Chapter 3 Political and Economic Analysis. Chapter 4 Global Analysis. In this unit you will find

Transcription

1 In this unit you will find Chapter 3 Political and Economic Analysis Chapter 4 Global Analysis ANALYZE THE AD This state government wants to attract global business to its state to grow its economy. How does this goal relate to the ad s visual component? 48

2 PRINT AD LANGUAGE Many state and federal governments use powerful visual components and colorful designs to attract business. They want companies to do business with their states or countries. Log on to glencoe.com and go to the Marketing Essentials OLC. Find the WebQuest for Unit 2. Begin the activity by finding business magazines that include advertisements for states. Marketing Internship A supermarket chain wants to expand globally and needs to research and choose the best locations. As you read, use this checklist to prepare for the unit project: Choose four countries such as Russia, China, India, or Japan. Find Web sites that provide country profile information. Look in your community for businesses that have global customers ANALYSIS SWOT Economic Socio-Cultural Political Technological STRATEGY Promotion Place Price Product IMPLEMENTATION Organization Management Staffing 4 BUDGET Cost of Sales Cost of Promotion Income and Expenses 5 CONTROL Evaluation Performance Measures Performance Analysis In this unit Marketing Core Functions Market Planning glencoe.com 49

3 CHAPTER 3 Political and Economic Analysis Chapter Objectives After reading this chapter, you should be able to: 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 EXPLORE THE PHOTO Market Talk The stock exchange is one place to take an economy s pulse. When investors are optimistic about the economy, they may buy more stocks. This is a way to own a small part of a company and share in its profits. Investors and consumers usually react to economic and political news and adjust their spending or investing accordingly. Quick Think Why would a weak economy in some countries affect other countries economies? 50 UNIT 2 ECONOMICS Peter Byron/Photo Edit

4 DECA Events These acronyms represent DECA competitive events that involve concepts in this chapter: AAM EMDM HMDM SEM ADC FMAL MMS SMDM ASM FMDM QSRM TMDM BLMDM FMML RFSM TSE BMDM HLM RMS Performance Indicators The performance indicators represent key skills and knowledge. Relating them to the concepts explained in this chapter is your key to success in DECA competitive events. Keep this in mind as you read, and write notes when you find material that helps you master a key skill. In these DECA competitive events, you should follow these performance indicators: Explain the concept of economic resources. Describe the concepts of economic scarcity and economic activities. Explain the types of economic systems. Determine the relationship between government and business. Explain the concept of productivity. Analyze the impact of the specialization/division of labor on productivity. Explain measures used to analyze economic conditions. Describe the concept of price stability as an economic indicator. Discuss the measure of consumer spending as an economic indicator. Discuss the impact of a nation s unemployment rates. Discuss the economic impact of inflation on business. Determine the impact of business cycles on business activities. ROLE PLAY Check your understanding of DECA performance indicators with the DECA activity in this chapter s review. For more information and DECA Prep practice, go to the Marketing Essentials OLC through glencoe.com. glencoe.com Chapter 3 Political and Economic Analysis 51

5 SECTION 3.1 What Is an Economy? READING GUIDE BEFORE YOU READ Connect Do you think economic decisions affect your daily life? In what ways? OBJECTIVES 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 KEY TERMS economy resources factors of production infrastructure entrepreneurship scarcity traditional economy market economy command economy ACADEMIC VOCABULARY You will find these words in your reading and on your tests. Make sure you know their meanings. approach theory THE MAIN IDEA An economy is how a nation makes economic choices that involve how the nation will use its resources to produce and distribute goods and services to meet the needs of its population. GRAPHIC ORGANIZER Create a diagram like the one below to record information about market economies and command economies. Market Economy Both Market and Command Economies Command Economy Go to the OLC through glencoe.com for printable graphic organizers, Academic Vocabulary definitions, and more. ACADEMIC STANDARDS English Language Arts NCTE 3 Apply strategies to interpret texts. Social Studies NCSS 7 Production, Distribution, and Consumption: how people organize the production, distribution, and consumption of goods and services Connect Choose a country that interests you and note how its economy works as you study this chapter. Economic Systems An economy, or economic system, is the organized way a nation provides for the needs and wants of its people. A nation chooses how to use its resources to produce and distribute goods and services. Countries with different economic systems have different approaches when making choices. A country s resources determine economic activities, 52 UNIT 2 ECONOMICS

