Chapter 02 – Understanding Economics and How It Affects Business
2-31
fast enough.
3. Socialist and communist countries have moved
toward CAPITALISM.
4. So-called capitalist countries tend to move toward
SOCIALISM.
5. No country is purely socialist or purely capitalist,
rather some MIX OF THE TWO SYSTEMS.
6. The result has been a BLEND of capitalism and
communism.
C. MIXED ECONOMIES are economic systems in which
some allocation of resources is made by the market
and some by government.
D. THE U.S. HAS A MIXED ECONOMY.
1. The role of government in many parts of the
economy is a matter of some debate.
2. For instance, the government has become the
largest employer in the U.S.
learning objective 5
Discuss the economic system of the United States, including the significance of
key economic indicators (especially GDP), productivity, and the business cycle.
VI. UNDERSTANDING THE U.S. ECONOMIC SYS-
TEM
A. KEY ECONOMIC INDICATORS
1. GROSS DOMESTIC PRODUCT (GDP)
a. GROSS DOMESTIC PRODUCT (GDP) is the
total value of final goods and services pro-
duced in a country in a given year.
b. Both domestic and foreign-owned companies
can produce goods and services included in
GDP.
Chapter 02 – Understanding Economics and How It Affects Business
2-32
PPT 2-37
Mixed Economies
MIXED ECONOMIES
2-37
LO 2-4
• Mixed Economies — Some allocation of resources
is made by the market and some by the government.
• Neither free-market nor command economies
have created sound economic conditions so
countries use a mix of the two economic systems.
PPT 2-38
Trending toward Mixed Economies
• Communist governments are disappearing.
TRENDING TOWARD MIXED
ECONOMIES
2-38
LO 2-4
• Socialist governments are
cutting back on social
programs, lowering taxes and
moving toward capitalism.
• Capitalist countries are
increasing social programs
and moving more toward
socialism.
REACHING BE-
YOND
our
borders
PPT 2-39
Economic Ex-
pansion in Africa
ECONOMIC EXPANSION
in AFRICA
2-39
• For much of the 20th century, focus has been placed
on Africa’s poverty levels.
• Over the last decade, 6 of the 10 fastest growing
countries have been African.
• Africa has outpaced the growth of East Asia, including
Japan.
• Experts hope that the younger generation of Africans
will take advantage of new opportunities.
TEXT FIGURE 2.4
Comparisons of Key Economic
Systems
This text figure compares capitalism, socialism, communism,
and mixed economies on five key elements.
test
prep
PPT 2-40
Test Prep
TEST PREP
2-40
• What led to the emergence of socialism?
• What are the benefits and drawbacks of
socialism?
• What countries still practice communism?
• What are the characteristics of a mixed economy?
Chapter 02 – Understanding Economics and How It Affects Business
2-33
c. A major influence on the growth of GDP is
how productive the workforce is.
d. GROSS OUTPUT (GO) is a measure of total
sales volume at all stages of production.
e. GO is considered a better indicator of the
business cycle.
2. THE UNEMPLOYMENT RATE
a. The UNEMPLOYMENT RATE is the number
of civilians at least 16 years old who are un-
employed and tried to find a job within the
prior four weeks.
b. There are four types of unemployment: fric-
tional, structural, cyclical, and seasonal (as
seen in Text Figure 2.5.)
c. The U.S. tries to protect those who are un-
employed because of recessions, industry
shifts, and other cyclical factors.
3. INFLATION AND PRICE INDEXES
a. THE PRICE INDEXES help measure the
health of the economy.
b. INFLATION is a general rise in the prices of
goods and services over time.
c. DISINFLATION is a situation in which price
increases are slowing (the inflation rate is de-
clining).
d. DEFLATION is a situation in which prices are
declining, occurring when countries produce
so many goods that people cannot afford to
buy them all.
e. STAGFLATION is a situation when the
Chapter 02 – Understanding Economics and How It Affects Business
2-34
PPT 2-41
Gross Domestic Product
GROSS DOMESTIC PRODUCT
2-41
LO 2-5
• Gross Domestic Product (GDP) — Total value of
final goods and services produced in a country in a
given year. As long as a company is within a
country
’
s border, their numbers go into the country
’
s
GDP (even if they are foreign-owned).
• When the GDP changes, businesses feel the
effect.
• Gross Output (GO) — A measure of total sales
volume at all stages of production.
PPT 2-42
The United States GDP
Source:WorldBank,www.worldbank.org,accessedOctober2014.
The UNITED STATES GDP
2-42
LO 2-5
PPT 2-43
Playing Catch Up
Source:WorldBank,www.worldbank.org,accessedOctober2014
.
