Economics

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Economics

• The Global Economy

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Summary Slide

• Resources
• How does an Economy Work?
• Economy Types
• Understanding the Economy
• Inflation
• Business Cycle

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Economy

• Economic systems
• The way a nation makes financial choices
• How a nation will use resources distribute
  goods and services

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Resources

• Anything used in the production of goods and
  services
• Technical term is factors of production

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Resources

• Land
• Any and all natural resources
• Labor
• All people who work in the economy
• Capital
• Money used to start and operate business
• Entrepreneurship
• Skills of people willing to take the risk to run
  a business

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Resources

• Each presents opportunities and problems
• Developing nations have abundant land, but lack
  an educated workforce and a functional
  infrastructure
• Education is extremely important for a workforce

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Scarcity

• Difference between needs and wants of a country
  and actual availability
• All nations have a problem with scarcity
• Even U.S. with all our wealth cannot provide for
  every citizen
• Nations have unlimited needs and wants, but very
  limited means of addressing them

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How does an Economy Work?

• Must answer three questions on how to use
  resources
• What should be produced?
• How should it be produced?
• For whom should it be produced
• From these questions two economies have been
  defined
• Market
• Command

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Market Economies

• In purest form, no government intervention
• Consumers decide on purchases
• Business decide how to produce, goal would be to
  have the best product at the best possible price
• Products are offered to those with the money to
  purchase them

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Command Economies

• Government makes all decisions
• One person or a small group decides what to make
• Government employs all workers
• Government decides who gets what
• Much greater security, but at the cost of freedom

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Mixed Economies

• No economy is exclusively market or command
• Each have elements of the other

Communism
Capitalism
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World Vision

• Three economic philosophies have defined the
  world
• Capitalism
• Socialism
• Communism

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Capitalism

• Characterized by private ownership
• Most frequently associated with a democratic from
  of government
• Concern for citizens, but does not offer as many
  social services as other forms
• U.S.A. and Japan are examples

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Socialism

• Main goal to keep prices low and provide
  employment
• Government runs key industries
• Medical care is typically free as is all
  education
• Higher taxes to fund government programs
• Canada, Sweden, Great Britain, etc.

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Communism

• Government runs everything
• Anyone who is able to work is given a job
• Receive a paycheck whether you work or not
• Government decides where you live and how much
  schooling you may pursue
• Cuba and North Korea

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Transitional Economies

• Typically former command economies moving toward
  market
• Current state of China
• Selling off old state holding and making way for
  privatization
• Allowing for greater internationalization

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Privatization

• Selling government business to private industries
• Many socialist nations gained greater market
  freedom
• Great Britain earned over 63 billion dollars by
  selling many utilities and or industries

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Understanding the Economy

• Great Depression
• Example of a failed economic system
• What were some of the causes and effects of the
  Depression?
• All economies want to increase productivity,
  decrease unemployment and maintain stable prices

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Measuring the Economy

• Employee Productivity
• Gross Domestic Profit (GDP)
• Inflation
• Unemployment

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Employee Productivity

• Productivity is output per worker hour measured
  over a defined period of time, i.e. week, month,
  year
• Many ways to increase productivity
• New equipment or facilities
• Better training or incentives
• Reduce workforce and increase responsibilities

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Gross Domestic Product

• Measure of all goods and services produced using
  national labor and property
• Includes imported raw material, but not exported
  labor

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Inflation

• Inflation refers to rising prices
• Low inflation (1 5) shows a stable economy
• Double digits inflation destroys an economy
• Money loses value
• What makes money valuable?
• Who gets hurt by inflation?

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Inflation

• As inflation increase the Federal Reserve Board
  will increase interest rates to make it difficult
  to borrow money
• Who chairs the Fed?

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Gauging Inflation

• Consumer Price Index (CPI)
• Measures change in price of 200 categories of
  retail goods and services used by average urban
  household
• Food, clothing, housing, transportation, and
  recreation are included
• Core PPI is calculated by removing food and
  utilities
• Typically these are very unstable prices

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Gauging Inflation

• Producer Price Index
• Measures wholesale prices
• Producer prices are often passed onto the
  consumer
• PPI is a trendsetter for the CPI
• When the PPI falls the CPI will follow

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Unemployment Rate

• Higher levels of unemployment increase the chance
  of economic downfall
• Businesses and consumers are less confident in a
  non-productive society
• When employment is high, wages will increase due
  to supply and demand

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Other Indicators

• Conference Board
• Private organization to assess the economy
• Consumer Confidence Index
• Consumers polled to see how they feel about
  economy, buying conditions, and finance
• Housing Starts and Auto Sales
• Big expenditures that are affected by the economy
  and interest rates

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Business Cycle

• A gradual change in the economy as a repeating
  trend
• Prosperity
• Recession
• Depression
• Recovery

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Business Cycle

• Prosperity (Expansion)
• Good time to start new business, high consumer
  confidence
• Recession
• Period of economic slow down for about 6 months
• Depression
• Prolonged recession, increasingly difficult to
  find work
• Recovery
• Increase in overall economic activity after
  economy bottoms out

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Business Cycle

• During prosperity and recovery, more hiring and
  businesses expand
• During recession and depression, there is a
  contraction of all assets
• Large fear of losing wages and job

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Government Influence

• Taxes have strong effect
• Higher taxes leave consumers with less money to
  fuel economy
• When economy needs a boost, government will lower
  interest rates or cut taxes
• Japan gave over 6 billion in shopping coupons to
  stimulate economy

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Credits

• All statistics and figures were retrieved from
  the Bureau of Labor Statistics website, September
  24, 2007
• www.bls.gov