6 such as manufacturing, buying, selling, transporting, and investing. Broad categories of resources that are common to all nations affect how business is done across the world. Resources Resources are all the things used in producing goods and services. Economists use the term factors of production when they talk about resources. Factors of production comprise four categories: land, labor, capital, and entrepreneurship. Tangible resources include land and capital. Intangible resources include labor and entrepreneurship. Land Land includes everything contained in the earth or found in the seas. Coal and crude oil are natural resources, and so is a lake and all of the living things in the lake. Trees and plants, as well as the soil in which they grow, are natural resources. These natural resources are used as the raw material for making goods and creating services that are marketed to customers. Some countries climate and geography are perfect for attracting tourists. Switzerland is a destination for skiing and mountain landscapes. So, the tourist trade is a viable industry that helps support the economy. Labor Labor refers to all the people who work. Labor includes full- and part-time workers, managers, and professional people in both the private and public sectors. Companies may spend a lot of money training employees because a well-trained labor force is an asset to a company. Economies with well-educated and well-trained labor have an advantage. Capital Capital includes money to start and operate a business. It also includes the goods used in the production process. Factories, office buildings, computers, and tools are all considered capital resources. Raw materials that have been processed into a more useful form (such as lumber or steel) are considered capital. Without capital, a business would not have the funds or the resources needed to develop, to advertise, and to transport goods. Capital includes infrastructure, which is the physical development of a country. This includes its roads, ports, sanitation facilities, and utilities, especially telecommunications. These things are necessary for the production and distribution of goods and services in an economy. For example, an international business needs dependable phone service. Entrepreneurship Entrepreneurship refers to the skills of people who are willing to invest their time and money to run a business. Entrepreneurs organize factors of production to create the goods and services that are part of an economy. They are the employers of a population. ECONOMICS and the SHOPPING MALL Your local shopping mall is a good place to observe economic principles. Labor is represented by salespeople employed in stores and also by all the people who manufactured the products for sale. Capital is at work here, too, as money was invested in manufacturing products and selling them. Do you think there are examples of the other two factors of production (land and entrepreneurship) in a shopping mall? Explain your answer. Chapter 3 Political and Economic Analysis 53 Royalty-free/Vote Photography/Alamy Images

7 SPAIN Tourism contributes greatly to Spain s economy. Spain wants to attract tourists. What resources or factors of production make Spain a good vacation spot? Scarcity Different economies have different amounts of resources. The United States has an educated labor force, a great deal of capital, an abundance of entrepreneurs, and many natural resources. Most underdeveloped nations are not that fortunate. They might have natural resources to spare but not the capital or the skilled labor to develop them. Even the United States, with its wealth of resources, cannot meet the needs and wants of all its citizens. Many citizens live below poverty level. Businesses go bankrupt on a regular basis. It is apparent that nations have unlimited wants and needs for growth and development but limited resources to meet them. The difference between wants and needs and available resources is called scarcity. Scarcity forces nations to make economic choices. How Does an Economy Work? Nations must answer three basic questions when deciding how to use their limited resources. The way nations answer these questions defines their economic system. 1. Which 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? Economists have studied the way nations answer the three basic economic questions and have classified economic systems into three broad categories: traditional, market, and command economies. However, no economy is purely traditional, purely market, or purely command. Elements of all three systems are found in all economies. Traditional Economies In a traditional economy, traditions and rituals answer the basic questions of what, how, and for whom. The answers are often based on cultural or religious practices and ideals 54 UNIT 2 ECONOMICS

8 How-Man Wong/CORBIS A TRADITIONAL ECONOMY Bhutan, one of the world s smallest and least developed countries, has a traditional economic system based on agriculture and forestry. However, it has expanded its tourism industry, which brings in elements of a market economy. How might a shift to a market economy affect the Bhutanese people? that have been passed from one generation to the next. Typically, these activities are assigned through tradition rather than by choice. 1. What? In a traditional economy there is little choice as to what to produce. If people belong to a community of farmers, they farm for generations. 2. How? Again, this is bound by traditions. The potter whose family has made clay pots for generations will continue to follow the practices of his or her ancestors. 3. For whom? Tradition regulates who buys and sells and where and how the exchange takes place. Market Economies In a pure market economy, there is no government involvement in economic decisions. Individuals and companies own the means of production and businesses compete for consumers. The government lets the market answer the three basic economic questions. 1. What? Consumers decide what should be produced in a market economy through the purchases that they make in the marketplace. Products that do not satisfy consumers needs are not purchased and therefore will not achieve success. 2. How? Businesses in a market economy decide how to produce goods and ser vices. Businesses must be competitive and produce quality products at lower prices than their competitors. It is necessary for them to find the most efficient way to produce their goods and services and the best way to encourage customers to buy these products. 3. For whom? In a market economy, the people who have more money are able to buy more goods and services. To obtain money, people are motivated to work and invest the money they make. Command Economies A command economy is a system in which a country s government makes economic decisions and decides what, when, and how much will be produced and distributed. Under this system, the government controls the factors of production and makes all decisions about their use. In a command economy, the Chapter 3 Political and Economic Analysis 55

