Download Chapter 4 Global Economies

Chapter 4 Global Economies
Section 4.2 Understanding the Economy
1. Understanding the Economy
What You'll Learn
 The goals of an economy
 The various measurements used to analyze an economy
 The four phases of the business cycle
2. Why It's Important
Soon you will be voting and you may also decide to invest in the stock market. These
decisions can impact your financial well being, so it is essential that you understand how
an economy is measured and what factors contribute to a strong or weak economy. It is
important to know how you, businesses, and the government influence the economy. That
way you will know how to invest your money and cast your ballots.
3. Key Terms
 productivity
 gross domestic product (GDP)
 inflation
 Consumer Price Index (CPI)
 Producer Price Index (PPI)
 business cycle
 prosperity (expansion)
 recession
 depression
 recovery
4. When Is an Economy Successful?
It is the goal of all economies to:
 increase productivity
 decrease unemployment
 maintain stable prices
5. Economic Measurements
Accurate economic measurements help determine a nation's economic strength.
 employee productivity
 Gross Domestic Product (GDP)
 inflation
 unemployment
6. Employee Productivity
Productivity is output per worker hour. It is usually measured over a defined period of
time, such as a week, month, or year. Businesses can increase their productivity by
investing in new equipment or facilities that increase efficiency, providing additional
training, and providing financial incentives.
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7. Productivity and Standard of Living
Productivity is a crucial factor in a country's standard of living. What would
you surmise about the United States' standard of living for the last five years
depicted on this chart? Why do you think employee productivity is
increasing?
8. Gross Domestic Product (GDP)
 Gross domestic product is a measure of the goods and services produced
using labor and property located in a country. Using GDP, governments
track an entire nation's production output.
9. Gross Domestic Product
GDP is the total output of goods and services produced in a country. What does
this chart tell you about the United States' GDP and its economy in general? How
do you think GDP would be affected by a recession?
10. Inflation Rate
Inflation refers to rising prices. A low inflation rate (1-5 percent) shows that an economy
is stable. Controlling inflation is one of a government's major goals. The United States
measures inflation in two ways:
 Consumer Price Index (CPI)
 Producer Price Index (PPI)
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11. Inflation Rate: Consumer Price Index
The Consumer Price Index (CPI), also called the cost-of-living index, measures the
change in price of some 400 retail goods and services used by the average urban
household, such as food, housing, utilities, transportation, and medical care. The Core
CPI excludes food and energy prices, which tend to be unpredictable.
12. Inflation Rate: Producer Price Index
The Producer Price Index (PPI) measures wholesale price levels in the economy.
Wholesale price increases often get passed along to the consumer. The Core PPI excludes
food and energy prices, which tend to be volatile. When there is a drop in the PPI, it is
generally followed by a drop in the CPI.
13. Inflation Barometers
Inflation Barometers
Source: Labor Department
Source: Labor Department
Source: Labor Department
CPI and PPI are barometers for inflation. The Core CPI and Core PPI take out the volatile
food and energy prices from the indexes. Based on these three charts, how would you
describe inflation in the United States for the latter part of the 1990s?
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