Download what is management

Other Teaching Tools
2.3
Video Notes
2.4
Brief Chapter Outline and Learning Goals
2.5
Lecture Outline and Lecture Notes
2.7
Career and Study Skills Notes
2.23
CAREER DEVELOPMENT: Career Exploration and Professional Help
2.23
STUDY SKILLS: Keys to Good Study Habits
2.24
Lecture Links
2.25
LECTURE LINK 2-1
Europe is Shrinking
2.25
LECTURE LINK 2-2
When Disaster Changes the Economic Rules
2.25
LECTURE LINK 2-3
Capitalism in Crisis
2.26
LECTURE LINK 2-4
Other Economic Indicators
2.28
LECTURE LINK 2-5
Controlling Your Personal Money Supply
2.29
Bonus Internet Exercises
2.30
BONUS INTERNET EXERCISE 2-1
Know Your History of Economics
BONUS INTERNET EXERCISE 2-2
Exploring the Gross Domestic Product 2.31
BONUS INTERNET EXERCISE 2-3
The Power of the Fed
Critical Thinking Exercises
2.30
2.32
2.33
CRITICAL THINKING EXERCISE 2-1
Applying Economic Principles to
Education
2.33
CRITICAL THINKING EXERCISE 2-2
Standard of Living Comparison:
Better/Same/Worse?
2. 34
CRITICAL THINKING EXERCISE 2-3
How Businesses Help Nonprofits
2.36
CRITICAL THINKING EXERCISE 2-4
Balancing the Federal Budget
2.37
2.1
CHAPTER
HOW ECONOMICS AFFECTS
BUSINESS
2
Bonus Cases
2.2
2.40
BONUS CASE 2-1
Foundations of the Capitalist System
2.40
BONUS CASE 2-2
Katrina’s Aftermath (Video Case)
2.42
BONUS CASE 2-3
The Rule of 72
2.45
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
OTHER TEACHING TOOLS
For a description of each of these valuable teaching tools, please see the Preface in this manual.
Student Learning Tools
Student Online Learning Center (OLC) www.mhhe.com/diasbusiness
Student Study Guide
Spanish Translation Glossary (OLC)
Spanish Translation Quizzes (OLC)
Instructor Teaching Tools
Annotated Instructor’s Resource Manual
IRCD (Instructor’s Resource Manual, Test Bank, PowerPoints, EZtest)
Asset Map
Online Learning Center (OLC) www.mhhe.com/diasbusiness
PageOut
PowerPoint Presentations (on IRCD and OLC)
Test Bank
Business Videos on DVD
Enhanced Cartridge option
Spanish Translation Glossary (OLC)
CHAPTER 2: How Economics Affects Business
2.3
VIDEO NOTES
Twenty videos are available, geared to individual chapter topics. The teaching notes for these
videos is included in the Video Notes section of this Instructor’s Resource Manual, beginning on page
V.01.
VIDEO 2: “Katrina’s Aftermath”
Hurricane Katrina’s winds and water topped New Orleans’ levees and flooded
the city. This video features an economist discussing the economic issues that must be
confronted in rebuilding the city.
(BONUS CASE 2-2, “Katrina’s Aftermath,” on page 2.42 of this manual relates
to this video.)
2.4
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
BRIEF CHAPTER OUTLINE AND LEARNING GOALS
CHAPTER 2
How Economics Affects Business
I. UNDERSTANDING ECONOMICS
►
LEARNING OBJECTIVE 1
Understand the basics of economics.
A.
Basics of Economics
B.
Microeconomics and Macroeconomics
C.
Economic Theorists
D.
Supply and Demand
►
LEARNING OBJECTIVE 2
Explain supply and demand.
II. FREE MARKET CAPITALISM
►
A.
LEARNING OBJECTIVE 3
Describe free market capitalism and degrees of
competition.
Capitalism in Free Markets
III. SOCIALISM AND COMMUNISM
►
A.
LEARNING OBJECTIVE 4
Understand the differences between socialism
and capitalism.
Socialism
1.
The Benefits of Socialism
2.
The Negative Consequences of Socialism
B.
Communism
C.
The Trend toward Mixed Economies
IV. ECONOMIC INDICATORS
►
LEARNING OBJECTIVE 5
Discuss the three major indicators of economic
conditions.
A.
Gross Domestic Product
B.
Unemployment
CHAPTER 2: How Economics Affects Business
2.5
C.
Price Indexes
D.
Fiscal and Monetary Policy
V. SUMMARY
2.6
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE OUTLINE AND LECTURE NOTES
CHAPTER OPENING PROFILE
WTRG Consulting (Text pages 38-39)
The opening profile of this chapter focuses on Jim Williams, owner of WTRG Consulting, a
business that provides macroeconomic and industry information to companies. Jim uses macroeconomic
theory to help clients, such as stock traders and oil companies, forecast trends and prices into the future.
This profile illustrates how basic economic principles are used daily by businesses of all types.
LECTURE OUTLINE
LECTURE NOTES
I. UNDERSTANDING ECONOMICS
►
LEARNING OBJECTIVE 1
Understand the basics of economics. (Text page
40)
A. Economics impacts every business, small
or large.
B. Basics of Economics
1. ECONOMICS is the study of how society chooses to employ resources to
produce goods and services and distribute them for consumption among
various competing groups and individuals.
2. These resources (“factors of production” from Chapter 1) are land, labor,
capital, entrepreneurship, and
knowledge.
C. Microeconomics and Macroeconomics
1.
POWERPOINT 2-1
Chapter Title
(Refers to text page 38)
POWERPOINT 2-2
Learning Objectives
(Refers to text page 39)
TEXT REFERENCE
Real World Business Apps
(Box in text on page 41)
Ashon, owner of a new Internet consulting business,
has read a news article about
economic forecasts. At first,
he does not understand the
terminology and assumes the
information is irrelevant to
his firm.
There are two basic types of economic
study: macro and micro.
a.
b.
MACROECONOMICS is the study
that looks at the operation of a nation’s economy as a whole.
MICROECONOMICS is the study
that looks at the behavior of peo-
CHAPTER 2: How Economics Affects Business
POWERPOINT 2-3
Understanding Economics
(Refers to text pages 40-41)
2.7
LECTURE OUTLINE
2.
LECTURE NOTES
ple and organizations in particular
markets.
Some economists define economics
as the allocation of “scarce” resources.
a.
3.
4.
Resources are scarce and need to
be divided among people.
b. However, there aren’t enough
known resources to do that.
RESOURCE DEVELOPMENT is the
study of how to increase resources
and to create the conditions that will
make better use of those resources.
Businesses can contribute to an economic system by inventing products
that increase available resources (example: genetically modified foods).
BONUS INTERNET
EXERCISE 2-1
Know Your History of
Economics
This Internet exercise is designed to help students gather
information about economics
from a historic perspective.
(See complete exercise on
page 2.30 of this manual.)
D. Economic Theorists
1.
The English economist Thomas Malthus believed that population growth
would outstrip resources.
POWERPOINT 2-4
Understanding Economics
(Refers to text pages 42-43)
a.
2.
2.8
In response, Thomas Carlyle
called economics “the dismal science.”
b. Many still believe, like Malthus,
that the solution to poverty is birth
control.
c. World population is currently
growing more slowly than expected.
d. But population in the developing
world will continue to climb quickly.
The challenge is to determine what
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE OUTLINE
3.
4.
5.
makes some countries relatively rich
and other countries relatively poor,
then to implement policies that lead to
increased prosperity for everyone.
Scottish economist Adam Smith advocated creating wealth through entrepreneurship.
a. Rather than divide fixed resources, Smith envisioned creating more resources so that everyone could be wealthier.
b. In 1776, Smith wrote a book
called The Wealth of Nations in
which he outlined steps for creating prosperity.
c. Smith believed that freedom was
vital to the survival of any economy.
d. Also, he believed that people will
work hard if they have incentives
for doing so.