9 Entertainment: A Click Away Intel Corporation and Revelations Entertainment recently teamed up to form a new digital entertainment venture called ClickStar. This Web-based company offers access to recently released feature films, thematic artist-created channels, and even space-related educational content from NASA missions. ClickStar s star power includes Academy Award winner Morgan Freeman, who heads up Revelations Entertainment and stars in a feature film that was made available on the Internet just two weeks after its release in movie theaters. Titled 10 Items or Less, the film was marketed for downloading to a PC at the same time it was in theaters. Click- Star hopes to address those who want fresh, top-quality entertainment from the comforts of home, without abandoning the popular tradition of going to the local Cineplex. Digital distribution agreements with the home entertainment branches of Sony Pictures, Universal Studios, and Warner Brothers mean that ClickStar can offer hundreds of studio titles and deliver them to the broadband consumer with just a click of a mouse. How would you promote downloadable access to first run movies so that it does not affect box office sales? Go to the Marketing Essentials OLC through glencoe.com for an activity on Internet marketing. government is responsible for answering the three basic economic questions. 1. What? One person (often a dictator) or a group of government officials (a central planning committee) decides what products are needed based on what they believe is important. 2. How? Since the government owns all means of production, it runs all busi nesses. It decides how goods and services will be produced. It controls all employment opportunities and workers benefits. In the most extreme command economy, the government tells people where they will work and how much they will get paid. 3. For whom? The government decides who will receive what is produced. In principle, wealth is shared equally among all people to ensure that everyone s basic needs are met. The idea is that all people are equal and are offered the same opportunities. The government provides subsidies for housing and food, medical care, education, and jobs. Compare How does a command economy differ from a market economy? Mixed Economies No economy is purely a traditional, market, or command economy. Every economy has influences that make it at least somewhat mixed. The United States is considered a mixed economy with leanings toward a market economy. In a pure market economy, there is no government interference at all. However, there is some government involvement in the U.S. economy through the laws and regulations that businesses must follow. There are also regulations to protect our food, air, and water supplies, and to protect consumers from unsafe products. There are labor laws that determine at what age people can start working, and the minimum wage they earn. The U.S. 56 UNIT 2 ECONOMICS glencoe.com

10 government provides social programs for those who need help, such as welfare and Medicaid for the poor and Medicare for the elderly. Since all economies in the world today are mixed, a meaningful economic classification depends on how much a government interferes with the free market. The three political philosophies that have shaped world economies are capitalism, socialism, and communism. Capitalism Capitalism is a political and economic philosophy characterized by marketplace competition and private ownership of businesses. It is the same as free enterprise. Government in a capitalist society is also concerned about its people and cares for those who cannot care for themselves. The number of social services, however, does not match that of a socialist country. Political Foundations of Capitalism The political system most frequently associated with capitalism is democracy. Nations that practice democracy believe that political power should be in the hands of the people. There is usually more than one political party from which to choose representatives to run the government in a democratic country. People in a democracy are free to elect those candidates who agree with their philosophy on how the government and the economy should be run. The United States and Japan are two examples of countries that are classified as capitalist and have a democratic form of government. Communism Communism is a social, political, and economic philosophy in which the government, usually authoritarian, controls the factors of production. There is no private ownership of property or capital. The theory behind these practices is that goods owned in common (by the government representing the community as a whole) are available to all as needed and society is classless. Characteristics of a Communist Country In a communist country all people who are able to work are assigned jobs. Theoretically, there is no unemployment. Employees who do not go to work continue to get paid under this system. The government decides the type of schooling people will receive and also tells them where to live. Housing accommodations are assigned according to need. Food and housing subsidies keep prices low, so everyone has a place to live and food to eat. Medical care is free. How ever, there is a little or no economic freedom associated with communism. In this system there is no financial incentive for people to increase their productivity. There are very few communist countries left in the world today. The economies of such countries have collapsed in recent years. The few countries that can still be classified as communist include Cuba and North Korea. China, which is still politically dominated by a communist party, is allowing more and more free enterprise practices. Vietnam and Laos are also following that path. Socialism Socialism is a term that originally referred to a system on its way to the communist ideal of a classless society. Today, most countries that are defined as socialist have democratic political institutions. They differ from capitalist nations in the increased amount of government involvement in the economy. The main goal is to meet basic needs for all and to provide employment for many. Characteristics of Socialist Countries Socialist countries tend to have more social services to ensure a certain standard of living for everyone. Medical care is free or low cost, as is education. These countries have systems for pensions and elderly care. Businesses and individuals pay much higher taxes than those in capitalist countries, so all contribute to financing government services. The Role of Government in Socialist Countries The government runs key industries and makes economic decisions. State-controlled, noncompetitive companies are often found in industries such as telecommunications, natural resources (such as gas, water, and power), Chapter 3 Political and Economic Analysis 57

11 Transforming an Economic System: The Reunification of Germany East Germany was a country of 18 million people whose standard of living, technology, and productivity had fallen far behind that of its western counterpart during more than four decades of Soviet Union-imposed command economics. After the reunification, wages in eastern Germany quickly rose to near the western levels. Western Germany s welfare and pension systems and its business regulations were extended to the east, despite warnings that they were too demanding for the east s lower level of economic development. A Tough Road to the West Nearly 17 percent of eastern Germans are still officially unemployed, compared with about 9 percent in western Germany. Rethinking eastern Germany s economy became urgent when the European Union (EU) included ten former Soviet satellite countries that had also converted to a market economy. Many Germans fear that vigorous, cheap competition from Poles, Czechs, and other new EU citizens will further harm eastern Germany s economy, increase its reliance on government handouts, and weigh down the overall German economy. About four percent of western Germany s gross domestic product is transferred to the east every year, a massive drain on the nation s finances. What can the German government do to fight competition from other new members of the EU? Go to the Marketing Essentials OLC through glencoe.com to find a project on German reunification. transportation, and banking. Canada, Germany, and Sweden are generally characterized as having socialist elements in their economies. Economies in Transition The breakup of the former Soviet Union probably provides the best example of societies making the difficult change from command to market economies. Most Eastern European countries that were once communist satellites have moved toward global market economies and more democratic forms of government. This means that the state-owned industries have been privatized in many of these nations. Privatization refers to the process of governments selling government-owned businesses to private individuals or businesses. This process generates much-needed revenue for the governments involved. It also 58 UNIT 2 ECONOMICS glencoe.com Stefan Sauer/dba/Landov

