CHAPTER
2
Our Global Economy
2-1
2-2
2-3
2-4
2-5
Economics and Decision Making
Basics of Economics
Economic Systems
Achieving Economic Development
Resources Satisfy Needs
CHAPTER
2
LESSON 2-1
Economics and Decision Making
GOALS
 Describe the basic economic
problem.
 List the steps of the decisionmaking process.
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2
If Money Were No Object…
 Where would you live?
 What would you drive?
 Where would you go to school?
 What would you wear?
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2
Reality…
 There is a limited supply of money
 There are limited resources
 There is limited amount of time to get
everything done you want to
accomplish
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2
The Basic Economic Problem
 Scarcity refers to the limited resources
available to satisfy the unlimited needs
and wants of people.
 Economics is the study of how people
choose to use limited resources to satisfy
their unlimited needs and wants.
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2
Making Economic Decisions
 Coping with scarcity
 Making choices
 Time
 Money
 Energy
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2
The Decision-Making Process
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2
The Decision-Making Process
1. Define the problem
 What do I want or need?
 Business Example: Declining domestic sales
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2
The Decision-Making Process
2. Identify the alternatives
 What are the different ways my problem
can be solved?
 Business Example:
 Increase Prices
 Reduce Expenses
 New Product Development
 Expansion
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2
The Decision-Making Process
3. Evaluate the alternatives
 What are the advantages and
disadvantages of each of the choices
available?
 Business Example:
 Lose or gain customers
 Downsizing
 R&D
 New products
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2
The Decision-Making Process
4. Make a choice
 Based on the advantages and
disadvantages, which would be my best
choice? Can I live with the consequences
of that choice?
 Opportunity Cost – the most attractive
alternative given up when a choice is
made
 If by expanding globally, Kellogg’s has to use a
manufacturing plant that currently has less than
ethical business practices
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2
The Decision-Making Process
5. Take action on the choice
 What needs to be done to put the decision
into action?
 Business Example: Expand Globally
 Select Countries
 Hire Sales Force
 Determine Logistics/Distribution
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The Decision-Making Process
6. Review the decision
 Did your decision solve the problem? As
time goes by, what different actions might
be necessary? Were there consequences
you did not predict when you evaluated
the alternatives?
 Did increase in sales offset cost of global
expansion?
 Can Kellogg’s upgrade manufacturing plant
with more current ethical standards?
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2
The Decision-Making Process
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2
LESSON 2-2
Basics of Economics
GOALS
 Describe how the market sets
prices.
 Explain the causes of inflation.
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2
Price-Setting Activities
 Supply is the relationship between the amount
of a good or service that businesses are willing
and able to make available and the price.
 Demand is the relationship between the amount
of a good or service that consumers are willing
and able to purchase and the price.
 Law of Demand – as price declines, demand
increases
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2
Market Price Is Set by Supply and
Demand
 Market price is the point at which supply and
demand cross.
 Also called Equilibrium Price
 Example: Air line tickets
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2
Market Price Is Set by Supply and
Demand
Airfare to Paris
Cost per Ticket
$2,500
$2,000
Market Price
$1,500
Qs
$1,000
Qd
$500
$0
0
100
200
300
400
500
600
Seats Sold
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2
Changing Prices
 Inflation – an increase in the average
prices of goods and services in a country
 Demand-pull inflation
 When demand exceeds supply
 Can occur when a government prints too much money
 Cost-push inflation
 When the expenses of a business increase
 Can occur when cost of salaries or raw materials go up
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2
LESSON 2-3
Economic Systems
GOALS
 Name the three main factors of
production.
 Understand how different countries
make economic decisions.
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2
Economic Resources Satisfy Needs
 Factors of Production – the 3 types of
resources used to produce goods and
services
 Natural resources
 Human resources
 Capital resources
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2
Natural Resources
 Raw materials that come from the earth,
from the water, and from the air
 Iron ore, gold, silver, agricultural products
 Also known as land
 Used in the production of goods and
services consumed by individuals,
businesses, and governments.
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2
Human Resources
 The people who work to create goods and
services
 Also known as labor
 While technology has changed or
eliminated certain tasks previously
performed by people, new types of work
are continually being created.
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2
Capital Resources
 Includes buildings, money, equipment, and
factories used in the production process
 Also called capital
 These items are expensive and are used
over several years by business
organizations.
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2
Economic System
The economic choices
of a country relate to
three basic questions:
1. What goods and
services are to be
produced?
2. How should the
goods and services
be produced?
3. For whom should the
goods and services
be produced?
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2
Economic Systems
 Economic Systems
 The method a country uses to answer the
basic economic questions
 Often based on customs, political factors, and
religious beliefs
 3 common types
 Command Economies
 Market Economies
 Mixed Economies
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2
Types of Economic Systems
 Command Economies
 Government regulates the amount,
distribution, and price of everything produced
 Government owns the productive resources
 Any income from these resources is used to
help fund government activities
 Also known as Communism
 China, Cuba, Vietnam, Laos, North Korea
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2
Types of Economic Systems
 Market Economies
 Individual companies and consumers make
the decisions about what, how, and for whom
items will be produced
 Also known as Capitalism of Free Enterprise
System
 United States, Japan, Australia, Canada
Is there such a thing as a Perfect Market Economy?
