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Political and Economic
Analysis
Chapter 3
Government
Economy
Chapter 3
People
Politics
Chapter Objectives
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Define the concept of an economy
List the factors of production
Explain the concept of scarcity
Discuss how traditional, market, command
and mixed economies answer the three basic
economic questions.
Cite examples of various economic systems
List the goals of a healthy economy
Explain how an economy is measured
Analyze the key phases of a business cycle
Chapter 3.1
What is an Economy?
Objectives
 Define the concept of an economy
 List the factors of production
 Explain the concept of scarcity
 Discuss how traditional, market, command
and mixed economies answer the three basic
economic questions.
 Cite examples of various economic systems
Chapter 3.1 – Key Terms
Economy
Factors of Production
Resources
Infrastructure
Entrepreneurship
Scarcity
Traditional Economy
Market Economy
Command Economy
What words come to mind when you
see the word Economy?
Economy
Do you think economic
decisions affect your
daily life? How?
The Main Idea:
An economy is how a nation
makes economic choices that
involve how the nation will use
its resources to produce and
distribute goods and services
to meet the needs of its
population.
Economic Systems
Economy
• An organized way a nation
provides for the needs and wants
of its people
Resources
• All the things used in producing
goods and services
Factors of
Production
• Land, Labor, Capital, and
Entrepreneurship
• Economists uses this term when
they talk about resources
Factors of Production
Land
• Includes everything contained in the earth or found
in the seas.
• Examples are coal, the lake & everything in it, trees
& plants.
Labor
• Refers to all the people who work
• Includes full and part-time workers, managers, and
professional people in both the public and private
sectors
Entrepreneurship
• Refers to the skills of the people willing to invest their
time and money to run a business.
• Entrepreneurs organize the factors of production to
create the goods and services that are part of an
economy
Factors of Production (cont.)
Capital
• Include money to start and operate
a business. It also includes goods
used in the production process
• Factories, office buildings, computers
and tools are all considered capital
resources
• Infrastructure: The physical
development of a country. This
includes its road, ports, sanitation
facilities, and utilities, especially
telecommunications
Scarcity
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The difference between wants and needs
and available resources is called scarcity.
Different economies have different amounts
of resources. The U.S. has an educated labor
force, a great deal of capital, an abundance
of entrepreneurs, and many natural
resources.
Most underdeveloped have natural
resources to spare but not the capital or the
skilled labor to develop them.
How Does an Economy
Work?
Nations must answer three basic questions
when deciding how to use their limited
resources:
1. What?
• What goods and services should
be produced?
2. How?
• How should the goods and
services be produced?
3. For Whom?
• For whom should the goods and
services be produced?
Economic Systems
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Economists study the way nations answer
the three basic economic questions and
classify the economic systems into three
broad categories.
Traditional
Market
Command
Traditional Economies
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Traditions and rituals answer the basic questions of
what, how, and for whom. The answers are often
based on cultural or religious practices and ideals that
have been passed from one generation to the next.
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What? There is little choice about what to produce.
People produce what they need to survive. They use
the natural resources to do this.
How? Traditional societies are underdeveloped. They
produce what they need with simple handmade tools.
People use the technique that has been passed down
through generations
For Whom? Traditional economies have a sense of
community. Any excess is traded among the residents..
Market Economies
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In a pure market economy, there is no
government involvement in economic
decisions.
Individuals and companies own the means
of production and businesses compete for
consumers.
Market Economies (cont)
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The government lets the market answer the
three basic economic questions:
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What? Consumers decide what should be
produced through the purchases that the make
How? Businesses decide how to produce goods
& services
For Whom? The people who have more
money are able to buy more goods and services.
Command Economies
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A command economy is a system in which a
country’s government makes economic
decisions and decides what, when, and how
much will be produced and distributed.
What? One person decides what products
are needed
How? The government owns all means of
production, it runs all businesses.
For Whom? The government decides who
will receive what is produced.
Mixed Economies
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No economy is purely a traditional, market,
or command economy.
Every economy has influences that make it
at least somewhat mixed.
The U.S. is considered a mixed economy
because there is governmental involvement
in the laws and regulations that businesses
must follow.
Mixed Economies (cont.)
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Most economies in the world are mixed.
An economic classification would depend on how
much the government interferes with the free
market.
Examples of Gov’t involvement in the U.S.:
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There are regulations that protect our food, water, air.
Labor laws determine what age people can start working
and the minimum salary.
Social programs are provided for those who needs help
such as welfare and Medicaid for the poor and Medicare
for the elderly
The Three Political
Philosophies
Capitalism
• Marketplace competition
• Private Ownership
Communism
• Government controls factors of production
• No private ownership of property or capital
Socialism
• Meet basic needs for all
• Provide employment for many
Capitalism, Communism
& Socialism
Capitalism
• Political & economic philosophy characterized by
marketplace competition and private ownership of
businesses
• It is the same as free enterprise.