Smith believed that businesspeople
work primarily for their own prosperity.
a. The INVISIBLE HAND is a phrase
coined by Adam Smith to describe
the process that turns selfdirected gain into social and economic benefits for all.
b. Basically, this meant that a person
working hard to make money for
his or her own personal interest
would (like an invisible hand) also
benefit others.
Some people end up with so much
wealth; they would not be able to
CHAPTER 2: How Economics Affects Business
LECTURE NOTES
LECTURE LINK 2-1
Europe Is Shrinking
According to the United Nations, Europe’s population
will shrink by more than 90
million people in the next 50
years. (See complete lecture
link on page 2.25 of this
manual.)
2.9
LECTURE OUTLINE
►
LECTURE NOTES
spend it all within a lifetime.
a. One such entrepreneur, Bill
Gates, has set up the largest
charitable foundation in history.
b. Warren Buffet has pledged to contribute part of his wealth to the
Gates Foundation each year.
LEARNING OBJECTIVE 2
Explain supply and demand. (Text pages 44-47)
E. Supply and Demand
1. SUPPLY refers to the quantity of
products that manufacturers or owners
are willing to sell at different prices at a
specific time.
a. The amount supplied will increase
as the price increases (direct relationship).
b. The quantity producers are willing
to supply at certain prices is illustrated on a supply curve.
2. DEMAND refers to the quantity of
products that people are willing to buy
at different prices at a specific time.
a. The quantity demanded will decrease as the price increases (inverse relationship).
b. The quantities consumers are willing to buy at certain prices are illustrated on a demand curve.
3. Supply and demand interact to determine price.
a. At the equilibrium price, the supply
and demand curves cross, and
the quantity demanded equals the
quantity supplied.
2.10
CRITICAL THINKING
EXERCISE 2-1
Applying Economic Principles to Education
Principles such as competition and productivity apply to
nonprofit organizations, such
as schools, as well as businesses. (See complete exercise on page 2.33 of this
manual.)
TEXT FIGURE 2.1
The Supply Curve at
Various Prices (Box in text
on page 44)
POWERPOINT 2-5
Understanding Economics
(Refers to text pages 44-47)
TEXT FIGURE 2.2
The Demand Curve at Various Prices (Box in text on
page 45)
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE OUTLINE
b.
4.
The equilibrium point is the point
at which the amount of goods
sought by buyers is equal to the
amount of goods produced by
suppliers.
BUSINESS CYCLES are the periodic
rises and falls that occur in economies
over time.
a. The business cycle involves a
common pattern of rapid growth
(recovery and prosperity) alternating with a period of decline (contraction or recession).
b. The business cycle is also known
as the economic cycle.
SELF CHECK QUESTIONS (Text pages 47)
1.
How are macroeconomics and microeconomics different?
2.
What theory did Adam Smith develop? Describe it in
your own words.
How are supply and demand interconnected?
3.
LECTURE NOTES
LECTURE LINK 2-2
When Disaster Changes the
Economic Rules
Hurricane Katrina changed
the Gulf states’ economies in
many ways. Demand for certain products increased and
shortages developed. (See
complete lecture link on page
2.25 of this manual.)
TEXT FIGURE 2.3
The Equilibrium Point (Box
in text on page 46)
TEXT FIGURE 2.4
The Business/Economic
Cycle (Box in text on page
46)
POWERPOINT 2-6
Understanding Economics
(Refers to text pages 46-47)
II. FREE-MARKET CAPITALISM
►
LEARNING OBJECTIVE 3
Describe free market capitalism and degrees of
competition. (Text pages 47-49)
A. In a FREE-MARKET, decisions about what
to produce and in what quantities are
made by the market.
1. Consumers send signals to producers
about what to make, how many, and
so on through the mechanism of price.
(Indianapolis Colts t-shirts are the example in the text.)
2. In the U.S. the price tells producers
how much to produce, reducing the
CHAPTER 2: How Economics Affects Business
BONUS CASE 2-1
Foundations of the
Capitalist System
What are the moral, ethical,
and spiritual foundations of
capitalism? (See complete
case, discussion questions,
and suggested answers on
page 2.40 of this manual.)
2.11
LECTURE OUTLINE
LECTURE NOTES
chances of a long-term shortage of
goods.
3. Prices in a free market are not determined by sellers; buyers and sellers
negotiating in the marketplace determine them.
B. Competition within Free Markets
1. Competition exists in different degrees, ranging from perfect to nonexistent.
2. PERFECT COMPETITION exists
when there are many sellers in the
market, no seller is large enough to
dictate the price of a product, and the
products are similar.
a. Sellers produce products that appear to be identical.
b. There are no true examples of
perfect competition, but agricultural products are often used as
an example.
3. MONOPOLISTIC COMPETITION exists when a large number of sellers
produce products that are very similar
but are perceived by buyers as different.
a. Product differentiation, making
buyers think similar products are
different, is a key to success.
b. The fast food industry is an example.
4. An OLIGOPOLY is a form of competition in which just a few sellers dominate a market.
a. The initial investment required to
2.12
BONUS CASE 2-2
Katrina’s Aftermath (Video
Case)
Despite numerous efforts by
businesses, government
agencies, and nonprofit organizations to end poverty,
poverty still persists. That
point was illustrated vividly
when hurricane Katrina hit
the Gulf Coast region of the
United States, and was especially apparent in New Orleans, Louisiana. (See complete case, discussion questions, and suggested answers
on page 2.42 of this manual.)
POWERPOINT 2-7
Free Market Capitalism
(Refers to text pages 48-49)
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE OUTLINE
5.
enter the market is usually high.
b. Prices among competing firms
tend to be close to the same.
c. Like monopolistic competition,
product differentiation is key to
market success.
d. Examples include breakfast cereal
and soft drinks.
A MONOPOLY occurs when there is
only one seller for a product or service.
a. U.S. laws prohibit the creation of
monopolies, but do permit approved monopolies in markets for
public utilities.
b. New laws have ended the monopoly status of utilities in some
areas, creating intense competition among utility companies.
c. Deregulation is meant to increase
competition and lower prices for
consumers.
d. Example: cable companies
LECTURE NOTES
TEXT REFERENCE
Career Development,
Career Exploration and
Professional Help
(Box in text on page 49)
One of the challenges students face is the career learning process. An additional
exercise and discussion is
available in this chapter on
page 2.23 in this manual.
SELF CHECK QUESTIONS (Text pages 50)
1.
What is a free market system?
2.
What are the four types of competition?
3.
Do you think one type of competition would be better
than another in developing countries? Why or why not?
III. SOCIALISM AND COMMUNISM
►
LEARNING OBJECTIVE 4
Understand the differences between socialism
and capitalism. (Text pages 50-55)
A. Socialism
1. SOCIALISM is an economic system
based on the premise that some, if not
CHAPTER 2: How Economics Affects Business
2.13
LECTURE OUTLINE
2.
3.
2.14
LECTURE NOTES
most, basic businesses should be
owned by the government so that profits can be distributed among the people.
a. Entrepreneurs can own small
businesses, but their profits are
steeply taxed to pay for social
programs.
b. Advocates of socialism
acknowledge the major benefits of
capitalism, but believe that wealth
should be more evenly distributed.
c. Socialism is the guiding economic
principle for many countries in Europe.
The benefits of socialism
a. The major benefit of socialism is
social equality.
b. Income is taken from the wealthier
people and redistributed to the
poorer members of the population.
c. Workers in socialist countries are
given free education, free health
care, free child care, and more
employee benefits.
The negative consequences of socialism
a. Socialism may create equality, but
it takes away some work incentives.
b. Tax rates in some nations once
reached 85%.
c. Because wealthy professionals
have very high tax rates, many of
them leave socialist countries for
POWERPOINT 2-8
Socialism and Communism
(Refers to text pages 50-52)
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE OUTLINE
countries with lower taxes.
d. The loss of the best and brightest
people to other countries is called
BRAIN DRAIN.
e. Socialist systems can result in
fewer inventions and less innovation.