12 demonstrates a high level of commitment to making the transition to a market system. A Move Toward Privatization Today many socialist countries are selling some of their state-run businesses to help balance their budgets as the costs of national health care, unemployment, and retirement programs soar. Great Britain has sold its national phone company, national steel company, national sugar com pany, and several others. Another example of such a transfer, also called privatization, is British Airways. Since its privatization in 1987, the company has been increasing exponentially and has become Europe s number-one airline. These sales generated approximately $63 billion for Great Britain. Developing Economies Developing economies are mostly poor countries with little industrialization that are trying to become more prosperous and develop their infrastructure. Much of their success depends on improving the education levels of their labor force and on directing and using foreign investment efficiently. Chad, a country in central Africa, is a good example of this situation. It is a traditional economy based on agriculture and farming. Cotton, cattle, and gum arabic are its primary exports. However, with an oil field and pipeline project paid for by foreign investors, Chad has begun to develop its oil reserves for export. This investment will help generate much-needed funds for this poor nation to use to improve its infrastructure and develop its labor resources. Key Terms and Concepts 1. Explain how the infrastructure of a country can be related to the factors of production. 2. What three broad categories do economists use to classify all types of economic systems? 3. In which economic system does the government let the market answer the three basic economic questions? Academic Skills Math 4. In a country with a population of 290,342,554, how many people would be considered below the poverty line if the percentage in that category was 12.7 percent? Social Studies/Civics and Government 5. Write a letter to a pen pal in a socialist country to learn more about that country s economic and political system. Be sure to include pertinent questions about taxes, as well as social services for its residents. Numbers and Operations: Percents A percent is a ratio comparing numbers to 100. To convert percents to decimals, move the decimal point two places to the left. 1. To solve the problem, convert the percent to a decimal number. 2. Multiply 290,342,554, the country s population, by that decimal number to find the number of people below the poverty line. For help, go to the Math Appendix located at the back of this book. Check your answers at the Marketing Essentials OLC through glencoe.com. glencoe.com Chapter 3 Political and Economic Analysis 59

13 SECTION 3.2 Understanding the Economy READING GUIDE BEFORE YOU READ Predict What do you think constitutes a healthy economy? OBJECTIVES List the goals of a healthy economy Explain how an economy is measured Analyze the key phases of the business cycle KEY TERMS productivity gross domestic product (GDP) gross national product (GNP) inflation consumer price index (CPI) producer price index (PPI) business cycle expansion recession depression recovery ACADEMIC VOCABULARY You will find these words in your reading and on your tests. Make sure you know their meanings. invest method THE MAIN IDEA Aspects of an economy such as consumers, businesses, and governments affect the economy and marketing decisions. GRAPHIC ORGANIZER Draw a chart like the one below and use it to identify the key economic measurements. Economic Measurements Labor Productivity Go to the OLC through glencoe.com for printable graphic organizers, Academic Vocabulary definitions, and more. ACADEMIC STANDARDS English Language Arts NCTE 1 Read texts to acquire new information. Social Studies NCSS 7 Production, Distribution, and Consumption: how people organize the production, distribution, and consumption of goods and services Cause and Effect Note how economic measurements affect each other and their influence on business cycles. The Economy and Marketing If you are a marketer and you want to perform a useful SWOT analysis (see Chapter 2), you need to consider the economic factors that will influence your marketing planning. An understanding of how to measure an economy and what factors contribute to economic strength or weakness is essential. It is only then that you can appreciate how the economy, consumers, businesses, and government influence each other. 60 UNIT 2 ECONOMICS

14 When Is an Economy Successful? A healthy economy has three goals: increase productivity, decrease unemployment, and maintain stable prices. All nations analyze their economies to keep track of how well they are doing. This analysis allows businesses, consumers, and governments to make appropriate economic decisions. Economic Measurements Accurate information about an economy is essential to the whole process. The key economic measurements that nations routinely use to determine their economic strength are labor productivity, gross domestic product, gross national product, standard of living, inflation rate, and unemployment rate. Labor Productivity Productivity is output per worker hour that is measured over a defined period of time, such as a week, month, or year. Businesses can increase their productivity in a number of ways. They can invest in new equipment or facilities that allow their employees to work more efficiently. Providing additional training or financial incentives can also boost staff productivity. Businesses can also reduce their work force and increase the responsibilities of the workers who remain. This makes an organization more financially efficient and more effective. Higher productivity improves a company s profit. Specialization and division of labor are key concepts related to increasing productivity. An assembly line is an example of specialization and division of labor whereby each part of a finished product is completed by a person who specializes in one aspect of its manufacturing. The theory behind this method of production is that the work can be completed faster and more efficiently when people specialize in their respective areas. Gross Domestic Product Most governments study productivity by keeping track of an entire nation s production WHAT IS PRODUCED WHERE Toyota, a Japanese car manufacturer, produces cars in Japan that are exported and sold in the United States. Toyota has also built factories in North America. If you buy a car manufactured by Toyota in Alabama, is this car part of the U.S. GDP? Is the same car also part of the U.S. GNP? Chapter 3 Political and Economic Analysis 61