• Political systems associated with capitalism is democracy.
Political power is in the hands of the people
• The government also cares about those who cannot take
care of themselves. (Welfare, Medicaid, Medicare)
• The U.S. and Japan are two examples of countries that
are classified as capitalist and have a democratic form of
government.
Capitalism, Communism
& Socialism
Communism
• Is a social, political, and economic philosophy in which the
government, usually authoritarian, controls the factors of production.
• There is no private ownership of property or capital.
• Theoretically, there is no unemployment
• The government decides the type of schooling people will receive
and also tells them where to live
• Housing accommodations are assigned according to need.
• Medical care is free. There is no financial incentive for people to
increase their productivity.
• The few countries that can be classified as communist include Cuba
and North Korea. China, Vietnam and Laos is now allowing more
free enterprise practices even though they are politically dominated
by a communist party.
Capitalism, Communism
& Socialism
Socialism
• The term that refers to a system on its way to communist ideal of a
classless society
• The main goal is to meet basic needs for all and to provide
employment for many and to ensure a certain standard of living for
all
• Medical care is free or low cost, as is education.
• There are systems for pensions and elderly care.
• Businesses and individuals pay higher taxes than those in capitalist
countries in order to contribute to financing of government services.
• The government runs key industries and makes economic decisions.
• Canada, Germany and Sweden are generally characterized as
having socialist elements in their economies.
Economies in Transition
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Most Eastern European countries that were
once communist satellites have moved
toward global market economies and more
democratic forms of government.
Many state owned industries have been
privatized in these countries.
Privatization
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Privatization refers to the process of selling
government-owned businesses to private
individuals.
This generates much needed revenue for the
governments involved.
A Move Toward Privatization
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Today many socialist countries are selling
their state-run businesses to help balance
their budgets as the costs of national health
care, unemployment, and retirement
programs soar.
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Example: Great Britain sold its national phone
company and more. British Airway was
privatized. All these sales generated
approximately $63 billion for Great Britain.
Developing Economies
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Developing economies are mostly poor
countries with little industrialization that are
trying to become more prosperous and
develop their infrastructure.
Much of their success depends on improving
the education levels of their labor force and
on directing and using foreign investment
efficiently.
Capitalism, Communism &
Socialism Examples
Capitalist Countries
• United States
• Japan
Communist Countries
• Cuba
• North Korea
Socialist Countries
• Germany
• Canada
• Sweden
Review Questions
Explain how the infrastructure of a country
is related to the factors of production?
2. What three broad categories do economists
use to classify all economic systems?
3. In which economic system does the
government let the market answer the
three basic economic questions?
1.
Political and Economic
Analysis
Chapter 3
Section 2
Government
Economy
Chapter 3
People
Politics
Chapter 3.2
Understanding the Economy?
Objectives
 List the goals of a healthy economy
 Explain how an economy is measured
 Analyze the key phases of a business cycle
Chapter 3.2 – Key Terms
Productivity
Consumer Price Index
(CPI)
Expansion
Gross Domestic
Product (GDP)
Gross National
Product (GNP)
Producer Price Index (PPI)
Recession
Depression
Inflation
Business Cycle
Recovery
The Main Idea:
Aspects of an economy such as
consumers, businesses, and
governments affect each other
and the economy in general.
Companies need current
economic information to make
good marketing decisions.
The Economy & Marketing
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An understanding of how to measure an
economy and what factors contribute to
economic strength or weakness is essential.
It is only then that you can appreciate how
the economy, consumers, businesses, and
government influence each other.
When is an Economy
Successful?
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A healthy economy has three goals:
Increase productivity
2. Decrease unemployment
3. Maintain stable prices
1.
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All nations analyze their economies to keep
track of how well they are doing.
Based of this analysis, businesses, consumers
and governments can make appropriate
economic decisions.
Economic Measurements
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The key economic measurements that
nations routinely use to determine their
economic strength are:
1.
2.
3.
4.
5.
6.
Labor productivity
Gross domestic product (GDP)
Gross national product (GNP)
Standard of living
Inflation rate
Unemployment rate
Labor Productivity
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Productivity is output per worker hour that is
measured over a defined period of time, such as a
week, month, or year.
Businesses can increase their productivity by:
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Investing in new equipment or facilities that allow
their employees to work more efficiently
Providing additional training or financial incentive to
boost staff productivity
Businesses can also reduce their work force and
increase the responsibilities of the workers who
remain.
Specialization and division of labor. Example: An
assembly line.
Gross Domestic Product
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Most governments study productivity by
keeping track of an entire nation’s
production output.
