as a week, month or year. To increase productivity Invest in new equipment or facilities increases worker efficiency Provide additional training or financial incentives Reduce work force increase the responsibilities of remaining workers Higher productivity increases a company’s profit Specialization and division of labor – each part of the finished product is completed by a specialized person on an assembly line

Gross Domestic Product (GDP) Output of goods and services produced by labor and property located within a country GDP includes: Private investment: business’s spending for equipment and software, and home construction Government spending Personal consumer spending Net exports of G/S Change in business inventories

Standard of Living Measurement of the amount of quality of goods and services that a nation’s people have It’s a number that reflects their quality of life To calculate it, divide the GDP by the total population. (Rates measured per person are also known as per capita measurements) GDP______ = per capita POPULATION

Inflation Rate Inflation refers to rising prices Low inflation- 1% to 5% per year is good and stable Double-digit inflation – 10% + hurts economy and money loses its value/spending power Controlling inflation is one of government’s major goals government regulates interest rates to control inflation Consumer Price Index (CPI) – measure the change in price over a period of time of 400 specific retail goods and services used by the average urban household Producer Price Index (PPI) – measures wholesale price levels. Increases/decreases are usually passed on to consumers

Unemployment Rate Nations chart unemployment or jobless rates High unemployment = economic slowdown

Business Cycle Throughout history economies have followed a pattern of expansion and contraction called the Business Cycle The length and intensity of each of the phases depends on many factors such as wars, natural disasters, and industrial innovation. 4 Phases in the Business Cycle: Expansion Recession Trough Recovery

Business Cycle Expansion: unemployment is low and consumer confidence and spending are high. Businesses develop new products and conduct research. Recession: the economy slows. Businesses layoff workers. Consumer confidence and spending are low, little demand so production of G/S decreases. Businesses have little money to invest. A depression is a deep long lasting recession. Recovery: The economy grows again. Jobs are created and consumers begin to spend. There is more demand, so production of G/S increases. This phase may last a long time. Trough: low point in the business cycle. It’s the transition between recession and recovery. The economy stops slowing and may show signs that a recovery is near

Factors That Affect Business Cycle The business cycle is affect by the actions of government, consumers, and businesses. Business Consumers Government Expansion Invest in properties, equipment, inventory, and hire more employees Buy luxury items Monitor spending may increase interest rates/taxes Recession Layoffs, reduce inventories, low demand Low consumer confidence, less spending Reduce interest rates, lower taxes Trough Cautiously optimistic Confidence may improve, may start spending Increase spending, tax rebates Recovery Higher demand, production increases Optimistic, more spending May increase interest and taxes