4. Consequences
a. Capitalism creates freedom of opportunity, which in turn creates incentives to work hard.
b. However, it also creates an unequal distribution of outcomes.
c. Socialist systems tend to discourage workers from working harder
and discourage innovation.
d. Most socialist systems have not
kept pace with the U.S. economically.
B. Communism
1. German political philosopher Karl Marx
felt that workers should take over
ownership of businesses and share
the wealth.
a. His 1848 work, The Communist
Manifesto, established his reputation as the founder of communism.
b. COMMUNISM is an economic and
political system in which the state
(the government) makes almost
all economic decisions and owns
almost all the major factors of
production.
2. Problems with communism
CHAPTER 2: How Economics Affects Business
LECTURE NOTES
CRITICAL THINKING
EXERCISE 2-2
Standard of Living
Comparison: Better/Same/
Worse?
This exercise asks students to
research key economic indicators for a capitalist country, a socialist country, and a
communist country. (See
complete exercise on page
2.34 of this manual.)
POWERPOINT 2-9
Socialism and Communism
(Refers to text pages 52-54)
2.15
LECTURE OUTLINE
LECTURE NOTES
a.
The government has no way of
knowing what to produce because
prices don’t reflect supply and
demand.
b. Shortages of many items may develop.
c. Communism doesn’t inspire businesspeople to work hard, and is
slowly disappearing as an alternative economic form.
3. Most communism countries today are
suffering severe economic depression,
including North Korea and Cuba.
a. The former Soviet Union is moving toward free markets.
b. Russia now has a flat tax of 13%,
a much lower tax rate than the
U.S. has.
C. The Trend Toward Mixed Economies
1. There are dominant two economic systems:
a. Free market economies
i. FREE MARKET ECONOMIES exist when the market
largely determines what
goods and services get produced, who gets them, and
how the economy grows.
ii. This system is commonly
known as capitalism.
b. Command economies
i. COMMAND ECONOMIES
are economic systems in
which the government largely
decides what goods and ser2.16
LECTURE LINK 2-3
Capitalism in Crisis
The worldwide business
slump of the 1930s ranked as
the worst and longest period
of high unemployment and
low business activity in modern times. The U.S. economic system seemed inadequate
to deal with massive economic disruptions. John
Maynard Keynes suggested
changing the role of central
government to ease the crisis.
(See complete lecture link on
page 2.26 of this manual.)
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE OUTLINE
vices will be produced, who
will get them, and how the
economy will grow.
ii. These economies are known
as socialism and communism.
2. No one economic system is perfect by
itself.
a. Free-market mechanisms haven’t
been responsive enough to a nation’s social and economic needs
and haven’t adequately protected
the environment.
b. Socialism and communism haven’t always created enough jobs
or wealth to keep economies
growing fast enough.
c. Socialist and communist countries
have moved toward capitalism.
d. The trend for so-called capitalist
countries to move toward socialism.
e. No country is purely capitalist or
purely communist; rather some
mix of the two systems.
f. The result has been a blend of
capitalism and communism, called
a mixed economy.
3. MIXED ECONOMIES are economies
where the market and some by government.
4. The U.S. has a mixed economy.
a. The role of government in many
parts of the economy is a matter
of some debate.
b. For instance, the government has
CHAPTER 2: How Economics Affects Business
LECTURE NOTES
CRITICAL THINKING
EXERCISE 2-3
How Businesses Help Nonprofits
Choosing a career at a nonprofit organization is not the
only way for students to help
society. The for-profit sector
creates the wealth that nonprofits use to do good. (See
complete exercise on page
2.36 of this manual.)
TEXT FIGURE 2.5
Comparisons of Key
Economic Systems (Box in
text on page 55)
TEXT REFERENCE
Study Skills: Keys to Good
Study Habits.
(Box in text on page 53)
Gives students suggestions
for improving their study
skills. An additional exercise
and discussion is available in
this chapter on page 2.24 of
this manual.
2.17
LECTURE OUTLINE
LECTURE NOTES
become the largest employer in
the U.S.
SELF CHECK QUESTIONS (Text page 54)
1.
What is the difference between socialism and communism? How are they the same? Which system, in
your opinion, is the best and why?
2.
Compare free market economies with socialism. What
are the advantages and disadvantages of each?
3.
What is a mixed economy?
4.
Why is the trend going toward mixed economies? Do
you think at some point the balance will likely change
to one of the pure types? Why or why not?
TEXT REFERENCE
Thinking Critically: The
Threat of Global Poverty
(Box in text on page 56)
When Americans see televised images of malnourished children in other countries, they often don’t see a
threat to their way of life.
This box discusses how
global poverty can breed
civil conflict, infectious diseases, crime and drug enterprises, and environmental
degradation.
IV. ECONOMIC INDICATORS
► LEARNING OBJECTIVE 5
Discuss the three major indicators of economic
conditions. (Text pages 56-60)
A. Understanding economic indicators helps
you assess the nation’s economy.
B. Gross Domestic Product
1. GROSS DOMESTIC PRODUCT
(GDP) is the total value of goods and
services produced in a country in a
given year.
2. GDP includes the output of both domestic and foreign-owned companies
as long as the companies are located
within the U.S.
3. GROSS NATIONAL PRODUCT
(GNP) is similar to GDP, but only
counts Americans producing products
in the country, not other foreign nationals.
4. A major influence on the growth of
GDP is how productive the work force
is.
2.18
POWERPOINT 2-10
Economic Indicators
(Refers to text pages 56-60)
BONUS INTERNET
EXERCISE 2-2
Exploring the Gross Domestic Product
This Internet exercise asks
students to gather data regarding the gross domestic
product (GDP) of the United
States from the Census Bureau’s Website. (See complete exercise on page 2.31
of this manual.)
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE OUTLINE
The total U.S. GDP in 2006 was over
$13 trillion.
C. Unemployment
1. The UNEMPLOYMENT RATE is the
number of civilians at least 16 years
old who are unemployed and tried to
find a job within the prior four weeks.
2. In recent years, the unemployment
rate has been as low as 3.9%.
3. There are four types of unemployment:
frictional, structural, cyclical, and seasonal (as seen in Text Figure 2.6.).
4. The U.S. tries to protect those who are
unemployed because of recessions,
industry shifts, and other cyclical factors.
D. PRICE INDEXES are indexes of the
changes in goods and prices of goods and
services based on the prices of the same
goods and services from a previous period.
1. The price indexes help measure the
health of the economy.
2. The Consumer Price Index measures
the prices of products from month to
month so economists can measure inflation.
a. INFLATION refers to a general
rise in the prices of goods and
services over time.
b. HYPERINFLATION occurs when
inflation increases beyond 50% in
a given time period.
c. STAGFLATION occurs when unemployment rates and inflation
LECTURE NOTES
5.
CHAPTER 2: How Economics Affects Business
TEXT FIGURE 2.6
Types of Unemployment
and U.S. Unemployment
Rates from 1989 to 2007
(Box in text on page 58)
TEXT FIGURE 2.7
Economic Indicators for
the U.S. Economy (Box in
text on page 59)
BONUS CASE 2-3
The Rule of 72
No formula is more useful
for understanding inflation
than the rule of 72. Basically,
the rule allows you to quickly compute how long it takes
the cost of goods and services to double at various
compounded rates of growth.
(See complete case, discussion questions, and suggested
answers on page 2.45 of this
manual.)
2.19
LECTURE OUTLINE
LECTURE NOTES
rates are high.
d. DEFLATION is a situation in
which prices are actually declining, occurring when countries produce so many goods that people
cannot afford to buy them all.
3. Consumer Price Index (CPI)
a. The CONSUMER PRICE INDEX
(CPI) consists of the monthly statistics that measure the pace of inflation or deflation.
b. It tracks the price of 400 goods.
c. Some wages, rents, government
benefits, and interest rates are
based on the CPI.
4. The PRODUCER PRICE INDEX (PPI)
is similar to the consumer price index,
but measures prices at the wholesale
level.
