CHAPTER 2

Understanding the United States Business System

Evaluating Economic Systems

Every economic system has three main goals Stability, full employment, and growth

Threat – recession, depressionWays to assess performance of goals

Gross Domestic Product (GDP) The total value of all goods and services produced within a country in one

year GDP per capita

GDP/Total population Inflation

Widespread price increases that threaten stability Deflation

Decrease in the general level of prices Occurs in periods of recession and depression People have less money to spend on goods and services

Evaluating Economic Systems

Growth Increase in the total output of goods and services

produced by a nation’s resources Important in maintaining businesses, jobs, wealth, and a

desirable standard of living

Unemployment A situation of joblessness among those who are

actively seeking work (% based on govt. survey) High unemployment indicates that business is

performing poorly (recession, depression) Low unemployment indicates that business is performing

well

The Business Cycle—a movement of the economy from one condition to another

THE BUSINESS CYCLE

*Prosperity

*Prosperity

Recove

ry*

Recove

ry*

*Depression

*Depression

Recession

Recession

Lev

el o

f Rea

l O

utp

ut

Time

What does it mean?

Prosperity-Peak of the business cycle Low unemployment Good wages Growth in GDP Businesses are producing and selling high amounts of

goods and servicesRecession—economic slowdown

Demand decreases Businesses lower production Unemployment begins to rise GDP growth slows

What does it mean?

Depression—when recession deepens and spreads Prolonged period of high unemployment Weak sales of goods and services Business failures GDP falls rapidly

Recovery—move back towards Prosperity Unemployment goes down Demand increases GDP begins to rise

Other Indicators of Economy Stability

Consumer Price Index Compares prices of common goods from one year to

the nextPersonal SavingsStock MarketDebt

Government Consumer Business

Trade

Import (I) A product made abroad, but sold in the US

Export (E) A product made in the US, but sold abroad

Balance of Trade  Trade Surplus: E > I

More money is flowing into the country than is flowing out

Trade Deficit: E < I More money is flowing out of the country than is flowing

in

International Business Environment

Geography Weather, Temperature, and Access to Ports

Cultural Influences Language, Religion, Values, Customs, Social

relationshipsEconomic Development

Advancement or lack of in technology, literacy, agricultural dependency.

Political and Legal Concerns Government system, Business regulations, Political

stability

International Trade Barriers

Restrictions to free trade

Quotas Limit on the quantity of a product imported or exported

Tariffs Tax on imported products

Embargo Blocking the import or export of product

USA Trading Info.

Primary trading partners China Mexico Canada

North American Free Trade Agreement (NAFTA) Agreement reached by the United States, Canada, and

Mexico Reduce tariffs (taxes) and other trade barriers  

Encouraging Free Trade

Free Trade Zones Products are imported and stored duty free

Common Markets European Union

Agreement between European countries similar to NAFTA

Developed the Euro currency

Global Market Entry

Multinational Company Organization that does business in several countries

Licensing Selling the rights to use intangible property

Franchising Selling rights to name, processes, and product

Joint Venture Agreement between two companies to share business

projects