15 output. Today the principal way of measuring that output in the United States is gross domestic product. Gross domestic pro duct (GDP) is the output of goods and services produced by labor and property located within a country. The U.S. Bureau of Economic Analysis publishes a report on the United States GDP. According to its 2006 report, the GDP grew 3.3 percent that year. Total output was more than $13 trillion. The GDP is made up of private investment, government spending, personal spending, net exports of goods and services, and change in business inventories (see Figure 3.1). Private investment includes spending by busi nesses for things like equipment and software, as well as home construction. Gov ernment spending includes money spent by local, state, and federal governments. Personal spending includes all con sumer expenditures for goods and services. Expanding inventories show that businesses are producing goods that are being stored in their warehouses that adds to the GDP. Inventories that are shrinking indicate that people are buying more than what was actually produced, so you subtract that figure from the GDP. As a review, here is the calculation for GDP: Add private investment, government spending, and personal spending, then you either add a trade surplus or subtract a trade deficit and you either add expanding inventories or subtract shrinking inventories. Since 1991, the United States has been using GDP as its primary measurement of productivity. Before 1991, it used a measure ment called gross national product. Gross national product (GNP) is the total dollar value of goods and services produced by a nation, including goods and services produced abroad by U.S. citizens and companies. Note the difference between GNP and GDP: With the GNP, it is not where the production takes place but who is responsible for it. For example, Ford is a U.S. corporation that has a plant in England. The portion of Ford s production that occurs in England is included in the U.S. GNP, but not in its GDP. Standard of Living A country s standard of living is a 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. To calculate the standard of living, you divide the GDP or GNP of a country by its population to get the per capita GDP or GNP. Most industrialized nations enjoy a high standard of living because they have a high level of production. Some marketers also look at additional factors to get a broader picture of a nation s standard of living. Since some countries provide more in terms of social services for their citizens, social benefits, such as free education and health care provided by the government may be reviewed. Number of households per 1,000 inhabitants with durable goods, such as washing machines, refrigerators, dishwashers, and autos, can be included in the analysis. Inflation Rate Inflation refers to rising prices. A low inflation rate (1 to 5 percent each year) is good because it shows that an economy is stable. Double-digit inflation (10 percent or higher) devastates an economy. When inflation gets that high, money loses its value. The period from the mid-1960s to the early 1980s was a highly inflationary period. Prices tripled in the United States during that time. People who live on a fixed income such as a monthly Social Security check are especially hurt by high inflation. Controlling inflation is one of a government s major goals. When inflation starts to go up, many governments raise interest rates to discourage borrowing money. The result is a slowdown in economic growth, which helps to bring inflation down. Two measures of inflation used in the United States are the consumer price index and the producer price index. The consumer price index (CPI) measures the change in price over a period of time of some 400 specific retail goods and services used by the average urban household. It is also called the cost of living index. Food, housing, utilities, 62 UNIT 2 ECONOMICS

16 3.1 The Gross Domestic Product The United States GDP GDP, or gross domestic product, is the output of goods and services produced by labor and property located within a country. Here is a look at what made up the U.S. economy in Why is consumer confidence so important to the United States GDP? 15.7% Private Investment is the smallest of the three segments. Investment by businesses is critical to the overall health of the economy. 18.6% Government Spending includes everything the government spends money on: entitlements (Social Security, Medicare, veterans benefits), defense (weapons, military operations), discretionary spending (NASA, Park Service), and interest payments on the national debt (the deficit). The deficit: The federal government usually has to borrow money to pay its bills. For example, during the 2003 calendar year, it borrowed $395 billion, which amounts to 2.8 percent of the GDP. 70.4% Personal Spending is the foundation of the economy. Consumer spending includes almost everything people purchase (from a cup of coffee to medical insurance). This is why consumer confidence is so important. Confident consumers spend more money. Note If you are saying, But this adds up to more than 100 percent, you are correct. Two items can shrink the economy s total production: imports and diminishing inventories. When we import more than we export, the resulting trade deficit is subtracted from the GDP. Expanding inventories add to the GDP. Shrinking inventories subtract from the GDP. Private Investment is the smallest Private Investment 15.7% / $1.67 trillion Government Spending includes everything Government Spending 18.6% / $2.06 trillion Personal Spending is the foundation Personal Spending 70.4% / $7.75 trillion Go to the Marketing Essentials OLC through glencoe.com to find a project on the GDP. glencoe.com Chapter 3 Political and Economic Analysis 63