E. Fiscal and Monetary Policy
1. FISCAL POLICY refers to the federal
government’s efforts to keep the
economy stable by increasing or decreasing taxes or government spending.
a. The first half of fiscal policy involves taxation.
i. High tax rates may discourage small business ownership.
ii. Low tax rates would tend to
give the economy a boost.
b. The second half of fiscal policy involves government spending.
2.20
LECTURE LINK 2-4
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 complete lecture link on
page 2.28 of this manual.)
TEXT FIGURE 2.8
Government Revenues and
Expenditures (Box in text on
page 61)
POWERPOINT 2-12
Fiscal and Monetary Policy
(Refers to text pages 62-64)
CRITICAL THINKING
EXERCISE 2-4
Balancing the Federal
Budget
Can your students balance
the federal budget? This exercise presents actual 2006
figures and asks them to
make adjustments in spending and income to do just
that. (See complete exercise
on page 2.37 of this manual.)
BONUS INTERNET
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE OUTLINE
i.
2.
3.
The national deficit is the
amount of money that the
federal government spends
over and above the amount it
gathers in taxes.
ii. The NATIONAL DEBT is the
sum of government deficits
over time.
c. One way to lessen the annual deficits is to cut government spending, but there is a continuing need
for social programs and for military
spending.
In an economic boom, businesses do
well.
a. A RECESSION occurs when the
GDP falls for two consecutive
quarters.
b. A DEPRESSION is a severe recession, when the GDP falls for
several quarters, and recovery is
a long time off.
c. The Great Depression in the late
1920s and 1930s in the U.S. lasted almost an entire decade.
d. RECOVERY is an improvement in
the economy, marking the end of
a recession or decline.
MONETARY POLICY is the management of the monetary supply and interest rates.
a. The Federal Reserve System (the
Fed) is a semiprivate organization
that decides how much money to
put into circulation.
CHAPTER 2: How Economics Affects Business
LECTURE NOTES
EXERCISE 2-3
The Power of the Fed
The Federal Reserve is one
of the most powerful institutions in our economy. This
Internet exercise directs students to explore the Fed
website. (See complete exercise on page 2.32 of this
manual.)
POWERPOINT 2-11
Fiscal and Monetary Policy
(Refers to text pages 60-62)
TEXT FIGURE 2.9
The National Debt (Box in
text on page 62)
TEXT REFERENCE
Ethical Challenge:
Recon Still Cleaning Up
After Katrina
(Box in text on page 63)
Hurricane Katrina is the
worst natural disaster in U.S.
history. This text box presents some of the failures and
unethical practices that resulted from the government’s
inadequate response to the
storm’s destruction. It is a
good overview of the role of
government in disaster situations.
LECTURE LINK 2-5
Controlling Your Personal
Money Supply
Controlling your personal
money supply is harder than
you may think. (See complete lecture link on page
2.29 of this manual.)
2.21
LECTURE OUTLINE
b.
c.
d.
LECTURE NOTES
Using interest rates
i. When the economy is booming, the Fed tends to raise interest rates.
ii. Lowering interest rates encourages more business borrowing.
iii. Raising and lowering interest
rates helps control the rapid
ups and downs of the economy.
The Federal Reserve also controls
the money supply.
i. The more money the Fed
makes available to businesspeople, the faster the economy grows.
ii. To slow the economy, the Fed
lowers the money supply.
The economic goal is to keep the
economy growing.
SELF CHECK QUESTIONS (Text page 64)
1.
2.
Name and discuss the three economic indicators.
What are price indexes? What do they have to do with
the economy?
3.
What is the difference between monetary policy and
fiscal policy?
TEXT REFERENCE
Career Spotlight:
Economics and You
(Box in text on page 64)
Although most of your students will not become economists, they will use economic concepts in their chosen career fields. This text
box discusses how businesspersons use economic indicators and principles on a daily
basis.
TEXT REFERENCE
Real World Business Apps
This text box continues the
story of Ashon presented
earlier in the text. Throughout the day Ashon recalled
the news article and has done
some basic research. He now
understands how economic
forecasts can help his Internet business. (Box in text on
page 65)
V. SUMMARY
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INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
CAREER AND STUDY SKILLS NOTES
CAREER DEVELOPMENT BOX:
Career Exploration and Professional Help (Text page 49)
Instructor’s Notes for Text Box Two:(Objectives to increase students’ knowledge, usage, and understanding of the concepts).
Getting your first job was probably accomplished with relative ease. You knew somebody already
working at the local fast food restaurant or shopping mall and they helped you get the interview that lead
to your first time job.
As age increases, job opportunities become more complex and decisions more critical to your
consideration of employment. Why are you more selective? What is required of you for the new, more
important job compared to the job you had in the past? Let’s explore these questions:

As you become older, your needs are expanding and lower level jobs cannot meet these newly increased needs.

As you look ahead to increasing your family size through marriage and children, job compensation becomes more critical; not only in pay but for the job benefits as well.

As you increase your skills and knowledge, you will demand better pay and higher job status
(You will have a chance to evaluate your skills and see just how they do stack up in the next section of this program.).

To keep this entire decision making process working in your best interest, the ability to understand the career planning process becomes very important.
If you have a sound level of understanding regarding the importance of learning career planning
skills, these skills can help guide you as you go forward; and if done early in your career, can pay great
dividends for the short and long term during the working years of your life!
STUDENT EXERCISE:
Have students visit the Career Center at their school and ask them to make a list of the five items
they found that were available to help them learn more about their careers; self assessment information;
job searches; and the other tools to help assist in developing their careers. Discuss the lists and make a
comprehensive list of items that all students can now use to help them in the career exploration and development process.
CHAPTER 2: How Economics Affects Business
2.23
STUDY SKILLS BOX:
Keys to Good Study Habits (Text page 53)
Instructor’s Notes for Text Box Two:(Objectives: to increase students’ knowledge, usage, and understanding of the concepts).
Knowledge is key to performance. We need to understand what methods can be taken to learn
and improve study skills. Most study skill improvement guides list the following ways to improve your
study skill effectiveness: Find a quiet place to study, a routine that maximizes your study alertness. Learn
how to .prioritize, take better notes, use time management, become a better reader, a better writer, or a
better listener. Maximize your memory, test taking. Reduce procrastination, test taking anxiety. Go back
and review this list to begin your own assessment regarding effective study skills. How does this list help
to identify what you already know about good study skills and what might be areas that need improvement?
STUDENT EXERCISES:
Now is the time to engage in discussions about the many resources available for helping students
become better at studying and test-taking. Some websites that will be helpful to spend time with are listed
below. Require the students to view these specific websites and be prepared to discuss at a later class:
STUDY SKILLS at www.shsu.edu/~counsel/hs/study skills.html
Writing Center STUDY SKILLS: www.ccis.edu/departments/writingcenter/studyskills.html
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INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE LINKS
LECTURE LINK 2-1
Europe is Shrinking
At the end of the 20th century, massive changes took place in Europe—the Berlin Wall came
down and communism disappeared as the Soviet Union collapsed. While the public’s attention was focused on these historic events, another significant change was quietly taking place.
According to the United Nations, Europe’s population will shrink by more than 90 million people
in the next 50 years, roughly twice the number killed worldwide during World War II. For more than two
decades the total fertility rate—the average number of children each woman will bear in her lifetime—has
remained below the 2.1 level required to replace the population.
In the late 1990s Europe’s population began to fall. Demographers doubt that the fertility rate will
return to replacement level in the near future. Some speculate that the decline may not be limited to Europe. The world’s population could actually decline by the end of the 21st century—a trend unseen since
the 14th century Black Death.
Among the first nations to experience the population implosion will be historically fertile Italy.
With births below replacement level since 1977, Italy is projected to lose nearly a quarter of its current
population by 2050. Contraceptive use is at record levels, and women are earning more college degrees
than men, leading many to seek careers first and families second. Couples who do start families are waiting longer to have their first child.
Germany has one of the world’s lowest birthrates: fewer babies were born in 2005 than in the last
year of World War II. A United Nations report estimated that by 2050 Germany will need 3.5 million
working-age immigrants each year to maintain its population ratio and fund pension, health care, and other programs.
