CHAPTER 2CHAPTER 2 Understanding the United States Business System

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

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

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

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

Trade Import (I)  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

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

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

Global Market Entry Multinational Company  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