Marketing Essentials
n Chapter 4 Global Economies
Section 4.2 Understanding
the Economy
Chapter 4 n Global Economies
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SECTION 4.2
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
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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
Key Terms
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productivity
gross domestic product (GDP)
inflation
Consumer Price Index (CPI)
Producer Price Index (PPI)
business cycle
prosperity (expansion)
recession
depression
recovery
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SECTION 4.2
Understanding the Economy
When Is an Economy Successful?
It is the goal of all economies to:
 increase productivity
 decrease unemployment
 maintain stable prices
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SECTION 4.2
Understanding the Economy
Economic Measurements
Accurate economic measurements help
determine a nation's economic strength.
 employee productivity
 Gross Domestic Product (GDP)
 inflation
 unemployment
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SECTION 4.2
Understanding the Economy
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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SECTION 4.2
Understanding the Economy
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?
Source: Bureau of Economic Analysis, Bureau of Labor Statistics
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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
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?
Source: Bureau of Economic Analysis, Bureau of Labor Statistics
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SECTION 4.2
Understanding the Economy
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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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
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.
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SECTION 4.2
Understanding the Economy
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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SECTION 4.2
Understanding the Economy
Unemployment Rate
All nations chart unemployment 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.
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SECTION 4.2
Understanding the Economy
Jobless Rate
Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics
One of the goals of an economy is low unemployment.
After viewing this chart on the jobless rate, what can be
said about the United States' attempt to reach that goal?
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SECTION 4.2
Understanding the Economy
Other Indicators
The Consumer Confidence Index (CCI)
measures consumer confidence about personal
finance, economic conditions, and buying
conditions. Retail sales are studied to see if
market actions match the CCI. Housing starts,
and truck and auto sales are reviewed. These
expenditures tend to be affected by the economy
and interest rates.
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SECTION 4.2
Understanding the Economy
Consumer Confidence
Source: The Conference Board
Source: The Conference Board
Source: The Conference Board
Consumer confidence is another economic indicator that provides
a view of how consumers feel about their economic prospects
(employment, spending). What conclusions can be drawn from
a review of these three charts? What trend is apparent? Why should
marketers be concerned with changes in consumer confidence?
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SECTION 4.2
Understanding the Economy
The Business Cycle
Sometimes an economy grows, and at other
times it slows down. These recurring changes
are called the business cycle. The business
cycle has four phases:
 prosperity
 recession
 depression
 recovery
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SECTION 4.2
Understanding the Economy
Prosperity
Prosperity is a period of economic growth
and expansion. Nationwide there is low
unemployment, an increase in the output
of goods and services, and high consumer
spending.
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SECTION 4.2
Understanding the Economy
Recession
Recession is a period of economic slowdown.
Unemployment begins to rise, fewer goods and
services are produced, and consumer spending
decreases. Recessions can end relatively quickly
or last for a long period of time.
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SECTION 4.2
Understanding the Economy
Depression
Depression is a period of prolonged
recession. Consumer spending is very low,
unemployment is very high, and production
of goods and services is down significantly.
Poverty results because many people are
out of work and cannot afford to buy food,
clothing, or shelter. The Great Depression of
the early 1930s best illustrates a depression.
Chapter 4 n Global Economies
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SECTION 4.2
Understanding the Economy
Recovery
Recovery is a period of renewed economic
growth following a recession or depression.
Recovery is characterized by reduced
unemployment, increased consumer
spending, and moderate expansion by
businesses. Periods of recovery differ in
length and strength.
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SECTION 4.2
Understanding the Economy
Factors that Affect the Business Cycles
A government influences business cycles
through its policies and programs. When
taxes are raised, businesses and consumers
have less money with which to fuel the
economy.
The government may reduce interest rates,
cut taxes, or institute federally funded
programs to spark a depressed economy.
Chapter 4 n Global Economies
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SECTION 4.2
Understanding the Economy
Managing the Economy
Source: Federal Reserve, Labor Department
The federal funds rate (rate
banks charge each other for
overnight loans) and the discount
rate (rate the U.S. Federal
Reserve charges banks that
borrow money from it) are used
to speed up or slow down an
economy. From this chart, what
do you think the motivation of the
Federal Reserve Board was in
1991? In 1999? Would you prefer
to start a new business when
interest rates are high or low?
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SECTION 4.2
Understanding the Economy
The Global Economy
A global economy makes possible a global
recession, because economies of different
countries depend on economic stability in
other countries and imports or exports from
other countries.
 Example: Thailand devalued its currency
in 1997, causing the collapse of other
Asian economies and a huge drop in
the U.S. stock market.
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4.2
ASSESSMENT
Reviewing Key Terms and Concepts
1. What are the goals of any economy?
2. Name four measurements used to
gauge the success of an economy.
3. Describe in the briefest terms what
each of the following stands for: GDP,
CPI, PPI, and Core CPI.
Slide 1 of 2
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4.2
ASSESSMENT
Reviewing Key Terms and Concepts
4. Describe the four phases of the business
cycle.
5. What stage of the business cycle was the
United States in during the year 2000?
Slide 2 of 2
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4.2
ASSESSMENT
Thinking Critically
Assume the economy was growing rapidly
and there were increases in the CPI, PPI,
as well as in employee wages and
spending. What might the government do
to reduce the risk of inflation?
Chapter 4 n Global Economies
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Marketing Essentials
End of Section 4.2
Chapter 4 n Global Economies
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