Without babies to replenish the labor force and pay taxes, Europeans will find it hard to fund the
pensions of longer-living retirees. To stay in the black, governments will need to take unpopular steps,
such as raising the retirement age, cutting benefits, hiking taxes, and increasing legal immigration.
Or do what France has done. Since World War I, France has been awarding medals for childbearing to women of “good character” to restore its war-devastated population. Today, with France again in
need of more children, France has relaxed its medal rules: the mothers don’t have to be married; and they
don’t even have to be French.i
LECTURE LINK 2-2
When Disaster Changes the Economic Rules
On Monday, August 29, 2005 Hurricane Katrina roared over the northern Gulf Coast as a category 3 hurricane. Television viewers have all seen the catastrophic damage done to New Orleans when the
levees failed. Other parts of the Gulf Coast—Louisiana, Mississippi, and Alabama—were also severely
affected. The damage carved across the Gulf South covered an area larger than all of Great Britain.
After the winds died down and the flooding subsided, residents in three states woke up to a radically changed world. In the coastal cities, condominiums and casinos were replaced with acre after acre of
rubble and mud. Houses and trees were toppled for hundreds of miles inland.
CHAPTER 2: How Economics Affects Business
2.25
Across the disaster zone, millions of electricity and telephone transmission poles were flattened,
cutting power and communications. Failing power disabled water treatment plans, making water undrinkable. The power failure also knocked out gas station pumps, leaving the Mid-South in a severe gasoline
shortage. Widespread use of electric generators to power homes added to the demand for gasoline. The
inevitable result—long lines at the few gas stations that were able to pump gas. Fights broke out at stations when people tried to break ahead in three-hour long lines.
Banks were severely limited in the services they could offer. ATM machines were useless. With
no telecommunication and no power to run electronic credit machines, credit cards were useless. The
economy rapidly reverted to an old-time barter system. Neighbors traded C and D cell batteries for a ride
across town. The lucky few whose power was restored opened their homes so the less fortunate could take
hot showers and do the laundry. Bottled water became the currency of convenience. A full five-gallon can
of gasoline could buy almost anything.
Store shelves were stripped of bottle water, powdered milk, bleach, dry milk, plastic storage boxes, beer, and—strangely—tomato soup. (Wal-Mart’s own database research showed that during hurricanes people eat more strawberry Pop-Tarts, so the company makes sure coastal stores are stocked appropriately.) Most businesses adopted a community-minded approach and kept prices stable. Even the retail
giant Wal-Mart immediately sent 1,900 truckloads of water and other emergency supplies to the area. The
company also contributed $17 million to the hurricane relief effort. But some unscrupulous local businesspeople doubled and tripled the price of ice, gasoline, and propane tanks. For a horrible week the demand curves for critical supplies shifted dramatically to the right while supply remained constant or declined.
Gradually over the next month, power and telephone service were restored to most households
and life began to get back to normal. Because of the disruption to petroleum refineries in the Gulf, gasoline prices remained high. However, this was the more normal interaction of high demand and short supply that predictably occurs. ii
LECTURE LINK 2-3
Capitalism in Crisis
The worldwide business slump of the 1930s ranked as the worst and longest period of high unemployment and low business activity in modern times. Many causes contributed to making the Great
Depression as severe as it was. During the 1920s many bank failures, together with low incomes among
farmers and factory workers, helped set the stage. Uneven distribution of income among workers also
contributed.
The Great Depression differed in both length and harshness from previous depressions in the
United States. In earlier depressions, business activity started to pick up after one or two years. But from
October 1929 until Franklin D. Roosevelt became president in March 1933, the economy slumped almost
every month. From 1930 to 1933 stock market prices of industrial companies fell about 80%. Banks and
individuals with investments in the stock market lost fortunes. Banks had also loaned money to many
people who could not repay it. The deepening depression forced large numbers of people to withdraw
their savings. Banks had difficulty meeting the withdrawals, which came at a time when the banks were
unable to collect on many loans. Between January 1930 and March 1933, about 9,000 banks failed. The
bank failures wiped out the savings of millions of people.
Bank failures meant less money available for loans to industry. The decline in available money
caused a drop in production and a further rise in unemployment. From 1929 to 1933, the total value of
goods and services produced annually in the United States fell from about $104 billion to about $56 billion. In 1932, the number of business closings was almost a third higher than the 1929 level.
2.26
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
In 1925, about 3% of the nation’s workers were unemployed. The unemployment rate reached
about 25%—or about 13 million persons—in 1933. Many people who kept or found jobs had to take salary cuts. In 1932, wage cuts averaged about 18%. In 1932, the New York City Police Department estimated that 7,000 persons over the age of 17 shined shoes for a living.
Human suffering became a reality for millions of Americans as the depression continued. Many
died of disease resulting from malnutrition. Thousands lost their homes because they could not pay the
mortgage. Severe droughts and dust storms hit parts of the Midwest and Southwest during the 1930s. The
afflicted region became known as the Dust Bowl, and thousands of farm families were wiped out.
President Herbert Hoover held office as the Depression began. America had operated for 150
years under Adam Smith’s philosophy of laissez faire, or free competition. Hoover believed that business,
if left alone to operate without government supervision, would correct the economic conditions. He vetoed several bills aimed at relieving the depression because he felt they gave the federal government too
much power. Most Americans felt that Hoover did not do enough to fight the depression and elected
Franklin D. Roosevelt president in 1932.
America was at a crossroads. The existing economic system had proved inadequate to deal with
massive economic disruption. Capitalism seemed to be discredited, as business failures and unemployment escalated. For many Americans without a job the teachings of Karl Marx and Frederick Engles held
tremendous appeal—“from each according to his ability, to each according to his need.” Many questioned
whether capitalism would survive.
It is this environment that influenced the ideas of John Maynard Keynes, a British economist at
Cambridge University. His General Theory of Employment, Interest, and Money (1936) ranks among the
most important books on economics. The book changed economic theory and policy and became the basis
of economic policies of most nations today.
The basis of Keynesian economics is simple. The level of economic activity depends on the total
spending of consumers, business, and government. If business expectations are poor, investment spending
will be cut, causing a series of reductions in total spending. If this should happen, the economy can move
into a depression and stay there. To avoid a depression, Keynes urged increased government spending and
easy money. These actions, he argued, would encourage investment, increase employment, and enable
consumers to spend more. Keynes sought not to destroy capitalism, but to save it.
President Roosevelt also believed the federal government had the chief responsibility of fighting
the Great Depression. After his inauguration, he called Congress into a special session to pass laws to relieve the suffering, which became known as the New Deal.
New Deal programs not only helped relieve the depression, but also renewed the confidence of
Americans in the government. But about 15% of the nation’s working force still did not have a job in
1940. The Great Depression did not end in the United States until 1942, after the country had entered
World War II.
New government policies increased federal control over banks and the stock market. Laws of the
New Deal also gave the government more power to provide money for the needy. Since the depression,
the powers of the federal government have been broadened. This shift can be dramatically seen in the pattern of government spending. In 1929, government spending made up less than 5% of the gross domestic
product—by the early 2000s this percent had grown to about one fifth.
The Great Depression also changed the attitudes of many Americans toward business and the federal government. Before the depression, most people regarded bankers and business executives as the nation’s leaders. After the stock market crashed and these leaders could not relieve the depression, Americans lost faith in them. The government finally succeeded in improving conditions. As a result, many
Americans decided that the government—not business—had the responsibility to maintain the national
economy.
CHAPTER 2: How Economics Affects Business
2.27
LECTURE LINK 2-4
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.
Prime Interest Rate
Lowest interest rate that banks charge preferred borrowers on
short-term loans.
Housing Starts
Tracks how many new single-family homes or buildings were
constructed during the month and can detect trends in the economy looking forward.
Durable-Goods Orders
New orders for goods that last more than three years.
Balance of Trade
Total value of a country’s exports minus the total value of its
imports, over a specific period of time.
Inflation Rate
Percentage increase in prices of goods or services over a period
of time.
