ECONOMICS - virtualtrademission.orgBanking services for member banks and the federal government...
Transcript of ECONOMICS - virtualtrademission.orgBanking services for member banks and the federal government...
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ECONOMICS: THE FRAMEWORK FOR BUSINESS
BUSN11 Chapter 2
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Economics: Navigating a Crisis
■ Understanding how the government, businesses, and individuals respond to issues requires understanding some basic definitions:
■ The Economy: A financial and social system of how resources flow through society
■ Economics: The study of the choices people, companies, and governments make in allocating resources
■ Macroeconomics: The study of a country’s overall dynamics
■ Microeconomics: Focuses on smaller economic units
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Global Economic Crisis: How Did This Happen?
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Moving in a Better Direction 2-1b
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Managing the Economy Through Fiscal Policy ■ Fiscal Policy: Government efforts to influence the economy through
taxation and spending – Designed to encourage growth, boost employment, and curb
inflation – Most economists agree that lower taxes can boost the economy – Most economists also agree that government spending can boost
the economy – The challenge is finding the right balance
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Debt Ceiling/Fiscal Cliff
■ Budget Surplus: When revenue is greater than expenses over a given period of time
■ Budget Deficit: When expenses are greater than revenue over a given period of time
■ Federal Debt: The sum of all the money the government has borrowed over the years and not repaid – When operating on a deficit, the government often has to borrow
money – At the end of 2018, the U.S. Federal Debt is estimated to be
$21.48 Trillion
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Managing the Economy Through Monetary Policy ■ Monetary Policy: Federal Reserve decisions that shape the economy
by influencing interest rates and the supply of money – The Federal Reserve is essentially the central bank of the United States – Federal Reserve functions include: ■ Bailing out and propping up shaky financial firms ■ Banking services for member banks and the federal government
■ Commercial Banks: Privately owned financial institutions that accept demand deposits and make loans and provide other services for the public
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Definitions of Money
■ Money Supply: The total amount of money within the overall economy
■ Money: Anything generally accepted as a medium of exchange, a measure of value, or a means of payment
■ M1 Money Supply: Includes all currency plus checking accounts and traveler’s checks
– Includes paper bills and metal coins
■ M2 Money Supply: Includes all of M1 Money Supply and savings accounts, money market accounts, and certificates of deposit
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Open Market Operations ■ Open Market Operations: The Federal Reserve function of buying and
selling government securities – Include treasury bonds, notes, and bills
■ When the economy is weak, the Fed buys government securities on the open market
– The money the Fed pays the sellers of the securities, that money goes directly into circulation, stimulating spending
■ When inflation is a concern, the Fed sells government securities – Buyers write checks to the Fed, the Fed withdraws these funds from banks,
making them unable to make as many loans, credit becomes tighter, and the money supply shrinks
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Discount Rate Changes ■ Discount Rate: The rate of interest that the Federal Reserve charges
when it loans funds to banks
■ When the Fed reduces the discount rate, banks can get funds at a lower cost and use them to make more loans to their customers
– More businesses and individuals are likely to take out loans from banks, thus stimulating the economy
– Usually happens during recessions
■ The Fed usually increases the discount rate in response to inflation – Higher interest rates mean fewer businesses and individuals willing to take out
loans, thus slowing down the economy
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Reserve Requirement Changes
■ Reserve Requirement: Specifies the minimum amount of reserves (funds) a bank must hold – Expressed as a percentage of bank’s deposits – Helps protect depositors who may want to withdraw their money
without notice
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Capitalism: The Free Market System
■ Economic System: A structure for allocating limited resources
■ Capitalism: An economic system based on private ownership, economic freedom, and fair competition – Also known as the private enterprise or free market system
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The Fundamental Rights of Capitalism ■ The right to own a business and keep after-tax profits
– If you do earn profits, you get to keep your after-tax income and spend how you see fit
■ The right to private property – Individuals and private businesses can buy, sell, and use property in any way
that makes sense to them
■ The right to free choice – People and businesses must be free to buy (and not to buy) according to their
wishes
