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Transcript
Global Economies What is an Economy? • An economy, or economic system, is the way a nation makes economic choices. – Choices that must be made involve how the nation will use its resources to produce and distribute goods and services. Resources = Factors of Production • Resources, or factors of production, are all the things used in producing goods and services. – – – – Land Labor Capital Entrepreneurship Land • Land includes everything on the earth that is in its natural state, or the earth’s natural resources. Labor • Labor is all the people who work in the economy. Capital • Capital includes money needed to start and operate a business, as well as the goods used in the production process. – – – – Factories Buildings Computers Tools • Capital also includes infrastructure, or the physical development of a country – – – – Roads Ports Sanitation facilities Utilities, especially telecommunications Entrepreneurship • Entrepreneurship refers to the skills of people who are willing to risk their time and money to run a business. How Does an Economy Work? • Nations must answer three basic questions when deciding how to use their limited resources. 1. What goods and services will be produced? 2. How should goods and services be produced? 3. For whom should the goods and services be produced? Need for Economic Systems SCARCITY • No one country has enough resources to supply everything that is needed or wanted which creates scarcity. • Scarcity forces nations to make economic choices. Types of Economic Systems • Market Economy – No government involvement in economic decisions • Command Economy – Government controls the factors of production and makes all decisions about their use • Mixed Economies – All economies in the world today (including the Free Enterprise System in the U.S.) are mixed with varying degrees of government regulation Command Economy Communism Market Economy Socialism Capitalism Capitalism • Capitalism is an economic system characterized by private ownership of businesses and marketplace competition. – Political system = democracy – Usually more than one political party – People free to elect those candidates who agree with their personal philosophy of government and economy – Examples: United States, Japan Socialism • In a socialist political system, there is increased government involvement in people’s lives and the economy. – Main goal is to keep prices low and provide employment – Government runs key industries, such as those in telecommunications, mining, transportation, and banking, and makes economic decisions – Tend to have more social services to ensure a certain standard of living for everyone • Medical care is free or low cost • Free education – some through college • Systems for pensions and elderly care – Businesses and individuals pay much higher taxes – Examples: Canada, Germany, Sweden, Great Britain, Australia Communism • Communist countries have a totalitarian form of government, which means that the government runs everything. – One political party, where all people share common economic and political goals – All who are able to work are assigned jobs – Government decides type of schooling people receive and tells them where to live – Food and housing subsidies keep prices low, so everyone has a place to live and food to eat – Medical care is free – No incentive for people to increase productivity has caused communist economies to collapse – Examples: Cuba, North Korea Economies in Transition • The breakup of the former Soviet Union probably provides the best examples of societies making the difficult change from command to market economies. – State-owned industries have been privatized, which refers to the process of selling government-owned businesses to individuals • Privatization generates much-needed revenue for the governments involved and demonstrates a high level of commitment to making the transition to a market system. When Is An Economy Successful? • Economic measurements – – – – Employee productivity Gross Domestic Product (GDP) Inflation rate Unemployment rate • Other indicators – Consumer Confidence index – Consumers Expectations index – “Jobs Plentiful” index • The Business Cycle Employee Productivity • Productivity is output per worker hour that is measured over a defined period of time, such as a week, month, or year. – Crucial factor in a country’s standard of living • Businesses can increase productivity in many ways: – Invest in new equipment or facilities that allow employees to work more efficiently – Provide additional training or financial incentives – Reduce workforces an increase responsibilities of workers who remain to make an organization more financially efficient and more effective Gross Domestic Product • Most governments study productivity by keeping track of an entire nation’s production output. – Principle way of measuring output in the U.S. is gross domestic product • Gross Domestic Product (GDP) is a measure of the goods and services produced using labor and property located in this country. Inflation Rate • Inflation refers to rising prices. – A low inflation rate (1-5%) is good because it shows that an economy is stable. • Controlling inflation is one of a government’s main goals. – When inflation gets high, money is devalued. – When inflation starts to go up, many governments raise interest rates to reduce everyone’s ability to borrow money, which slows down economic growth. • Measures of inflation in U.S. – Consumer Price Index (CPI), or cost-of-living index, measures the change in price over a time of 400 specific retail goods and services, excluding food and energy, used by the average urban household – Producer Price Index (PPI) measures wholesale price levels in the economy • When there is a drop in the PPI, it is generally followed by a drop in the CPI. Unemployment Rate • 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. Other Indicators • The Conference Board, a private business research organization made up of businesses and individuals, provides additional information to help economists evaluate the performance of the U.S. economy. – Consumers are polled to see how they feel about personal finance, economic conditions, and buying conditions. – Surveys review how customers feel about current economic environment as well as the future. – Retail sales are studied to see if Consumer Confidence polls match consumer actions in the marketplace. – Rate of housing starts and sales of vehicles are also reviewed. – Wages and new payroll jobs provide additional information about the strength of the economy. The Business Cycle • Governments keep statistics about how the economy grows and slows in recurring patterns, known as the business cycle. – Prosperity, or expansion, is the time when the economy is flourishing and is a good time for new businesses to start up. – Recession is a period of economic slowdown that lasts for six months, which results in workforce reductions and less consumer spending. – Depression is a period of prolonged recession, where it becomes nearly impossible to find a job and businesses are forced to shut down. – Recovery is the increase in the overall economic activity, which allows business to pick up, people find jobs, and the demand for goods increases. The Business Cycle Factors That Affect Business Cycles • Businesses tend to react to business cycles by expanding their operations during periods of recovery or prosperity and curtailing their operations during periods of recessions. – Expansion = investments in new properties, equipment, and inventories, as well as hiring more employees – Recession = worker layoffs, cut back on inventories to match lowered demand • Government influences business cycles through its policies and programs. – When the economy needs a boost, the government may reduce interest rates, cut taxes, or institute federally funded programs.