Consumer Confidence Index Measures the degree of consumer confidence in the economy,
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.
The correct name for the report is “Summary of Commentary on Current Economic Conditions by Federal Reserve District.” Each Federal Reserve Bank gathers information on current economic conditions in
its district. The Beige Book summarizes this information by district and sector and is a gauge on the
strength of the economy.
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.
Coincident indicators move at the same time as the economy does. The Gross Domestic Product
measures the economy’s output as it occurs.
Leading economic indicators are indicators which change before the economy changes. Stock
market returns are a leading indicator, as the stock market usually begins to fall before the economy declines and they improve before the economy begins to pull out of a recession. Housing starts and the consumer confidence index are other leading economic indicators.iii
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INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
LECTURE LINK 2-5
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 Americans to use debit cards to manage money.
A dollar here, a dollar there, everyone loses track of some cash. What surprised the survey’s authors was how much cash goes unaccounted for at the end of a week. The survey asked over 2,000 respondents to estimate their “mystery spending or money they couldn’t keep track of. Of those, 48% said
they couldn’t account for an average of $2,340 a year. At the extreme end of the spectrum were 7% who
said they lost track of more than $100 per week, or $5,000 per year.
People 34 and under are the biggest offenders. Men lost track of an average of $50 a week, or
$3,078 a year. Over half of them said they blew the cash during a night out. Young women spent $42 in
mystery cash a week, or $2,709 a year. Two-thirds of the women blamed shopping trips.iv
CHAPTER 2: How Economics Affects Business
2.29
BONUS INTERNET EXERCISESv
BONUS INTERNET EXERCISE 2-1
Know Your History of Economics
PURPOSE:
To gather information regarding the foundation of economics from a historic perspective. The
concepts of economics that are discussed in the classroom today can be traced from the founders of economics. Concepts of rational self interest, population growth, free trade, diminishing returns and utility
maximization come from such famous economist as Ricardo, Smith, Malthus, and Bentham.
EXERCISE:
Go to the internet and look up the following economist: Adam Smith, Jeremy Bentham, David
Ricardo, and T.R. Malthus. Choose one of these economists and answer the following questions that describe their contributions to the field of economics.
1.
Describe the personality of your chosen economist.
2.
What major contributions did this chosen economist contribute to the filed of economics regarding:
a.
Microeconomics
b.
Macroeconomics
c.
The field of economics
3.
How does the works of your chosen economist have any relevance to our economy today?
4.
How did your chosen economist further the field of economic study?
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INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
BONUS INTERNET EXERCISE 2-2
Exploring the Gross Domestic Product
PURPOSE:
To gather data regarding U.S. Gross Domestic Product, analyze spending trends, and discover
historical patterns. To answer the following questions, explore the Census Bureau’s homepage on the Internet at www.bea.gov.
EXERCISE:
The U.S. Bureau of Economic Analysis (a part of the U.S. Department of Commerce) publishes
extensive data about the national, state, regional, and local GNP. Go to the Bureau’s Website
(www.bea.gov) to answer the following questions (Sometimes the web address for a location changes.
You might need to search to find the exact location mentioned.).
1.
What percentage of the GDP comes from private industries? From the federal government? From
state and local governments?
2.
The annual output of final goods and services for a state or region is called the GSP, gross state
product.
3.
4.
a.
What is the latest GSP for the Southeast region of the U.S.?
b.
For the Far West?
c.
Is which of these regions is the GSP increasing more rapidly?
Locate the historical data on current dollar GDP and “real” GDP.
a.
In which years did the current dollar GDP decline?
b.
In which years did the real GDP decline?
Go to one of the news Websites (such as www.CNN.com, www.cbsnews.com, www.msnbc.com,
or www.foxnews.com) and locate news stories from the years identified in Question 3. What
events and trends occurred during those years?
CHAPTER 2: How Economics Affects Business
2.31
BONUS INTERNET EXERCISE 2-3
The Power of the Fed!
The Internet is a wonderful tool for exploring important functions of our powerful economy, and
one specific way to better understand this is viewing the extremely well constructed websites of the Federal Reserve Banks (go to any of the Federal Reserve websites—there are websites based on the 12 Federal Reserve Banks located across the United States).
For this exercise, assume you are going to start your own banking business and you have applied
for your local business license approval and met local building and zoning codes, etc. However, before
you get too caught up in local approval, the banking industry is heavily regulated and all new bank startups, mergers and other banking activities are governed by the Federal Reserve Bank that would be designated to regulate this new activity based on your geographic location. To better understand the Federal
Reserve’s purpose, visit the Federal Reserve Bank of St. Louis website and answer the following questions:
1.
Where are the 12 Federal Reserve Banks located (click on the icon “About The Fed”)?
2.
Go to the section “Banking Information” and click on “Supervisory & Regulatory.” Go to the section of regulations, laws and other guidance and click the “Laws” icon and find the Federal Reserve Act and click. Once here, explain the Federal Reserve Act:
3.
Go to the section “Applications and Notices.” Once there, explain what the Bank’s Supervision
and Regulatory Department is responsible for processing:
4.
Go to “Structure Information” icon and explain the function of the NIC (National Information
Center). What type of information does this site provide?
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INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
CRITICAL THINKING EXERCISES
CRITICAL THINKING EXERCISE 2-1
Applying Economic Principles to Education
Recently, the U.S. Supreme Court ruled that cities could have voucher programs that give money
directly to parents, and the parents can then choose between competing schools: public and private. The
idea for promoting such a ruling was to create competition among schools. As with businesses, schools
were expected to improve their products (how effectively they teach) to win students from competitors.
Supposedly, that would mean an improvement in all schools, private and public, and would benefit many
students.
1.
Do you believe that such economic principles apply in both private and public organizations? Be
prepared to defend your answer.
2.
Are there other public functions that might benefit from more competition, including competition
from private firms?
CHAPTER 2: How Economics Affects Business
2.33
CRITICAL THINKING EXERCISE 2-2
Standard of Living Comparison: Better/Same/Worse?
Is the standard of living different in capitalist, socialist, and communist economies? Which economic system provides the highest standard of living? One way of answering these questions is by comparing economic data you might find in the library or on the Internet. (Hint: try the CIA Website.) Choose
one capitalist country, one socialist country, and one communist country. Use the following chart to record your findings.
CAPITALIST
COUNTRY
SOCIALIST
COUNTRY
COMMUNIST
COUNTRY
Country Chosen
1996
2006
1996
2006
1996
2006
Gross Domestic
Product (total dollars
& growth including
growth trends)
Consumer Price
Index (CPI)
Unemployment Rate
Inflation Rate
Average Household
Income
Government Stability
(unstable/stable)
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INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
NOTES ON CRITICAL THINKING EXERCISE 2-2
In searching for the answers to this exercise, students should go to the library or go online to find
possible sources. The CIA publishes the “World Factbook” (https://www.cia.gov/library/publications/theworld-factbook/index.html), which gives a surprisingly complete collection of economic and demographic data. As students search these sources, they can record the latest information they find. Even if they
cannot find the answers, encourage them to note what information is available in those sources so they
can refer to them again in the future.
Consumer prices are meaningless in an economy that the government controls most of the consumer goods. The official price and the price paid to unofficial sellers working underground are two radically different things. One lesson from an exercise like this is that information is often difficult to obtain
from a controlled government and the information you do get may not be accurate.
CHAPTER 2: How Economics Affects Business
2.35
CRITICAL THINKING EXERCISE 2-3
How Businesses Help Nonprofits
Many people say that businesspeople do not do enough for society. Some students choose to go
into the public sector instead of business because they “want to help others.” However, businesspeople
say that they do more to help others than nonprofit groups do because they provide jobs for people rather
than giving them charity, which often precludes them from searching for work. Furthermore, they believe
that businesses create all the wealth that nonprofit groups distribute.
1.
Can you find some middle ground in this debate that would show that both businesspeople and
those who work for nonprofit organizations contribute to society and need to work together more
closely to help people?
2.
Could you use the concepts of Adam Smith to help illustrate your position?