PLAYING CATCH-UP
Countries Challenging the U.S. in GDP
2-43
LO 2-5
PPT 2-44
Unemployment
• Unemployment Rate — The percentage of
civilians at least 16-years-old who are unemployed
and tried to find a job within the prior four weeks.
UNEMPLOYMENT
2-44
LO 2-5
• Four Types of
Unemployment
1. Frictional
2. Structural
3. Cyclical
4. Seasonal
TEXT FIGURE 2.5
U.S. Unemployment Rate 1989–2014
This text figure shows the unemployment rate for the years
from 1989 to 2014.
PPT 2-45
U.S. Unemployment Rate
U.S. UNEMPLOYMENT RATE
2-45
* As of October 2014
LO 2-5
TEXT FIGURE 2.6
Four Types of Unemployment
This figure describes the four types of unemployment: fric-
tional, structural, cyclical, and seasonal.
PPT 2-46
Best and Worst Cities for a Job
Search
Source:MoneyMagazine,accessedOctober2014.
BEST and WORST CITIES
for a JOB SEARCH
2-46
Best
Washington, D.C.
San Jose, CA
New York, NY
Worst
St. Louis, MO
Detroit, MI
Miami, FL
LO 2-5
PPT 2-47
Inflation
INFLATION
2-47
LO 2-5
• Inflation — The general rise in the prices of goods
and services over time.
• Disinflation — When the price increases are slowing
(inflation rate declining).
• Deflation — Prices are declining because too few
dollars are chasing too many goods.
• Stagflation — Economy is slowing, but prices are
going up.
Chapter 02 – Understanding Economics and How It Affects Business
2-35
economy is slowing, but prices keep going up
anyhow.
f. CONSUMER PRICE INDEX (CPI)
i. The CONSUMER PRICE INDEX (CPI)
consists of monthly statistics that meas-
ure the pace of inflation or deflation.
ii. Some wages, rents, government benefits,
and interest rates are based on the CPI.
iii. CORE INFLATION is the CPI minus food
and energy costs.
g. The PRODUCER PRICE INDEX (PPI) is an
index that measures prices at the wholesale
level.
B. PRODUCTIVITY IN THE UNITED STATES
1. U.S. productivity has gone up in recent years be-
cause computers have made production faster.
2. The HIGHER PRODUCTIVITY is, the LOWER
COSTS are in producing goods and services,
and the lower prices can be.
3. The U.S. economy is a SERVICE ECONOMY—
very labor-intensive—creating productivity issues.
C. PRODUCTIVITY IN THE SERVICE SECTOR
1. Technologies may add to the quality of the ser-
vices but not to the OUTPUT PER WORKER
which is the definition of productivity.
2. New measures of productivity for the service
economy are needed to measure QUALITY as
well as QUANTITY of output.
D. THE BUSINESS CYCLE
Chapter 02 – Understanding Economics and How It Affects Business
2-36
lecture enhancer 2-6
OTHER ECONOMIC INDICATORS
In addition to the GDP, CPI, and unemployment indicators,
there are other economic indicators that can forecast changes
in the economy. (See the complete lecture enhancer on page
2.66 of this manual.)
lecture enhancer 2-7
HOW ACCURATE IS GDP?
Many components go in to creating the GDP. However, some
argue it’s not entirely accurate. (See the complete lecture en-
hancer on page 2.67 of this manual.)
PPT 2-48
Consumer Price Index
CONSUMER PRICE INDEX
2-48
LO 2-5
• Consumer Price Index (CPI) — Monthly statistics
that measure the pace of inflation or deflation.
• The government computes the costs of goods and
services (housing, food, apparel, medical care,
etc.) to see if they are going up or down.
• The wages, rent/leases, tax brackets, government
benefits and interest rates of some citizens are
based upon the CPI.
PPT 2-49
Producer Price Index
PRODUCER PRICE INDEX
2-49
LO 2-5
• Producer Price Index (PPI) — An index that
measures prices at the wholesale level.
PPT 2-50
Productivity
• Productivity in the U.S. has risen due to the
technological advances that have made
production faster and easier.
PRODUCTIVITY
2-50
LO 2-5
• Productivity in the
service sector grows
more slowly
because of fewer
technologies.
lecture enhancer 2-8
HONDA BECOMES AN AMERI-
CAN EXPORTER
After years of producing vehicles in the U.S., Honda has capi-
talized on the enhanced productivity here and has began ship-
ping out its cars. (See the complete lecture enhancer on page
2.67 of this manual.)
PPT 2-51
Productivity in the Service Sector
PRODUCTIVITY in the
SERVICE SECTOR
2-51
LO 2-5
• The higher the productivity, the lower the costs of
producing goods and services. This helps lower
prices.
• New technology adds to the quality of the
services provided, but not to the worker
’
s output.
• A new form of measurement needs to be created
to account for the quality as well as the quantity
of output.
