BE 280 Marketing Education
Chapter 3section 2
Understanding the Economy
When is an Economy Successful?
A healthy (good) economy has 3 goals:
- Increases productivity
- Decreases unemployment
- Maintains stable prices
Accurate information about an economy is essential to the whole process.
Key (Main) measurements of economic strength.
- Labor productivity
Productivity-Output per worker hour that is measured over a defined period of time (week, month, or year)
WAYS FOR BUSINESSES TO INCREASE THEIR PRODUCTIVITY
- Invest in new equipment or facilities
- Provide additional training or financial incentives
- Reduce work force and increase the responsibilities of the workers
Increased productivity improves a company’s Profit
- Gross Domestic Product (GDP) – (Keeps track of productivity)
GDP-The output of goods and services produced by labor and property located within a country.
2010 ≈ 14.7 trillion
GNP-(before 1991) The total dollar value of goods and services produced by a nation including goods and services produced abroad by U.S. citizens and companies.
- Standard of living
- Measurement of the amount and quality of goods and services that a nation’s people have.
It is a figure that reflects their quality of life.
- Divide GDP of a country by its population – per capita GDP
- Inflation Rate
Inflation- Rising prices
A low inflation rate ( 1 to 5% each year) is good because it shows that an economy is stable
Double-digit inflation ( 10% or higher) devastates an economy. (money loses its value)
*When this happens the government tries to slow down the economy – by raising interest rates)
2 Measures of Inflation
Consumer Price Index (CPI)- measures the change in price over a period of time for 400 specific retail goods and services used by the average urban household.
Producer Price Index (PPI)- measures wholesale price levels in the economy
*It is often a trendsetter –
When there is a drop in PPI, it is generally followed by a drop inCPI
- Unemployment Rate
The higher the unemployment rate, the greater the chances of economic slowdown
The lower the unemployment rate, the greater the chances of economicexpansion
**More people work = more people spend money and pay taxes and government doesn’t have to provide as many social services.**
THE BUSINESS CYCLE
Business cycle- recurring changes in the economy of growth (expansion) and slowing down (contraction)
4 key phases of the Business CycleExpansion (prosperity) / Recession / Depression (Trough) / Recovery
- Economy is flourishing
- Low unemployment, increase in output, & high consumer spending
- Good time for new businesses to start or expand
- Expansion continues until it peaks (beginning of a recession)
- Period of economic slowdown that lasts for at least 2 quarters or 6 months
- Significant decrease in activity spread across the economy
- Companies reduce workforces &consumers have less $ to spend
- Produces make fewer goods and services
- R&D is cut & businesses generally don’t expand
- Ends at the Trough phase (lowest point)
- Period of prolonged recession
- Nearly impossible to find a job
- Many businesses are forced to shut down
- Consumer spending is very low, unemployment is very high & production slows down significantly
- Increased poverty (can’t afford food, cloths, shelter)
- Great depression of the 1930’s
- Renewed economic growth following a recession/ depression
- Cycle begins with economic expansion
- GDP begins to increase
- Business picks up, people find jobs and demand for goods increases
- Reduced unemployment, increased consumer spending & moderate expansion by businesses
- Periods of recovery differ in length