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INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
CRITICAL THINKING EXERCISE 2-4
Balancing the Federal Budget
The Federal government’s historical budget deficit is discussed and debated endlessly. Everyone
has an opinion on how to balance the budget. Below are actual figures (more or less) for fiscal year 2006.
Rearrange the figures to eliminate the $248,181,000,000 deficit and balance the budget. You can either
cut money going out or increase money coming in, but interest payments on the national debt cannot be
adjusted. Good luck.
CHAPTER 2: How Economics Affects Business
2.37
FEDERAL GOVERNMENT REVENUE AND SPENDING, 2006
MONEY COMING IN (RECEIPTS) (all figures in $billions)
Individual income taxes
2006
Proposed
Value
1,043,908
Corporation income taxes
353,915
Social Security
837,821
Excise taxes
73,961
Other
97,649
TOTAL, FEDERAL RECEIPTS
2,407,254
MONEY GOING OUT (OUTLAYS) (all figures in $billions)
National defense
521,840
Human resources
1,672,076
Education, training, employment, and social services
118,560
Health
252,780
Medicare
329,868
Income security
352,477
Social security
548,549
Veterans benefits and services
69,842
Physical resources
164,800
Energy
782
Natural resources and environment
33,055
Commerce and housing credit
6,188
Transportation
70,244
Community and regional development
54,531
Other functions
International affairs, space and technology, agriculture,
justice, general government
Interest on National Debt (CANNOT BE CHANGED)
TOTAL, FEDERAL OUTLAYS
SURPLUS (DEFICIT)
2.38
70,116
226,603
226,603
2,655,435
(248.2)
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INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
NOTES ON CRITICAL THINKING EXERCISE 2-4
There is no “right” or “wrong” answer to this exercise. Each student will modify the budget figures based on their individual beliefs and attitudes. It is interesting to assign this exercise as a group project and have the groups negotiate an equitable balance.
You can also update the figures with the current year’s data by visiting Websites such as
www.federalbudget.com/, www.whitehouse.gov/omb/budget/, or www.gpoaccess.gov/usbudget. You
may have a hard time finding reliable totals, as different sources use different categorization methods.
CHAPTER 2: How Economics Affects Business
2.39
BONUS CASES
BONUS CASE 2-1
Foundations of the Capitalist System
Throughout history of capitalism, there has been one persistent criticism. The whole system
seems to be based on selfishnessthe more one works, the more one prospers. If one is unable to work,
the system seems to have no answer to his or her problems. Furthermore, there does not seem to be any
moral or spiritual foundation to the system. Where do businesses get their values? What about concepts
such as sharing, helping neighbors, and protecting the environment?
It is important to make a distinction between plain capitalism and democratic capitalism. Democratic capitalism is a system based on three components: (1) free enterprise; that is, freedom to own your
own businesses and farms and freedom to keep the profits, (2) a freely elected government that has internal checks and balances, and (3) moral, ethical, and spiritual values that are part of the very fabric of the
country and the business system. Plain capitalism is a system where there is free enterprise, but no freely
elected government and no foundation of moral, ethical, and spiritual values. There are several “capitalist” countries headed by right-wing dictators that do not have democratic capitalism and do not have the
relative prosperity and social justice that we have in the United States.
Let’s explore democratic capitalism in more detail so that you can understand how the system
works. One of the most important elements of democratic capitalism is its moral and spiritual base. When
the U.S. was being settled, there was so much religious debate and rivalry among religions that people
were tortured and killed for their beliefs. When it came time to establish a free and separate U. S., however, the founding fathers were adamant about freedom of religion. They were very religious people themselves.
Thomas Jefferson was proud of his religious heritage and his fight for religious freedom in the
U.S. He asked that his epitaph should read: “Author of the Declaration of Independence, of the Statute of
Virginia for Religious Freedom, and Father of the University of Virginia.” Jefferson felt that freedom of
religion was one of his most important contributions. He felt it was as important as being President of the
United States.
Democratic capitalism cannot work effectively and fairly without all three components. With all
three, the democratic capitalist system can become the most fair and equitable economic system in the
world. Not everyone agrees on the role of government in the democratic system and on how much of the
total gross national product the government should control. (Recent history indicates that somewhere between 20% and 25% of GDP gives the government the funds it needs to create more social justice and
more equitable distribution of wealth.) A freely elected government is important to democratic capitalism
because if the people feel that the system is not fair, they can elect new politicians to change the rules.
DISCUSSION QUESTIONS FOR BONUS CASE 2-1
1.
Why is it so necessary to have a freely elected government for democratic capitalism to create a
prosperous and fair economy?
2.
Go through the three components of democratic capitalism and picture an economy without each
one. What happens to freedom, fairness, and moral and ethical behavior? Which part of the system seems weakest today? What can be done about it?
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ANSWERS TO DISCUSSION QUESTIONS FOR BONUS CASE 2-1
1.
Why is it so necessary to have a freely elected government for democratic capitalism to create a
prosperous and fair economy?
Because any kind of dictatorship hinders the operation of free markets, or at least tends to do so.
Free choice in the market is based on a value system that includes free choice in it, including free choice
of leaders.
2.
Go through the three components of democratic capitalism and picture an economy without each
one. What happens to freedom, fairness, and moral and ethical behavior? Which part of the system seems weakest today? What can be done about it?
Without free enterprise, shortages develop and the whole economy tends to slow. Poverty, hunger, and starvation often result. Without a freely-elected government, the arbitrary allocation of resources
can lead to the same problems as an absence of free markets. But what is needed in any economy is a
moral and ethical base. Without that base, the market mechanism falters.
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BONUS CASE 2-2
Katrina’s Aftermath (Video Case)
(NOTE: This case can be used with the Video on DVD for this chapter.)
Free market capitalism has been credited with the marvelous growth and prosperity enjoyed by
the United States and other developed countries. But no country really has a totally free market system.
Always, the government acts to help assure those who are poor, elderly, or disabled that they will receive
some minimum amount of assistance. Usually that assistance includes education or some kind of welfare
assistance (e.g., food, housing, or tax relief). The resulting system is called a mixed economic system because it is a mixture of free market capitalism and government social programs. If the government programs are extensive, the system might be called socialism.
In the United States, there are many very rich people and many very poor people. Despite numerous efforts by businesses, government agencies, and nonprofit organizations to end poverty, poverty still
persists. That point was illustrated vividly when hurricane Katrina hit the Gulf Coast region of the United
States, and was especially apparent in New Orleans, Louisiana.
Who is to blame for persistent poverty? And why did the people in New Orleans suffer for so
many days before assistance arrived? Is the government indifferent to the needs of some? Is the city government responsible, or the state government, or the federal government? There have been major natural
disasters throughout the world in recent years, and the results have been much the same. Many people die;
others lose their homes and jobs. Almost always, citizens try to help, but the task is simply too great. At
times, even the state and federal government are overwhelmed by the need.
In the case of New Orleans, businesses like Wal-Mart responded rather quickly, but they couldn’t
get food and materials to people without help. Nonprofit groups of all kinds drove down to help, but government bureaucracy made it difficult, if not impossible, to get a coordinated effort going. Communications between and among various government, private, and nonprofit organizations was almost nonexistent. Much of the infrastructure (roads, rivers, water system, electricity, and so forth) were not operating.
In short, capitalism is a great system for creating wealth in a macroeconomic environment where
supply and demand dictate through prices what gets produced and in what quantity and quality. In the
short run, however, shortages can exist for a while without the appropriate response. In the long run, the
free market system will do its work. The demand for supplies will result in flows of goods. Homes will be
rebuilt. Businesses will reopen. Jobs will be created. People will get on with their lives. That has happened again and again in Florida and other places where disaster has struck.
Wars and natural disasters create a real challenge for any economic system. The fastest response
usually comes when people are free to create their own businesses, free to own their own land, free to set
their own prices, and free to keep the profits from what they earn. Acadian Ambulance is an example of
what free markets can do. In the midst of the Katrina disaster, the company had a satellite communication
system up and running. Acadian was thus able to coordinate hospitals, law enforcement, and rescue workers. Land lines, cell phones, and internet communications had all failed. But one creative company was
able to rise above the chaos.