Chapter 02 – Understanding Economics and How It Affects Business
2-37
1. BUSINESS CYCLES are the periodic rises and
falls that occur in economies over time.
2. Joseph Schumpeter identified FOUR PHASES
OF BUSINESS CYCLES:
a. In an ECONOMIC BOOM, there is strong
business activity.
b. A RECESSION is two or more consecutive
quarters of decline in the GDP.
c. A DEPRESSION is a severe recession, usu-
ally accompanied by deflation.
d. A RECOVERY occurs when the economy
stabilizes.
3. The goal of economists is to predict these fluctu-
ations, which can be very difficult.
4. Fluctuations in the economy are INEVITABLE.
5. The government uses FISCAL and MONETARY
policy to minimize these disruptions.
learning objective 6
Contrast fiscal policy and monetary policy, and explain how each affects the
economy.
E. STABILIZING THE ECONOMY THROUGH FISCAL
POLICY
1. FISCAL POLICY is the federal government’s ef-
forts to keep the economy stable by increasing or
decreasing taxes or government spending.
2. The first half of fiscal policy involves TAXATION.
a. HIGH TAX RATES may discourage small-
business ownership.
b. LOW TAX RATES would tend to give the
Chapter 02 – Understanding Economics and How It Affects Business
2-38
PPT 2-52
Business Cycles
BUSINESS CYCLES
2-52
LO 2-5
• Business Cycles — Periodic rises and falls that
occur in economies over time.
• Four Phases of Long-Term Business Cycles:
1. Economic Boom
2. Recession – Two or more consecutive quarters of
decline in the GDP.
3. Depression – A severe recession.
4. Recovery – When the economy stabilizes and
starts to grow. This leads to an Economic Boom.
lecture enhancer 2-9
WHAT IS A DEPRESSION?
There is a well-established definition for a recession. A de-
pression is, well, not so easy to define. (See the complete lec-
ture enhancer on page 2.68 of this manual.)
PPT 2-53
Fiscal Policy
FISCAL POLICY
2-53
LO 2-6
• Fiscal Policy — The federal
government
’
s efforts to keep
the economy stable by
increasing or decreasing taxes
or government spending.
• Tools of Fiscal Policy:
– Taxation
– Government Spending
Chapter 02 – Understanding Economics and How It Affects Business
2-39
economy a boost.
3. The second half of fiscal policy involves GOV-
ERNMENT SPENDING.
a. The NATIONAL DEFICIT is the amount of
money that the federal government spends over
and above the amount it gathers in taxes.
b. The NATIONAL DEBT is the sum of govern-
ment deficits over time.
c. The national debt of the U.S. is over $17
TRILLION.
4. One way to lessen the annual deficits is to CUT
GOVERNMENT SPENDING, but there is a contin-
uing need for social programs and for military
spending.
F. FISCAL POLICY IN ACTION DURING AN ECONOM-
IC CRISIS
1. President George W. Bush followed the basic
economic principles of free markets.
a. However, the economy plummeted and Presi-
dent Bush approved spending almost $1 trillion
to revive the failing economy.
b. President Barack Obama promised to spend
additional funds.
2. KEYNESIAN ECONOMIC THEORY is the theory
that a government policy of increasing spending
and cutting taxes could stimulate the economy in a
recession.
Chapter 02 – Understanding Economics and How It Affects Business
2-40
TEXT FIGURE 2.8
The National Debt
This text figure shows the national debt—the sum of govern-
ment deficits over time—for years 1980 to 2014.
PPT 2-54
National Deficits, Debt, and Surplus
NATIONAL DEFICITS, DEBT
and SURPLUS
2-54
LO 2-6
• National Deficit — The amount of money the federal
government spends beyond what it gathers in taxes.
• National Debt — The sum of government deficits
over time.
• National Surplus — When government takes in
more than it spends.
PPT 2-55
What’s Our National Debt?
WHAT’S OUR NATIONAL DEBT?
2-55
LO 2-6
• The National Debt has reached nearly $18 trillion.
• If $1 bills were stacked, the National Debt would
would stretch over 1,000,000 miles. The moon is
only 238,857 miles away.
• Follow the U.S. National Debt Clock here.
PPT 2-56
What Can a ____ Dollars Buy?
WHAT CAN a ____ DOLLARS BUY?
2-56
LO 2-6
• A million dollars can buy an Egg McMuffin and a
large coffee for President Obama and 2,000
Secret Service members every day for six
months.
• A billion dollars can buy Egg McMuffins and large
coffees for them for 489 years.
• A trillion dollars can buy Egg McMuffins and
large coffees for them for 488,992 years.
Chapter 02 – Understanding Economics and How It Affects Business
2-41
G. USING MONETARY POLICY TO KEEP THE ECON-
OMY GROWING
1. The FEDERAL RESERVE SYSTEM (THE FED) is
a semiprivate organization that decides how much
money to put into circulation.
