n Chapter 4 Global Economies

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Marketing Essentials
n Chapter 4 Global Economies
Section 4.2 Understanding the Economy
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SECTION 4.2
Understanding the Economy
What You'll Learn

• The goals of an economy
• The various measurements used to analyze an
  economy
• The four phases of the business cycle

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SECTION 4.2
Understanding the Economy
Why It's Important
Soon you will be voting and you may also decide
to invest in the stock market. These decisions
can impact your financial well being, so it is
essential that you understand how an economy is
measured and what factors contribute to a strong
or weak economy. It is important to know how you,
businesses, and the government influence the
economy. That way you will know how to invest
your money and cast your ballots.
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SECTION 4.2
Understanding the Economy
Key Terms

• productivity
• gross domestic product (GDP)
• inflation
• Consumer Price Index (CPI)
• Producer Price Index (PPI)
• business cycle
• prosperity (expansion)
• recession
• depression
• recovery

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SECTION 4.2
Understanding the Economy
When Is an Economy Successful?
It is the goal of all economies to

• increase productivity
• decrease unemployment
• maintain stable prices

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SECTION 4.2
Understanding the Economy
Economic Measurements
Accurate economic measurements help determine a
nation's economic strength.

• employee productivity
• Gross Domestic Product (GDP)
• inflation
• unemployment

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SECTION 4.2
Understanding the Economy
Employee 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.
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SECTION 4.2
Understanding the Economy
Productivity and 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?
Source Bureau of Economic Analysis, Bureau of
Labor Statistics
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SECTION 4.2
Understanding the Economy
Gross Domestic Product (GDP)
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.
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SECTION 4.2
Understanding the Economy
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?
Source Bureau of Economic Analysis, Bureau of
Labor Statistics
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SECTION 4.2
Understanding the Economy
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)

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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
Inflation Barometers
Source Labor Department
Source Labor Department
Source Labor Department
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?
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SECTION 4.2
Understanding the Economy
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.

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SECTION 4.2
Understanding the Economy
Jobless Rate
Source Bureau of Labor Statistics
Source Bureau of Labor Statistics
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?
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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
Consumer Confidence
Source The Conference Board
Source The Conference Board
Source The Conference Board
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?
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SECTION 4.2
Understanding the Economy
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

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SECTION 4.2
Understanding the Economy
Prosperity
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.
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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
Factors that Affect the Business Cycles
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.
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SECTION 4.2
Understanding the Economy
Managing the Economy
The federal funds rate (rate banks charge each
other for overnight loans) and the discount rate
(rate the U.S. Federal Reserve charges banks that
borrow money from it) are used to speed up or
slow down an economy. From this chart, what do
you think the motivation of the Federal Reserve
Board was in 1991? In 1999? Would you prefer to
start a new business when interest rates are high
or low?
Source Federal Reserve, Labor Department
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SECTION 4.2
Understanding the Economy
The Global Economy
A global economy makes possible a global
recession, because economies of different
countries depend on economic stability in other
countries and imports or exports from other
countries.

• Example Thailand devalued its currency in 1997,
  causing the collapse of other Asian economies
  and a huge drop in the U.S. stock market.

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ASSESSMENT
4.2
Reviewing Key Terms and Concepts
1. What are the goals of any economy? 2. Name
four measurements used to gauge the success
of an economy. 3. Describe in the briefest terms
what each of the following stands for GDP,
CPI, PPI, and Core CPI.
Slide 1 of 2
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ASSESSMENT
4.2
Reviewing Key Terms and Concepts
4. Describe the four phases of the business
cycle. 5. What stage of the business cycle was
the United States in during the year 2000?
Slide 2 of 2
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ASSESSMENT
4.2
Thinking Critically
Assume the economy was growing rapidly and there
were increases in the CPI, PPI, as well as in
employee wages and spending. What might the
government do to reduce the risk of inflation?
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Marketing Essentials
End of Section 4.2