Chapter 02 – Understanding Economics and How It Affects Business
PPT 2-49
Consumer Price Index
After discussing hyperinflation in the previous slide, students
can appreciate the importance of monitoring a nation’s inflation
rate to prevent it from spiraling out of control. As inflation is
increasing, it acts as a hidden tax increase eroding the purchas-
ing power of the population.
PPT 2-50
Price Index
PPT 2-51
Productivity
PPT 2-55
National Deficits, Debt, and Surplus
PPT 2-56
What’s Our National Debt?
1. Discuss with the class the size of the national debt and
what impact this has on the economy. (Increased bor-
rowing by the government takes money out of the con-
sumer and business markets, impacting the cost of bor-
rowing.)
2. The national debt has continued to increase roughly $4
billion per day since September 28, 2007.
3. On a per person basis, each citizen’s share of this debt
is roughly $46,000.
4. A family of four shares the debt burden of about
$184,000.
PPT 2-57
What Can a ___ Dollars Buy?
1. Before showing the slide, ask students, “If you were a
rich, generous person who wanted to treat President
Obama and his 2,000 Secret Services members to an
Egg McMuffin every morning, how many days could
you treat them if you decided to spend a million dol-
lars? A billion dollars? A trillion dollars?”
2. Students are usually surprised to see how much a mil-
lion, billion, or trillion dollars can buy.
Chapter 02 – Understanding Economics and How It Affects Business
PPT 2-58
Monetary Policy
PPT 2-59
Progress Assessment
1. The three key economic indicators are the Gross Do-
mestic Product (GDP), the unemployment rate, and the
price indexes. The U.S. GDP is approximately $14 tril-
lion. Our high GDP allows citizens to enjoy a high
standard of living. In 2000, the U.S. reached it lowest
unemployment rate in over 30 years. However, the re-
cent recession could lead unemployment to at least 10
percent. The consumer price index (CPI) has not risen
to high levels keeping inflation in check. However the
recession has caused fears of deflation.
2. A recession is two or more consecutive quarters of de-
cline in the GDP. A depression is a severe recession,
usually accompanied by deflation.
3. Fiscal policy refers to the government’s efforts to keep
the economy stable by increasing or decreasing taxes or
government spending.
4. Monetary policy is the management of the nation’s
money supply and interest rates. The Federal Reserve
controls the money supply in the United States.
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lecture
links
lecture link 2-1
INDIA’S UPCOMING ERA OF GROWTH
By all accounts, India is destined for massive growth over the next decade. Yet India is always
measured in the shadow of its neighbor and fellow burgeoning economic superpower, China. After all, by
2030 the two nations are estimated to account for 34% of the globe’s total economic output. Experts as-
sert that China will be on top, however, and is on target to overtake the U.S. with 24% of world GDP by
the same year.
But China’s massive growth could ultimately be hindered by its one-child policy. With popula-
tion escalation stunted, the pool of Chinese citizens eligible for work will shrink just as the nation surges
towards GDP dominance. India, on the other hand, will experience one of the fastest growths of working-
age populations in the world between 2010 and 2050. India’s upcoming spike of work-eligible citizens
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lecture link 2-2
THE GRADUAL RETURN OF AMERICAN OPTIMISM
The debate over the Bush-era tax cuts raged in Congress for months, ending at last in December
2010 with a compromise between the Obama administration and Republicans. According to the new leg-
islation, the tax laws instated by President Bush will continue for two more years along with a number of
provisions from the 2009 stimulus package. Critics fear the extension of the cuts will deprive the govern-
ment of the cash it so desperately needs to shrink the deficit. But for big business leaders, the tax breaks
and stimulus expansion are cause for newfound optimism.
lecture link 2-3
A NEW CROP OF CONSUMERS IN AFRICA
While a great deal of focus has been given to burgeoning economic superpowers like India and
China, Africa has a growing middle class that rivals both those countries. Thanks to open markets and
greater political stability, economists estimate Africa’s middle class (those who spend $2-20 a day) makes
up 34% of the continent’s population. A new study shows that this 313-million strong middle class, which
has grown 60% over the last decade, is upwardly mobile and in the market for foreign goods.
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and chaos that has defined Africa for decades is now in the past, leaving the future open for more
political freedom and economic growth.iii
lecture link 2-4
THE CIRCULAR FLOW MODEL
(PPT 2-23 presents this simplified Circular Flow Model.)
