UNDERSTANDING THE ECONOMY Lesson 3-2

Understanding the Economy Objectives List the goals of a healthy economy Explain how an economy is measured Analyze the four key phases of the business cycle Marketing Essentials Chapter 3, Section 3.2

Goals of an Economy A healthy economy has three goals: Increase productivity Decrease unemployment Maintain stable prices Marketing Essentials Chapter 3, Section 3.2

When Is an Economy Successful? Economic Measurements six measurements used to determine the economic strength of a country Six Measurements: Labor productivity Gross domestic product (GDP) Gross national product (GNP) Standard of living Unemployment rate Inflation rate Marketing Essentials Chapter 3, Section 3.2

Assignment Go online. Find the definition of each of the 6 Economic Measurements. Enter your definitions in the definition field of your note pages Complete the CIA Country Comparison Activity (handout provided by your instructor)

Labor Productivity  the value of goods and services produced in a period of time, divided by the hours of labor used to produce the goods and services - defined period of time, such as a week, month, or a year -Increased productivity by a business raises living standards, improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs. 1. Labor Productivity:

Gross domestic product (GDP)  is the output of goods and services produced by labor and property located within a country The GDP is made up of: Private investment Government spending Personal spending Net exports of goods and services Change in business inventories Largest Sector Largest Sector of the GDP? 2. Gross Domestic Product

Gross national product (GNP)  is the total dollar value of goods and services produced by a nation, including the goods and services produced abroad by U.S. citizens and companies GNP, it is not where the production takes place but who is responsible for it U.S. switched to using the GDP to measure its economy in Gross National Product

Honda has a plant in the U.S. Is the output of this plant included in the GNP or the GDP of the U.S.? - GDP Honda is owned by Japan, is this included in the GNP of the U.S.? -no as it is not owned by the U.S. Ford has a plant in Mexico Are cars produced in Mexico included in the GDP or the GNP or both for the U.S.? –GNP

Standard of living is a measurement of the amount and quality of goods and services that a nation’s people have Figure that reflects their quality of life To calculate the standard of living: Divide the a country’s GDP or GNP by its population to get the per capita GDP or GNP 4. Standard of Living Marketing Essentials Chapter 3, Section 3.2

Unemployment Rate: Jobless rate Higher unemployment = greater chance of economic slowdown Lower the rate = greater chances of economic expansion 5. Unemployment Rate

Inflation  refers to a period of rising prices on goods & services Play video: Inflation

From the video, answer the following questions in your notes: What Causes Inflation? When a country prints more money than what is justified by their wealth What happens to the value of the dollar when this occurs? It goes down What is the target amount of inflation increase by banks? 2 %– 3 % Inflation

Low inflation rate (1 - 5 percent) shows that an economy is stable Double-digit inflation rate devastates an economy country’s money loses its value During high inflation: Prices increase and buying power goes down People on fixed incomes especially hurt (elderly) To combat inflation: governments raise interest rates to discourage borrowing money and slow economic growth Inflation

The cycle of economic growth and decline is called the business cycle Business cycle  Recurring changes in economic activity, such as the expansion (growth) and contraction (slow down/decline) of an economy Consists of four Stages: Expansion Recession Trough Recovery The Business Cycle

Expansion  is a time when the economy is flourishing Characterized by: Low unemployment High output of goods and services High consumer spending Good time to open new businesses Will peak at the end and a recession period begins Expansion

Recession  is a period of economic slowdown that lasts for at least six months. Characterized by: Reduced workforces and higher unemployment R&D cut back, expansion on hold Lower consumer spending Low production of goods and services Recession Expansion

A depression  is a period of prolonged recession Characterized by: Businesses shut down Impossible to find jobs Unemployment very high Consumer spending is very low Production of goods and services is down significantly Depression

Trough  when the economy reaches its lowest point in a recession, then begins to rise Trough Expansion

Recovery  is the term used to signify a period of renewed economic growth following a recession or depression. This time is characterized by: Increasing GDP Increasing Sales Reduced unemployment Increased consumer spending Moderate expansion of busineses recovery A period of renewed economic growth following a recession or depression. The Business Cycle Marketing Essentials Chapter 3, Section 3.2

The business cycle can be affected by the actions of: Businesses Consumers Government These things are, in turn, affected by the business cycle The Business Cycle Marketing Essentials Chapter 3, Section 3.2

Understanding the Economy Identifying Economic Measurements Section 3.2

Understanding the Economy Study Organizer Use the chart like this one and use it to take notes about economic measurements. Marketing Essentials Chapter 3, Section 3.2

CHAPTER 1 REVIEWSECTION 3.2 REVIEW