17 transportation, and medical care are a few of its components. The core CPI excludes food and energy prices, which tend to be unpredictable. The producer price index (PPI) measures wholesale price levels in the economy. It is often a trendsetter, as producer prices generally get passed along to the consumer. When there is a drop in the PPI, it is generally followed by a drop in the CPI. Unemployment Rate All nations chart unemployment, or jobless 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. This is true because when more people work, there are more people spending money and paying taxes. Businesses and government both take in more money, and the government does not have to provide as many social services. Other Economic Indicators and Trends The Conference Board provides additional indicators to help economists evaluate the performance of the U.S. economy. The Conference Board is a private business research organization that is made up of businesses and individuals who work together to assess the state of the economy. Three Conference Board indicators are the consumer confidence index, the consumer expectations index, and the jobs index, which measures consumers perceptions regarding the number of jobs available. Consumers are polled to see how they feel about personal finance, economic conditions, and buying conditions. Retail sales are studied to see if consumer confidence polls match consumer actions in the marketplace. Along those same lines, the rate of housing starts is reviewed, as are sales of trucks and autos. These are big expenditures that tend to be affected by the economy and interest rates. Wages and new payroll jobs provide additional information about the strength of the economy at any given point in time. When everyone is employed, supply and demand theory predicts that wages should increase due to the shortage of workers. Economists study these factors, because they may affect inflation and other economic indicators. The Business Cycle History shows that sometimes an economy grows, which is called expansion, and at other times it slows down (contraction). These recurring changes in economic activity are called the business cycle (see Figure 3.2). The business cycle includes the following key phases: expansion, recession, trough, and recovery, at which time expansion begins again. Expansion is a time when the economy is flourishing, sometimes referred to as a period of prosperity. Nationwide there is low unemployment, an increase in the output of goods and services, and high consumer spending. This is a good time for new businesses to start up or expand their operations. Expansion continues until it reaches a peak. A peak signifies the end of expansion and the beginning of a recession. A recession is a period of economic slowdown that lasts for at least two quarters, or six months, according to financial experts. The National Bureau of Economic Research (NBER) defines a recession as a significant decline in activity spread across the economy, lasting more than a few months. During a recession, companies reduce their workforces and consumers have less money to spend. Since consumers are spending less, producers make fewer goods and services. Research and development (R&D) is cut back, and future plans for expanding busi ness operations are generally put on hold. Recessions can end relatively quickly or last for a long time. According to the NBER, a reces sion begins immediately after the economy reaches a peak of activity and ends as the economy reaches its trough. A trough is when the economy reaches its lowest point in a recession, after which economic activity begins to rise. A depression is a period of prolonged recession. During a depression, it becomes nearly impossible to find a job, and many businesses are forced to shut down. During a depression, consumer spending is very low, 64 UNIT 2 ECONOMICS

18 3.2 The Business Cycle The Four Key Phases of the Cycle Throughout history, economies have followed a pattern of expansion and contraction called the business cycle. There are four phases in the business cycle: expansion (ended by a peak), recession, trough, and recovery. The length and intensity of each of the phases depends on many factors such as wars, natural disasters, and industrial innovation. In which phase is the United States today? Recovery During a recovery, the economy begins to grow again. Jobs are created and consumers begin to spend. With greater demand, the production of goods and services increases. This phase may last a long time. Trough Expansion During an expansion (prosperity), unemployment is low, and consumer confidence and spending are high. Businesses prosper and invest in new product development and research and development. A peak marks the end of this phase and the beginning of a recession. A trough is the low point in the business cycle, marking the transition from recession to recovery. During a trough, the economy stops slowing and may show signs that a recovery is near. Recession During a recession, the economy slows. Businesses lay off workers. Consumer confidence and spending are low. With little demand, the production of goods and services decreases, and businesses have little money to invest. A depression is a period of prolonged and deep recession. Go to the Marketing Essentials OLC through glencoe.com for a project on the business cycle. glencoe.com Chapter 3 Political and Economic Analysis 65

19 China Anxiously Seeks a Soft Economic Landing After a decade with the economic throttle wide open, China is overheating, and the country s leaders are grappling with ways to slow the breakneck growth without choking it off. This is difficult for China s leaders, who are fairly new to the market economy game and who lack many of the finely tuned policy tools available to central bankers in the West and in Japan. Prime Minister Wen Jiabao has sought to assure foreign investors that China is taking significant steps to achieve a soft landing. The global recovery now depends on China as one of its twin engines, along with the United States. A hard landing a steep decline in economic growth leading to higher urban unemployment and a sharp drop in imports would rattle economies across Asia as well as around the world. Many Asian nations now depend heavily on selling to China, especially after China s overall imports jumped 40 percent in The Chinese accounted for a third of all the growth in Japan s exports, and a similar share of South Korea s, and they took two-thirds of the growth in Taiwan s exports. A sharp slowing of growth in China would hit those economies hard. How do you classify China politically and economically? What is its new role in the global economy? Go to the Marketing Essentials OLC through glencoe.com to find a project on China s economy. unemployment is very high, and production of goods and services is down significantly. Poverty results because so many people are out of work and cannot afford to buy food, clothing, or shelter. The Great Depression of the early 1930s best illustrates this phase of the business cycle. Recovery is the term used to signify a period of renewed economic growth following a recession or depression. This is where the cycle begins again with economic expansion. The GDP begins to increase. During this stage, business picks up, people find jobs, and the demand for goods increases. Thus, recovery is characterized by reduced unemployment, increased consumer spending, and moderate expansion by businesses. Periods of recovery differ in length and strength. Factors That Affect Business Cycles Business cycles are affected by the actions of businesses, consumers, and the government. In turn, businesses, consumers, and the government are affected by business cycles. Businesses tend to react to business cycles by expanding their operations during periods of recovery or expansion and curtailing their operations during periods of recession. During an expansion they may invest in new properties, equipment, and inven tories, and hire more employees. When the economy moves into a recession, businesses may lay off workers. Businesses also cut back inventories to match lowered demand for products in a recession or depression. This has a ripple effect in the economy as business suppliers lose revenue. 66 UNIT 2 ECONOMICS glencoe.com