Each of the factors of production mentioned in the text has a price. To use land, a business must
make rent or mortgage payments (simplified as “rent.”) Labor must be paid salary or wages. The build-
ings, equipment, production lines, etc. (capital) are financed by paying interest. Finally, the entrepreneur
expects to earn a profit from using his or her entrepreneurship. However, this resource payment is not
guaranteed. If costs exceed income, the business may suffer a loss. (Some newer versions of this model
include “knowledge” as a factor of production; older versions usually don’t.)
Businesses demand resources in order to produce products and services. In a capitalist economy,
the households own the factors of production and must be compensated. This income flows back into the
households. The prices of resources are set by the interaction of supply and demand.
lecture link 2-5
THE ECONOMIC IMPACT OF THE 2010 OIL SPILL
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But despite what the oil spill’s effect on the national economy ultimately amounts to, the local impact of
the spill on the Gulf region is nothing short of catastrophic. Approximately 33% of federal waters in the
Gulf were closed off to commercial fishing, crippling the region’s $2.4 billion commercial fishing indus-
try.
lecture link 2-6
OTHER ECONOMIC INDICATORS
In addition to the key economic indicators mentioned in the text—CPI, GDP, unemployment
rate—there are other indicators measure different segments of the economy. Below are some of the more
important ones.
KEY ECONOMIC INDICATORS
Producer Price Index Monthly index that measures changes in wholesale prices
Consumer Confidence Index Measures the degree of consumer confidence in the econ-
omy, and can indicate an upcoming increase or decrease in
economic activity
THE “BEIGE BOOK”
Many economists use the Federal Reserve Board “Beige Book” to detect trends in the economy.
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TIMING OF THE INDICATORS
Economic indicators can further be classified by the timing of the indicator.
Some indicators are lagging, meaning that they don’t change direction until a few quarters after
the economy does. An example is the unemployment rate. Unemployment tends to increase for two or
three quarters after the economy starts to improve.
lecture link 2-7
NEW ECONOMIC MEASURES
Michael Gelobter, the Executive Director of Redefining Progress, doesn’t believe we are using
the right measures of progress in the United States. He thinks that GDP, unemployment levels, and price
indexes don’t capture real economic progress or decline. He prefers what he calls the genuine progress
indicator (GPI). To other economic measures, he would add the three E’s: environment, economy, and
equity. Gelobter would look at GDP, but he would also measure prison time, heart attacks, and clear-cut
forests. Any increases would subtract from real progress, he believes. Furthermore, he would add to eco-
nomic growth if there were more volunteerism and more time spent with families.
lecture link 2-8
CHINA’S POTENTIAL REAL ESTATE BUST
Last year, Chinese banks lent a staggering $1.4 trillion, much of it going to the development of
skyscrapers and other commercial property. At the time, government leaders championed the economic
expansion. Now Chinese officials are trying to rein in commercial lending by raising the reserve require-
ments for the nation’s banks. Why the sudden change of heart? After years of unprecedented growth, fi-
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though, Chinese officials have only dissuaded banks from issuing further real estate loans rather than or-
dering them to halt any current or future construction projects. In fact, some Chinese officials balk that
claims of market saturation are overblown. In some cases, local governments are even spurring the
growth themselves. For instance, eastern Beijing government officials are hoping to add an additional 10
million square feet of office space this year, despite a 35% vacancy rate in the area.
lecture link 2-9
WHAT IS A DEPRESSION?
No one disputes the definition of a recession, and the economic downturn of 2008-2010 surely
qualified. Recessions have two handy definitions—two straight quarters of economic contraction, or when
the National Bureau of Economic Research makes the call.
Declaring a depression is much trickier.
• By one definition, it is a downturn of three years or more with a 10% drop in economic
output and unemployment above 10%.
• Another definition says a depression is a sustained recession during which the populace
has to dispose of tangible assets to pay for everyday living.
• Morici says a depression is a recession that “does not self-correct” because of fundamen-
tal structural problems in the economy, such as broken banks or a huge trade deficit.
• Or maybe a depression is whatever corporate America says it is.
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Before the 1930s, any serious economic downturn was called a depression or a “panic.” The term
“recession” didn’t come into common use until “depression” became burdened by memories of the 1930s.
When the economy collapsed again in 1937, people didn’t want to call that a new depression, and that’s
when the term “recession” was first used. According to Millsaps College professor Robert McElvaine,
“People also use ‘downward blip.’ Alan Greenspan once called it a ‘sideways waffle’.”viii
lecture link 2-10
CONTROLLING YOUR PERSONAL MONEY SUPPLY
Controlling your personal money supply is harder than you may think. In a recent study, nearly
half of those asked said they lose track of how they spend their pocket cash, on average more than $2,000
a year. The study was commissioned by the Visa credit card group, part of their campaign to get Ameri-
cans to use debit cards to manage money.