Today, the principal way of measuring that
output in the U.S. is gross domestic product.
Gross domestic product (GDP) is the
output of goods and services produced by
labor and property located within a
country.
Gross Domestic Product (cont.)
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The GDP is made up of private investment,
government spending, personal spending, net
exports of goods and services and change in business
inventories.
Private investment includes spending by businesses
for things like equipment & software, as well as
home construction.
Government spending includes money spent by
local, state and federal governments.
Personal spending includes all consumer
expenditures for goods and services.
Gross Domestic Product (cont.)
Private
Investment
Government
Spending
Personal
Spending
GDP
Trade
Surplus /
Trade Deficit
Gross National Product
(GNP)
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The GNP used to be the measurement used
by the US to measure productivity.
Gross National Product (GNP) is the total
dollar value of foods and services produced
abroad by U.S. citizens and companies.
The difference between GDP & GNP: The
GNP is concerned with who is responsible for
the production not where it is done.
Standard of Living
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A country’s standard of living is a
measurement of the amount and quality of
goods and services that a nation’s people
have. It is a figure that reflects their quality
of life.
To calculate this:
GDP
or
GNP
Population
Per capita
GDP or GNP
Inflation Rate
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Inflation refers to rising prices. A low
inflation rate (1-5%) each year is good
because it shows that the economy is stable.
Double-digit inflation (10% or higher)
devastates an economy.
When the inflation gets that high, money
does not have the same value it did with
lower inflation.
Controlling inflation is one of the
government major goal
Inflation Rate (cont.)
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When inflation starts to go up, many
governments raise interest rates to
discourage borrowing money. The result is a
slow down in economic growth, which helps
to bring inflation down.
Two measures of inflation used in the U.S.
are the consumer price index and the
producer price index.
Consumer Price Index (CPI)
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The Consumer Price Index (CPI) measures
the change in price over a period of time of
some 400 specific retail goods and services
used by the average urban household.
It is also called the cost of living index.
Food, housing, utilities, transportation, and
medical care are a few of its components.
The core CPI excludes food and energy
prices, which tend to be unpredictable.
Producer Price Index (PPI)
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Producer Price Index (PPI) measures
wholesale price levels in the economy.
Producer prices generally get passed along
to the consumer.
When there is a drop in the PPI, it is
generally followed by a drop in the CPI
Unemployment Rate
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All nations chart unemployment, or jobless
rates.
The higher the unemployment rate, the greater
the chances of an economic slowdown.
The lower the unemployment rate, the greater
the chances of an economic expansion.
When more people work, there are more
people spending money and paying taxes.
Businesses and government both take in more
money, and the government does not have to
provide as many social services.
Other Economic Indicators &
Trends
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The Conference Board, a private business research
organization that is made up of businesses and
individuals who work together to assess the state of the
economy.
Three Conference Board Indicators are:
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Consumer Confidence Index
Consumer Expectations index
Job Index (measures consumer perceptions regarding job
availability)
Consumers are polled. Retail sales are studied. The rate
of housing sales are reviewed, as are sales of trucks and
autos.
Wages and new payroll jobs also provide information.
The Business Cycle
The Business Cycle
Expansion
• During an expansion,
unemployment is low and consumer
confidence and spending are high.
Business develop new products and
conduct research. A peak marks the
end of this phase and the beginning
of recession.
Recession
• During a recession, the economy
slows. Businesses lay off workers.
Consumer confidence and spending
are low. There is little demand, so
production of goods and services
decreases. Businesses have little
money to invest. A depression is
deep and long lasting recession.
The Business Cycle (cont.)
Trough
Recovery
• A trough is the low point in the
business cycle. It is the transition
between recession and recovery.
The economy stops slowing and may
show signs that a recovery is near.
• During a recovery, the economy
grows again. Jobs are created and
consumers begin to spend. There is
more demand, so production of
goods and services increases. This
phase may last a long time.
Factors Affecting Business Cycle
Factor
How Can this factor
affect the business
Cycle?
How can the
business cycle
affect this factor?
Businesses
They tend to expand
Recession leads to less
during the Recovery phase consumer spending
therefore lose money
Consumers
They spend less the cycle
leads to recession
Government
The Gov’t might issue
rebates to spur spending
Increase in wages
during a recovery or
expansion
In a recession, less
taxes is paid to the
gov’t
Questions for Section 3.2
1. During a recession, what is the average
person’s greatest fear?
2. How is a depression different from a
recession?
Assess for Understanding
1. Explain: How are two of the factors of
production related?
2. Compare & Contrast: How are the three
basic economic questions answered in a
traditional economy, in a market economy,
and in a command economy?
3. Explain: How are GDP and CPI used in a
market economy for analysis and
marketing decision?