Chapter 4 Global Economies 1 Section 4.2 Understanding the Economy Marketing Essentials

Chapter 4 Global Economies 2 SECTION 4.2 What You'll Learn  The goals of an economy  The various measurements used to analyze an economy  The four phases of the business cycle Understanding the Economy

Chapter 4 Global Economies 3 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.

Chapter 4 Global Economies 4 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

Chapter 4 Global Economies 5 SECTION 4.2 Understanding the Economy It is the goal of all economies to: When Is an Economy Successful?  increase productivity  decrease unemployment  maintain stable prices

Chapter 4 Global Economies 6 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

Chapter 4 Global Economies 7 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.

Chapter 4 Global Economies 8 SECTION 4.2 Understanding the Economy 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? Productivity and Standard of Living Source: Bureau of Economic Analysis, Bureau of Labor Statistics

Chapter 4 Global Economies 9 SECTION 4.2 Understanding the Economy 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. Gross Domestic Product (GDP)

Chapter 4 Global Economies 10 SECTION 4.2 Understanding the Economy 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? Gross Domestic Product Source: Bureau of Economic Analysis, Bureau of Labor Statistics

Chapter 4 Global Economies 11 SECTION 4.2 Understanding the Economy 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: Inflation Rate  Consumer Price Index (CPI)  Producer Price Index (PPI)

Chapter 4 Global Economies 12 SECTION 4.2 Understanding the Economy 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. Inflation Rate: Consumer Price Index

Chapter 4 Global Economies 13 SECTION 4.2 Understanding the Economy 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. Inflation Rate: Producer Price Index

Chapter 4 Global Economies 14 SECTION 4.2 Understanding the Economy 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? Inflation Barometers Source: Labor Department

Chapter 4 Global Economies 15 SECTION 4.2 Understanding the Economy 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. Unemployment Rate

Chapter 4 Global Economies 16 SECTION 4.2 Understanding the Economy 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? Jobless Rate Source: Bureau of Labor Statistics

Chapter 4 Global Economies 17 SECTION 4.2 Understanding the Economy 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. Other Indicators

Chapter 4 Global Economies 18 SECTION 4.2 Understanding the Economy 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? Consumer Confidence Source: The Conference Board

Chapter 4 Global Economies 19 SECTION 4.2 Understanding the Economy 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: The Business Cycle  prosperity  recession  depression  recovery

Chapter 4 Global Economies 20 SECTION 4.2 Understanding the Economy 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. Prosperity

Chapter 4 Global Economies 21 SECTION 4.2 Understanding the Economy 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. Recession

Chapter 4 Global Economies 22 SECTION 4.2 Understanding the Economy 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. Depression

Chapter 4 Global Economies 23 SECTION 4.2 Understanding the Economy 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. Recovery

Chapter 4 Global Economies 24 SECTION 4.2 Understanding the Economy 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. Factors that Affect the Business Cycles

Chapter 4 Global Economies 25 SECTION 4.2 Understanding 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? Managing the Economy Source: Federal Reserve, Labor Department

Chapter 4 Global Economies 26 SECTION 4.2 Understanding the 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. The Global Economy  Example: Thailand devalued its currency in 1997, causing the collapse of other Asian economies and a huge drop in the U.S. stock market.

Chapter 4 Global Economies A SSESSMENT 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

Chapter 4 Global Economies A SSESSMENT 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

Chapter 4 Global Economies A SSESSMENT 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?

Chapter 4 Global Economies 30 Marketing Essentials End of Section 4.2