2. MONETARY POLICY is the management of the
monetary supply and interest rates; it is controlled
by the Fed.
a. When the economy is booming, the Fed tends
to RAISE INTEREST RATES.
b. LOWERING INTEREST RATES encourages
more business borrowing.
c. Raising and lowering interest rates helps con-
trol the rapid ups and downs of the economy.
d. In 2010–2014, the Fed kept interest rates near
zero, but the economy remained sluggish.
3. The Federal Reserve also controls the MONEY
SUPPLY.
a. The MORE MONEY the Fed makes available
to businesspeople, the FASTER THE ECON-
OMY GROWS.
b. To SLOW THE ECONOMY, the Fed LOW-
ERS the money supply.
4. The economic goal is to keep the economy grow-
ing.
VII. SUMMARY
Chapter 02 – Understanding Economics and How It Affects Business
2-42
PPT 2-57
Monetary Policy
MONETARY POLICY
2-57
LO 2-6
• Monetary Policy — The management of the money
supply and interest rates by the Federal Reserve
Bank (the Fed).
• The Fed’s most visible role is increasing and
lowering interest rates.
– When the economy is booming, the Fed tends to
increase interest rates.
– When the economy is in a recession, the Fed
tends to decrease the interest rates.
Chapter 02 – Understanding How Economics Affects Business
2-43
PowerPoint slide notes
PPT 2-1
Chapter Title
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Understanding
Economics
and
How it Affects
Business
CHAPTER 2
PPT 2-2
Learning Objectives
LEARNING OBJECTIVES
1-2
1. Explain basic economics.
2. Explain what capitalism is and how free markets
work.
3. Compare socialism and communism.
PPT 2-3
Learning Objectives
LEARNING OBJECTIVES
1-3
4. Analyze the trend toward mixed economies.
5. Describe the economic system of the U.S., including
the significance of key economic indicators
(especially GDP), productivity and the business
cycle.
6. Contrast fiscal policy and monetary policy, and
explain how each affects the economy.
Chapter 02 – Understanding How Economics Affects Business
2-44
PPT 2-4
Matt Flannery
2-4
MATT FLANNERY
Kiva
• Co-founder of Kiva.org and
helps people in developing
countries get small loans.
• Microlending has been a
source of funding in the
developing world since the
1980s.
• Came up with the idea while
working in rural Africa.
PPT 2-5
Name That Company
NAME that COMPANY
1-5
This organization has administrative control over
the Florida Power and Light Company because
the United States wants to control potential
monopolies.
Name that organization!
Organization: Florida Public Service Commission
PPT 2-6
The Major Branches of Economics
The MAJOR BRANCHES of
ECONOMICS
2-6
LO 2-1
• Economics — The study of how society employs
resources to produce goods and services for
consumption among various groups and individuals.
• Macroeconomics — Concentrates on the operation
of a nation
’
s economy as a whole.
• Microeconomics — Concentrates on the behavior
of people and organizations in markets for particular
products or services.
This slide gives students insight into the definition of econom-
ics. When going over this definition it often helps to further
define the term resources. The term resources ties back into
Chapter 1 and includes the factors of production: land, labor,
capital, knowledge and entrepreneurship.
Chapter 02 – Understanding How Economics Affects Business
2-45
PPT 2-7
Resource Development
RESOURCE DEVELOPMENT
2-7
LO 2-1
• Resource
Development — The
study of how to increase
resources and create
conditions that will make
better use of them.
Businesses can contribute to an economic system by inventing
new products that increase the availability and development of
an economy’s resources.
PPT 2-8
Examples of Ways to Increase Re-
sources
EXAMPLES of WAYS to
INCREASE RESOURCES
2-8
LO 2-1
• New energy sources
– Hydrogen fuel
• New ways of growing
foods
– Hydroponics
• New ways of creating
goods and services
– Aquaculture
– Nanotechnology
PPT 2-9
Thomas Malthus and the Dismal
Science
THOMAS MALTHUS and
the DISMAL SCIENCE
2-9
LO 2-1
• Malthus believed that if the rich had most of the
wealth and the poor had most of the population,
resources would run out.
• This belief led the writer Thomas Carlyle to call
economics “The Dismal Science.”
• Neo-Malthusians believe there are too many
people in the world and believe the answer is
radical birth control.
Thomas Malthus believed that if people were left to their own
devices there would be chaos; therefore the government need-
ed to be heavily involved in controlling the economy. Mal-
thus’ ideas are still with us. Neo-Malthusian ideas of over-
population are prevalent in books such as Paul Ehrlich’s The
Population Bomb which contains ideas similar to those pre-
sented by Thomas Malthus 200 years ago