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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

Economic Measurements

Accurate information about an economy is essential to the whole process.

Key (Main) measurements of economic strength.

  1. 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

  1. Gross Domestic Product (GDP) – (Keeps track of productivity)

GDP-The output of goods and services produced by labor and property located within a country.

(since 1991)

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.

  1. Standard of living
  2. 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
  1. 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

  1. 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 Cycle

Expansion (prosperity) / Recession / Depression (Trough) / Recovery
  • Economy is flourishing
  • Prosperity
  • 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