20 During a period of recession, consumers biggest fear is losing their jobs; the other big fear is a decrease in wages. These fears result in a loss of consumer confidence in the economy, which reduces consumer spending. Reduced consumer spending causes businesses to reduce their operations in response to lower demand. The opposite is true during periods of prosperity and recovery. During those periods, consumers are more optimistic. They spend more money on material goods and luxury items. Businesses will also respond by producing more goods. This cycle shows how important consumers are to an economy consumer spending accounts for more than two-thirds of the U.S. GDP. Government s Influence Over Business Cycles A government influences business cycles through its policies and programs. Taxation has a strong bearing on what happens in an economy. As the government requires more money to run programs, higher taxes are needed. When taxes are raised, businesses and consumers have less money with which to fuel the economy. When the economy needs a boost, the government may reduce interest rates, cut taxes, or institute federally funded programs to spark a depressed economy. When an economy worsens, the Federal Reserve generally responds by lowering interest rates to encourage businesses and consumers to spend. Mortgage rates are low because the commercial banks prime lending rate reflects the Fed s funding rate. For example, when the Federal Fund rate was at one percent, the prime lending rate was around four percent, and mortgage rates were between five and six percent. If inflation becomes a problem, interest rates might be increased to discourage buying on credit. Another action a government can take to spur economic growth is illustrated by Japan s decision to hand out free shopping coupons to its citizens. In 1999, Japan slashed income tax rates and distributed nearly $6 billion in shopping coupons to encourage people to spend. The government took these dramatic actions to spur consumption and revive an economy that was in its worst recession in 50 years. Key Terms and Concepts 1. How can businesses increase productivity? 2. Explain the difference between GNP and GDP. 3. What three factors affect business cycles? Academic Skills Math 4. If a country s GDP is $10 billion and its population is 250,000, what is its per capita GDP? Social Studies/Civics and Government 5. Write a short newspaper article regarding the current U.S. economy and why teenagers should understand economic indicators. Numbers and Operations: Representing Large Numbers Numbers can be written in several different ways, all having the same value. 1. To solve the problem, write the country s GDP as $10,000,000, Divide that number by the country s population to find the per capita GDP. For help, go to the Math Appendix located at the back of this book. Check your answers at the Marketing Essentials OLC through glencoe.com. glencoe.com Chapter 3 Political and Economic Analysis 67

21 OLIVIER TRAVERS INTERNET MARKETING CONSULTANT PUBLISHER, THEENDOFFREE.COM Creativity, sales ability, tenacity, personal organization, and time and project management skills. What do you do at work? I typically act as the hub of communication between team members and contractors who handle marketing, development, and design. Most clients already have an Internet presence they want to grow or improve. I help clients determine what types of technical services they require, and in many cases, which vendors will be able to provide the best and most effi cient services. I have a background in sales and channel marketing so I m always interested in helping companies set up partnerships and affi liate programs, as well as launch and grow outbound sales efforts. What skills are most important to you? Salesmanship, listening skills, empathy, self-motivation and autonomy, and the ability to keep learning on the fl y. Nothing beats working as a sales rep before getting into marketing and consulting. It gives you a fi rm grasp of how customers think, what a sales cycle is, how to close a sale, and it forces you to be pragmatic and realistic. Courses marketing, general business Degrees High School, BA, or MBA Marketing careers often begin with entry-level sales positions in companies of all types and sizes. Growth to increase faster than average for the next ten years. Source: Occupational Outlook Handbook What is your key to success? Personal networking, providing value to people who will partner with me or will send me leads in the future. Also, the ability to connect the dots between various disciplines: marketing, sales, business operations, and online technology. How does working as a sales representative prepare you for a career in marketing? Go to the Marketing Essentials OLC through glencoe.com to find a career-related activity. 68 UNIT 2 ECONOMICS glencoe.com