Ultimately, you and I, as taxpayers, will have to pay for the damages in the Gulf region. The government uses fiscal policy, taxes and spending, to keep the economy growing and to respond to people in
need. The government also uses monetary policy to keep the economy growing at the right pace. That
means that the Federal Reserve will raise or lower interest rates and control the money supply so that
businesses can prosper and grow—creating jobs and minimizing poverty.
There have always been ups and downs in the economy. Though thick and thin, people have always responded by helping their neighbors and helping those throughout the world who have less. More
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and more countries are adopting the concepts of free markets and free trade. The results are obvious in
places like China, India, South Korea, and around the world. A good understanding of economics is the
basis for all such growth—and the reason for discussing economics early in this text.
DISCUSSION QUESTIONS FOR BONUS CASE 2-2
1.
No economic system has been able to respond quickly to the devastation caused by war or major
natural disasters. Why is the free market system more likely to respond faster? What advantages
might a socialist system have in responding to the needs of the poor?
2.
What could the government do to better coordinate the efforts of churches, other nonprofit organizations, government agencies, businesses, and individual citizens when emergencies strike?
What factors have hindered such coordination in the past?
3.
When disasters hit an area, the cost of everything seems to go up immediately: food, water, housing, gas, etc. Explain why this phenomenon may be a good thing, using the laws of supply and
demand to explain your answer. What would happen if prices did not go up?
ANSWERS TO DISCUSSION QUESTIONS FOR BONUS CASE 2-2
1.
No economic system has been able to respond quickly to the devastation caused by war or major
natural disasters. Why is the free market system more likely to respond faster? What advantages
might a socialist system have in responding to the needs of the poor?
The single greatest impediment to quick response is cumbersome bureaucracy. The free market
system has less. Companies and individuals can respond immediately with needed human essentials. For
example, a company like Wal-Mart, with its formidable infrastructure and transportation systems, can
efficiently move goods where they are most in demand and meet local needs. Simultaneously they can
enhance their marketing through benevolent response to human suffering and make an already ubiquitous
name more well thought of universally.
The socialist system could respond quickly with essential goods and services already directly tied
to national government agencies. There would be less incentive to the individual to profit through price
gouging which is especially harmful to the economically disadvantaged.
2.
What could the government do to better coordinate the efforts of churches, other nonprofit organizations, government agencies, businesses, and individual citizens when emergencies strike?
What factors have hindered such coordination in the past?
Hurricane Katrina exposed the lack of preparedness of all levels of government to huge-scale natural disasters. The national government should take the lead in coordinating with state and local governments for long-term relief and placing authorities immediately to ensure appropriate action.
Local government, with the aid of state and national governments, should be free to meet first responder and emergency needs. Planning to meet immediate future needs while the larger scope of clean
up, rebuilding, and disaster prevention such as improved levee systems needs to be a priority of the national government.
3.
When disasters hit an area, the cost of everything seems to go up immediately: food, water, housing, gas, etc. Explain why this phenomenon may be a good thing, using the laws of supply and
demand to explain your answer. What would happen if prices did not go up?
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When disasters hit an area, supply and demand quickly come into play. In the aftermath of Katrina, dwindling supplies of gasoline led to a spike in prices and long lines at service stations. As demand
increased, supply went to zero in some places. Gasoline prices immediately skyrocketed and price gouging was common.
Certain items, such as batteries, ices, and water, quickly sold out. Companies like Wal-Mart and
Home Depot responded by bringing in ice, building materials, chain saws, and other emergency-related
items to meet demands of the public while keeping supplies from becoming critically low for long periods
of time. This response led to higher sales, greater profits, and excellent public relations for the companies.
Meanwhile, higher oil prices brought about by the declining supply of crude oil from the rigs in
the Gulf of Mexico increased prices of most goods. This phenomenon produces profit incentives for oil
companies to search for and produce more oil. Other factors such as limited oil reserves and global warming increase the potential profit in alternative energy sources that produce no greenhouse gases and other
pollutants.
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BONUS CASE 2-3
The Rule of 72
No formula is more useful for understanding inflation than the Rule of 72. Basically, the rule allows you to quickly compute how long it takes the cost of goods and services to double at various compounded rates of growth. For example, if houses were increasing in cost at 9% a year, how long would it
take for the price of a home to double? The answer is easy to calculate. Simply divide 72 by the annual
increase (9%) and you get the approximate number of years it takes to double the price (eight years). Of
course, the same calculation can be used to predict how high food prices or auto prices will be 10 years
from now.
Here’s an example of how you can use the Rule of 72. If the cost of going to college goes up by
6% a year, how much might you have to pay to send your child to college in 24 years (this assumes you
will have a child 6 years from now) if college costs are now $10,000 a year? To find the answer, you divide 72 by 6, which shows that the cost of an education would double in 12 years. It would double twice
in 24 years. Your son or daughter can expect to pay $40,000 per year to attend college.
DISCUSSION QUESTIONS FOR BONUS CASE 2-3
1.
If the cost of a private college education is about $20,000 per year now, what will it cost your
children per year if costs go up 9% a year and your children go to college 16 years from now?
2.
If the value of a home doubles in 12 years, what is the annual rate of return? (Hint: use the rule of
72 in reverse.)
3.
If you put $1,000 into a savings account and earned 6% per year, how much money would you
have in the account after 48 years?
4.
If interest on the national debt is 6% a year, how long would it take for the debt to double? How
long would it take if interest rates went up to 8%?
ANSWERS TO DISCUSSION QUESTIONS FOR BONUS CASE 2-3
1.
If the cost of a private college education is about $20,000 per year now, what will it cost your
children per year if costs go up 9% a year and your children go to college 16 years from now?
Using the Rrule of 72, costs would double in 8 years (72 divided by 9). There are two 8-year periods in 16 years, meaning that costs would double twice: $40,000 then $80,000 per year. So the cost
would be $80,000 per year.
2.
If the value of a home doubles in 12 years, what is the annual rate of return? (Hint: Use the Rule
of 72 in reverse.)
Using the Rule of 72, you divide 12 into 72 and get the rate of return, which is 6%.
3.
If you put $1,000 into a savings account and earned 6% per year, how much money would you
have in the account after 48 years?
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Your original $1,000 would double in 12 years (72 divided by 6 equals 12). There are four 12year periods in 48 years, so the amount would double four times: $2,000, $4,000, $8,000, for an end
amount of $16,000.
4.
If interest on the national debt is 6% a year, how long would it take for the debt to double? How
long would it take if interest rates went up to 8%?
Again, using the Rule of 72, it would take about 12 years at 6% (72 divided by 6) and 9 years at
8% (72 divided by 8.)
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ENDNOTES
Sources: Scott Elder, “Europe’s Baby Bust,” National Geographic, September 2003; “The Population Divide,” The
Register-Guard, May 14, 2006; and “Europe Facing Culture Dilemma,” The Clarion-Ledger, March 29, 2006, p.
10A.
i
Sources: Liza Featherstone, “Wal-Mart to the Rescue!” The Nation, September 13, 2005; “Wal-Mart and Sam’s
Club’s Response to Hurricane Disaster Continues,” Walmartfacts.com, August 31, 2005; and interviews with affected residents.
ii
Sources: Mike Moffatt, “A Beginner’s Guide to Economic Indicators,” About.com, May 16, 2006; “Economic
Indicators,” Investopedia.com; “Leading Indicators Index Shows Economy Braking,” The Clarion-Ledger, May 19,
2006, p. 3C; and “Economic Indicators,” GPOAccess, Council of Economic Advisors, www.gpoaccess.gov.
iii
iv
Source: “Half of Americans ‘Lose’ $2,000 in Cash a Year,” CNNMoney.com, September 13, 2007.
v
The Internet is a dynamic, changing information source. Web links noted in this manual were checked at the time
of publication, but content may change over time. Please review the website before recommending it to your students.
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