■ The right to fair competition – Capitalism depends on fair competition to drive higher quality, lower prices, and
more choices
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Four Degrees of Competition 2-3b
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Supply and Demand: Fundamental Principles of a Free Market System ■ Supply: Quantity of products that producers are willing to offer for sale
at difference – Supply Curve: Graphed relationship between price and quantity from a supplier
standpoint
■ Demand: Quantity of products that consumers are willing to buy at different market prices
– Demand Curve: Graphed relationship between price and quantity from a customer demand standpoint
■ Equilibrium Price: Price associated with the point at which quantity demanded equals quantity supplied of a product
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Socialism
■ Socialism: Based on the principle that the government should own and operate key enterprises that directly affect public welfare
– Enterprises such as utilities, telecommunications, and healthcare
■ Goal is to run these enterprises in the best interest of the overall public
– Inefficiencies and corruption often interfere with this goal
■ Have higher taxes, designed to distribute more wealth through society – Tax revenues fund things like free childcare, free university, and free public
healthcare
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Communism
■ Communism: Economic and political system that calls for public ownership of virtually all enterprises, under the direction of a strong central government
■ Karl Marx envisioned communism to drastically improve the lot of the worker at the expense of the super rich
■ Most communist countries have not thrived
– They imposed authoritarian governments that suspended individual rights and choices
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Mixed Economies: The Story of the Future ■ Mixed Economies: Economies that embody elements of both planned
and market-based economic systems – Even the U.S. – one of the most market-oriented economies – does not have a pure market economy
■ Privatization: Process of converting government owned businesses to private ownership
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Ways to Evaluate Economic Performance ■ Gross Domestic Product
■ Employment Level
■ The Business Cycle
■ Price Levels
■ Productivity
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Gross Domestic Product
■ Gross Domestic Product (GDP): Measures the total value of all final goods and services produced within a nation’s physical boundaries over a given period of time
■ All domestic production is included – even if the firm is foreign owned – Ex. GDP includes Hyundai Sonatas built in Alabama, even though Hyundai is a
Korean firm
■ GDP is a vital measure of economic health – Business people, economists, and political leaders all use GDP to measure
economic performance
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Employment Level
■ Unemployment Rate: The percentage of people in the labor force 16 years old and up who do not have jobs and are actively seeking employment
■ Some unemployment is good – Means you have the freedom to change jobs – Ex. If you have an awful boss, you may want to just quit
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The Business Cycle ■ The Business Cycle: Periodic contraction and expansion that occur
over time in virtually every economy
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The Business Cycle ■ Contraction: A period of economic downturn, marked by rising
unemployment and failing business production – Recession: An economic downturn marked by a decrease in GDP for 2
consecutive quarter – Depression: An especially long and deep recession
■ Recovery: A period of rising economic growth and employment
■ Expansion: Period of robust economic growth and high employment
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Price Levels ■ The rate of price change across the economy is a basic measure of
economic well-being
■ Inflation: A period of rising average prices across the economy
■ Hyperinflation: An average monthly inflation rate of more than 50%
■ Disinflation: A period of slowing average price increases across the economy
■ Deflation: A period of falling average prices across the economy
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How the Government Evaluates Inflation ■ Consumer Price Index (CPI): A measure of inflation that evaluates the
change in the weighted-average price of goods and services that the average consumer buys each month
■ Producer Price Index (PPI): A measure of inflation that evaluates the change over time in the weighted-average wholesale prices
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Productivity
■ Productivity: Refers to the relationship between the production of goods and services and the resources needed to produce them
■ Calculated using the following equation: Output/Input = Productivity
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THE BIG PICTURE
■ One key goal of Economics is to guide your decision making by offering a deeper understanding of the broad forces that affect both your business and your personal life
■ Knowing basic principles of Economics can help you make better business decisions in virtually every area
■ You won’t find an Economics department in a business – instead you’ll find people throughout the organization applying theories and trends to their work