22 CHAPTER 3 REVIEW SECTION 3.1 An economy is how a nation chooses to use its resources to produce and distribute goods and services to provide for the needs and wants of its people. The four factors of production are land, labor, capital, and entrepreneurship. Due to the possibility of scarcity, all nations must answer three fundamental economic questions: what will be produced, how will it be produced, and who should get what is produced. Capitalism, socialism, and communism encourage different economic systems. SECTION 3.2 The characteristics of a healthy economy are high productivity, stable prices, and low unemployment. Economic indicators include productivity, gross domestic product (GDP), standard of living, CPI, consumer confidence, and unemployment rates. The key phases of the business cycle are expansion, recession, trough, and recovery. Economic business cycles affect businesses, consumers, and governments. 1. On a sheet of paper, use each of these key terms and academic vocabulary words in a written sentence. Key Terms economy (p. 52) resources (p. 53) factors of production (p. 53) infrastructure (p. 53) entrepreneurship (p. 53) scarcity (p. 54) traditional economy (p. 54) market economy (p. 55) command economy (p. 55) productivity (p. 61) gross domestic product (GDP) (p. 62) gross national product (GNP) (p. 62) inflation (p. 62) consumer price index (CPI) (p. 62) producer price index (PPI) (p. 64) business cycle (p. 64) expansion (p. 64) recession (p. 64) depression (p. 64) recovery (p. 66) Academic Vocabulary approach (p. 52) theory (p. 57) invest (p. 61) method (p. 61) 2. What is an economy? (3.1) 3. Name the factors of production. (3.1) 4. List the types of economies. (3.1) 5. Explain the concept of scarcity. (3.1) 6. Explain the three economic systems. (3.1) 7. What is capitalism? (3.1) 8. List three goals of a healthy economy? (3.2) 9. List at least three economic indicators. (3.2) 10. Describe the phases of a business cycle. (3.2) 11. Describe two ways governments infl uence business cycles. (3.2) Chapter 3 Political and Economic Analysis 69

23 CHAPTER 3 REVIEW 12. Workplace Skills Human Relations Assume you work in a bank and an elderly couple on a fi xed income asks you why the interest rate is so low on their savings account. How would you explain the basis for fl uctuations in interest rates? 13. Technology Applications Compare Two Economic Systems Select a foreign country and compare its economic system with that of the United States. Use the Internet to research all economic aspects of this country. If you lived in that country, how different would your life be? Why? Use a wordprocessing program and presentation software to prepare an oral report for your class. 14. Math Practice Fixed Income Madeline, a retiree, lives on a fi xed income of $1,200 a month. Each month she spends $450 for rent, and she budgets $150 for food, $50 for clothing, and $40 for various needs. She deposits the money that is left over in her savings account. How much money does she put into her savings each month? If her rent is increased by ten percent, how much would she have for savings? Numbers and Operations: Computation To find the amount deposited, add the expenses, and then subtract their total from income. To find the amount deposited after the rent goes up, find 10 percent of the rent and subtract that number from the original amount deposited. For help, go to the Math Appendix located at the back of this book. 15. English Language Arts/Writing Economic Analysis Research your community s economy and write a threeparagraph essay about it. Describe its industries. Discuss whether these industries are growing or declining and why. Then predict where the economy is headed. 16. What Is Your Role in the Economy? Consider the part you play in the U.S. economy. Consider the following questions: What goods and services do you consume? What labor do you provide? What are some of your rights as a citizen and consumer? What are some of your responsibilities? 17. Economic Systems Select a foreign country that either has gone through a major transformation from a command economy to a market-oriented economy or is an emerging country becoming industrialized. What obstacles did the nation overcome? What is its current economic situation? What is its future economy? Activity Write a three-page report. Share your fi ndings in an oral presentation. 70 UNIT 2 ECONOMICS

24 CHAPTER 3 REVIEW 18. What Is the Current State of the Economy? Visit the Web site for the United States Department of Commerce to fi nd current information on economic indicators. Prepare a list of the economic indicators that are provided at this Web site. 1. Directions Choose the letter of the best answer. Write the letter for the answer on a separate piece of paper. If a country s per capita GDP is $42,000 and the total population is 230,000, what is the total GDP of the country? A $9.66 billion B $5.47 billion C $8.45 million D $10.23 billion 2. Directions Choose either True or False as the answer. Write the letter for the answer on a separate piece of paper. GDP is the total dollar value of goods and services produced by a nation. T F Test-Taking Tip When answering multiple-choice questions, ask yourself if each option is true or false. Role Play Marketing Intern Situation Assume the role of intern for a marketing company. The company owner is a believer in community service, and has created a company community service program. Part of the program is an educational lecture series. Your supervisor (judge) must give a presentation about capitalism, communism, and socialism as political philosophies and their influence on world economies. Your supervisor (judge) has asked you for input in preparing the presentation. Activity You are to prepare an outline for your supervisor (judge) that includes pertinent information about each type of economic system and examples of countries with each type. You will then review your outlined material with your supervisor (judge). Evaluation You will be evaluated on how well you meet the following performance indicators: Explain the types of economic systems. Determine the relationship between government and business. Explain the concept of competition. Explain the concept of economic resources. Prepare simple written reports. For more information and DECA Prep practice, go to the Marketing Essentials OLC through glencoe.com. glencoe.com Chapter 3 Political and Economic Analysis 71