The Economy and
Marketing
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Understanding the Economy

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List the goals of a healthy economy
Explain how an economy is measured
Analyze the key phases of the business cycle
Objectives

Economics Standard 9 – Explain how the
following economic indicators are used in a
market economy for business analysis and
marketing decisions: GDP, standard of living,
inflation rates, interest rates, unemployment
rate, productivity rates, stock market reports,
and CPI.
Standard
Goals of a Healthy Economy
Increase
Productivity
Decrease
Unemployment
Government
& business
analyze
labor
productivity,
GDP, GNP
Government
analyzes
unemployment
& standard of
living
Maintain
Stable
Prices
Government
monitors
inflation,
CPI, PPI
All nations analyze their economies to keep track of
how well they are meeting these goals
Unemployment
Rate
Gross
Domestic
Product
(GDP)
Standard of
Living
Economic
Measurements
Labor
Productivity
Inflation Rate
Nations routinely use economic measurements to analyze their
economic strength

Businesses can increase productivity by:

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Investing in new equipment/facilities to increase
efficiency
Provide additional training to employees
Reduce workforce and increase number of
responsibilities of the workers who remain
High productivity improves a company’s profit
Labor Productivity

Specialization & division of labor are key to
increasing productivity

Assembly lines are an example of specialization
& division of labor


Each part of a finished product is completed by a
different person who specializes in one aspect of
manufacturing
Work can be completed faster and more
efficiently, it also makes it easier to identify
issues with products
Labor Productivity


The principal way of measuring a nation’s
production output in a given year
Made up of private investment, government
spending, personal spending, net exports of
goods & services, and change in business
inventories


Private investment – spending by businesses for
equipment & software, also home construction
Government spending – money spent by federal,
state, and local gov’ts

Social services & construction projects
Gross Domestic Product
(GDP)

Expanding inventories show that businesses
are producing goods/services that are being
stored in warehouses – this adds to GDP

Shrinking inventories means people are
purchasing more goods/services than what was
produced – this is subtracted from GDP
Gross Domestic Product
(GDP)

GDP = C + I + G + (X – M)
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C = Personal Consumption: all spending by
households
I = Gross Investment: money spent on all
purchases of machinery by businesses,
construction of capital, & change in inventories
G = Government spending
X = Exports
M = Imports
Gross Domestic Product
(GDP)


In 1991, the US started using GDP as its
primary measurement of productivity
Before 1991, it used GNP (gross national
product)

Total dollar value of goods & services produced
by a nation including goods and services
produced abroad by US citizens and companies
GDP vs GNP

When comparing GDP and GNP, location of
production is important

EX: FORD is a US corporation and has a plant
in England


The portion of production that takes place in
England is counted in the US GNP but NOT in
the GDP
The portion of production that takes place in
England is counted in England’s GDP but not the
GNP
GDP vs GNP

Measurement of a country’s amount and
quality of goods and services that a nation’s
people have

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Standard of living = GDP / population OR
GNP / population


Reflects a quality of life
This gives you an amount of GDP or GNP per
person (per capita)
Most industrialized nations have a higher
standard of living because they have a high
level of production
Standard of Living

Some countries provide more social services for
their citizens


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Free education and health care provided by the
government
The number of households per 1,000
inhabitants with durable goods (washing
machines, refrigerators, dishwashers, vehicles)
can be included in the analysis
High levels of social services & durable goods
means a country has a high standard of living
Standard of Living

Inflation refers to a rise in prices of goods and
services

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A low inflation rate (1-5% each year) is good
because it shows that the economy is stable
Double Digit inflation (10% or higher) hurts an
economy


When inflation is this high, money LOSES its value
People who live on a fixed income (ex: Social
Security) are hurt by high inflation
Inflation Rate

Controlling inflation is one of the governments
major goals

When inflation rises, the gov’t increases interest
rates to discourage borrowing money


The result is slower economic growth, which helps
bring inflation down
Two measures of inflation in the US
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
Consumer Price Index (CPI) aka Cost of Living
Index
Producer Price Index (PPI)
Inflation Rate

CPI measures the change in price over a period
of time

Examines the price of 400 specific retail goods &
services used by the average household (referred
to as a basket of goods) and how the price of this
basket has changed

Food, housing, utilities, transportation, and
medical care are a few components
Inflation Rate

PPI measures wholesale price levels in the
economy

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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
Inflation Rate
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All nations chart the unemployment rate
(jobless rate)
The higher the unemployment rate, the greater
the chances are of slow economic times
The lower the unemployment rate, the greater
the chances are of an economic expansion

When more people work, there are more people
spending money and paying taxes
Unemployment Rate

3 types of unemployment:

Frictional
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Structural
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Workers are searching for jobs or waiting to take
jobs
Any worker who becomes unemployed due to a
lack of skill with a new technology introduced by
his or her employer
Cyclical

Results from the normal fluctuations of the
business cycle – caused by a decline in total
spending in the economy
Unemployment Rate

An unemployed person is anyone who is
willing and able to work but does not have a
job

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Not included in the unemployment rate is
anyone under the age of 16 and or discouraged
workers (those not seeking employment)
Part-time workers are considered EMPLOYED!
4-5% of the labor force can be unemployed and
we can still be considered at full employment
Unemployment Rate
Peak
Peak
Trough
Business Cycle

Business cycles are affected by the actions of
businesses, consumers, and the government

In turn, all three of these groups are affected by
the business cycle
Factors that Affect Business Cycles

Businesses:

Expansion/Recovery:

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Expand their operations
Invest in new properties, equipment, inventories &
hire more employees
Recession/Depression:

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Cut back operations
Lay off employees
Cut back inventories to match lowered demand
Factors that Affect Business Cycles
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Consumers:
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Recession:
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Biggest fears are losing jobs and decreased wages
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This reduces consumer spending
Reduced consumer spending causes businesses to
reduce their operations in response to lower
demand
Prosperity & Recovery:
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Consumers are optimistic
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Spend more money on material goods & luxury
items
Businesses respond by producing more goods
**Consumer spending accounts for more than
two-thirds of the US GDP
Factors that Affect Business Cycles
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Government:

Policies & programs
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Taxation has a strong effect
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When the economy needs a boost, the gov’t may
cut taxes or lower interest rates
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When the government requires more money to
run programs, higher taxes are needed
When taxes are raised, businesses & consumers
have less money to fuel the economy
This gives businesses & consumers more money
to spend and invest
In 2008, the government issued tax rebates to
taxpayers to encourage consumer spending
Factors that Affect Business Cycles