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2
Types of Economic Systems
 3 Characteristics of Market Economies
 Private property – individuals have right to buy and
sell productive resources and to own business
enterprises
 Profit motive – individuals are inspired by the
opportunity to be rewarded for taking business risks
and for working hard
 Free, competitive marketplace – consumers have the
power to use their choices to determine what is to be
produced and to influence the prices to be charged
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2
Types of Economic Systems
 Mixed Economies
 Blend between government involvement in business
and private ownership
 Government owns transportation, communications, and
major industries
 Individuals free to engage in other business opportunities
and free to make buying choices
 Also known as Socialism
 Sweden, France
 Privatization – process of changing an industry from
public to private ownership
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CHAPTER
2
LESSON 2-4
Achieving Economic Development
GOALS
 Describe the factors that affect
economic development.
 Identify the different levels of
economic development.
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2
Economic Development
 Traveling on a high-speed bullet train to
manage a computer network in a high-rise
building
 Going by ox cart to a grass hut to operate
a hand loom to make cloth for family
members and other people in their village
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CHAPTER
What Influences a Country’s
Economic Development?
2
 Literacy level
 Technology
 Agricultural dependency
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2
What Influences a Country’s
Economic Development?
 True or false?
 countries with better education systems usually
provide more goods and services that are of higher
quality for their citizens
 automated production, distribution, and
communication systems allow companies to create
and deliver goods, services, and ideas quickly
 an economy that is largely involved in agriculture
does not have the manufacturing base to provide
citizens with a large number of high quality products
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2
Level of Economic Development
 Industrialized or Developed Countries
 Less-Developed Countries
 Developing Countries
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2
Levels of Economic Development
LessDeveloped
Country
 Low literacy
 Limited
technology
 Agricultural or
mining
economy
Developing
Country
Industrialized
Country
 Improving
literacy
 Improving
technology
 Decreasing
dependence
on agriculture
or mining
 High literacy
 Modern
technology
 Industrial
economy
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2
Industrialized or Developed
Countries
 Strong Infrastructure
 a nation’s transportation, communication, and
utility systems
 Actively involved in international business
and foreign trade
 Average annual income per person of
more than $30,000
 US, Canada, UK, France, Germany, Italy,
Japan
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2
Less-Developed Countries (LDCs)
 Little economic wealth
 May have resources, but no technology to make use
of them
 Weak Infrastructure, poor health care, low
literacy rates, low levels of employment skills,
uncertain political environments
 Little to no foreign trade
 Average annual income per person of less than
$1,000
 Bangladesh, Cambodia, Chad, Haiti, Nepal, Niger,
and Sudan
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2
Developing Countries
 Evolving from less developed to
industrialized
 Improving educational systems, increasing
technology, and expanding industries
 Also known as Emerging Markets
 Argentina, Brazil, Ecuador, India, Kenya,
Hungary, Poland, South Africa, Turkey,
Thailand, and Vietnam
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CHAPTER
2
LESSON 2-5
Resources Satisfy Needs
GOALS
 Discuss economic principles that
explain the need for international
trade.
 Identify various measures of
economic progress and
development.
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CHAPTER
2
The Economics of Foreign Trade
 Absolute advantage exists when a
country can produce a good or service at a
lower cost than other countries
 Usually occurs as a result of the natural
resources or raw materials of a country
 Examples:
 South America – coffee
 Saudi Arabia – oil
 Canada - lumber
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2
The Economics of Foreign Trade
 Comparative advantage exists when a
country can produce a good or service
with more efficiency than other countries
 Maximizing economic wealth
 If advantage exists in more than one area,
produce goods with greatest return and buy
other goods elsewhere
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2
Measuring Economic Progress
 Measures of Production
 Gross domestic product (GDP)
 Measures the output of goods that a country produces within
its borders
 Includes items produced with foreign resources
 Gross national product (GNP)
 Measures the total value of all goods and services produced
by the resources of a country
 GDP plus production on other countries using our resources
 Per Capita
 Refers to an amount per person
 Takes total GDP divided by country population
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CHAPTER
2
Per Capita GDP for Selected
Countries
Rank Country
US$
Rank Country
US$
1
Qatar
143,427
8
San Marino
60,664
2
Luxembourg
92,049
9
Switzerland
58,087
3
Singapore
82,762
10
Hong Kong
54,722
4
Brunei
73,233
11
US
54,597
5
Kuwait
71,020
12
Saudi Arabia
52,183
6
Norway
66,937
13
Bahrain
51,714
7
UAE
64,479
14
Ireland
49,195
Source: International Monetary Fund (2014)
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2
Measuring Economic Progress
 International Trade Activity
 Balance of trade – the difference between a
country’s exports and imports
 Trade Surplus – when a country exports (sells)
more than it imports (buys)
 Trade Deficit – when a country imports (buys)
more than it exports (sells)
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2
Balance of Trade
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2
Measuring Economic Progress
 International Trade Activity
 Foreign exchange rate – the value of one country’s
money in relation to the value of the money of another
country
 How strong is the US dollar today?
 Foreign debt – the amount a country owes to other
countries
 How much external debt does the US have?
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2
Measuring Economic Progress
 Other Economic Measurements
 Consumer price index (CPI)
 How inflation is measured in US
 Monthly report that provides price levels for various products
and services in different regions of the country
 Unemployment rate
 Number of people not working
 When people are not earning an income, they cannot
purchase needed goods and services
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