Political & Economic Analysis

1. Political & Economic Analysis Define the concept of an economy List the factors of production Explain the concept of scarcity Discuss how traditional, market, command, and mixed economies answer the three basic economic questions Cite examples of various economic systems List the goals of a healthy economy Explain how an economy is measured Analyze the key phases of the business cycle

2. Market Talk Why would a weak economy in some countries affect other countries’ economies?

3. Why is it Important?

4. What does all of this mean?

5. What Is an Economy? • The way a nation provides for the needs and wants of its people. • The choices that must be made involve how the nation will use its resources to produce and distribute goods and services.

6. Resources • All things used in producing goods and services. • “Factors of production” • Land • Labor • Capital • Entrepreneurship

7. Land • Refers to everything on the earth that is in its natural state, or the Earth’s natural resources. • Everything contained in the earth or found in the seas

8. Labor • All the people who work in the economy • Full- & part-time workers in both the private and public sectors

9. Capital • Money needed to start and operate a business • Goods used in the production process • At a national level, capital includes infrastructure, such as roads, ports, sanitation facilities, and utilities

10. Entrepreneurship • Skills of people who are willing to risk their time and money to run a business • Organize the other factors of production to create the goods and services desired in an economy

11. The Factors of Production Labor Capital Land Entrepreneurship Product

12. Scarcity The difference between wants and needs and available resources. Example: Most underdeveloped nations have natural resources, but do not have capital or skilled labor to develop them.

13. How Does an Economy Work? The way nations answer three basic questions defines their economic systems. 1. What goods and services should be produced? 2. How should the goods and services be produced? 3. For whom should the goods and services be produced?

14. Traditional Economies • What? Little choice as to what to produce. If people belong to a community of farmers, they farm for generations. • How? Bound by tradition. The potter whose family has made clay pots for generations will continue to follow the practices of his or her ancestors.

15. Traditional Economies • For Whom? Tradition regulates who buys and sells and where an how the exchange takes place.

16. Market Economies In a pure market economy there is no government involvement in economic decisions. The government lets the market answer the following three basic economic questions: 1. What? Consumers decide what should be produced in a market economy through the purchases they make.

17. Market Economies 2. How? Production is left entirely up to businesses. Businesses must be competitive in such an economy and produce quality products at lower prices than their competitors. 3. For whom? In a market economy, the people who have more money are able to buy more goods and services.

18. Command Economies In a command economy the government answers the three basic economic questions. 1. What? A dictator or a central planning committee decides what products are needed. 2. How? Since the government owns all means of production in a command economy, it decides how goods and services will be produced.

19. Command Economies 3. For whom? The government decides who will get what is produced in a command economy.

20. Mixed Economies All economies in the world today are mixed. There is some government involvement in the economy. Example: The United States government is involved in the economy through laws and regulations governing businesses, and provides socialistic programs, such as welfare, Medicaid, and Medicare.

21. Continuum of Economic Systems

22. Capitalism • Capitalism features private ownership of businesses and marketplace competition. It is the same as a free enterprise system. • The political system most frequently associated with capitalism is democracy.

23. Socialism The main goal of socialism is to keep prices low for all people and to provide employment for many. The government runs key industries, generally in telecommunications, mining, transportation, and banking. Socialist countries tend to have more social services.

24. Communism • Communist countries have a totalitarian form of government; this means that the government runs everything and makes all decisions. • Theoretically, there is no unemployment in communist countries. • The government decides the type of schooling people will receive and also tells them where to live.

25. Economies in Transition • Many countries are in transition from either communism or socialism to capitalism. • Privatization is a common aspect of transition from a command economy to free enterprise system. Privatization means state-owned industries are sold to private individuals and companies.

26. Developing Economies

27. Understanding the Economy

28. When Is an Economy Successful? It is the goal of all economies to: • increase productivity • decrease unemployment • maintain stable prices

29. Economic Measurements Accurate economic measurements help determine a nation's economic strength. • employee productivity • Gross Domestic Product (GDP) • inflation • unemployment

30. Employee (Labor)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.

31. Productivity & Standard of Living 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?

32. Gross Domestic Product • 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.

33. Gross Domestic Product 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?

34. Inflation Rate • 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: • Consumer Price Index (CPI) • Producer Price Index (PPI)

35. Inflation Rate: Consumer Price Index 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.

36. Consumer Price Index (CPI)

37. Inflation Rate;Producer Price Index 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.

38. Producer Price Index (PPI)

39. Inflation Barometers • 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?

40. Unemployment Rate 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.

42. Jobless Rate 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?

43. Other Indicators 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.

44. Consumer Confidence 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?

45. The Business Cycle 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: • prosperity • recession • depression • recovery

46. Prosperity (Expansion) 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.

47. Recession 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.

48. Depression 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.

49. Recovery 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.

50. Factors That Affect the Business Cycle • 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.