1 1-1 MUSOLINO MUSOLINO How Economics Affects Business: The Creation and Distribution of Wealth 2 CHAPTER
11 1-1
MUSOLINOMUSOLINO
How Economics Affects
Business: The Creation
and Distribution of Wealth
2
CH
AP
TER
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Economics: Create WealthEconomics: Create Wealth
Study of how society chooses Study of how society chooses to employ resources to to employ resources to produce goods & services and produce goods & services and distribute them among distribute them among competing groups/individualscompeting groups/individuals
Micro v. MacroMicro v. Macro
Resource DevelopmentResource Development
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Four “What’s” of Four “What’s” of an Economic Systeman Economic System
$ What is produced?What is produced?
$ What amount is produced?What amount is produced?
$ What is the method of output What is the method of output distribution?distribution?
$ What is the rate of economic What is the rate of economic growth?growth?
Adapted from:Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8
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Economic TheoriesEconomic Theories
Thomas Malthus (Early 1800s)Thomas Malthus (Early 1800s) “ “Dismal Science”Dismal Science” Too many people Too many people
Adam Smith (1776)Adam Smith (1776) Freedom is vitalFreedom is vital ““Invisible Hand”Invisible Hand”
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Three Economic SystemsThree Economic Systems
CommunismCommunism
SocialismSocialism
CapitalismCapitalism
(Highly Controlled(Highly Controlled)) (Little Control(Little Control))
MixedMixed
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Free-Market CapitalismFree-Market Capitalism
Private PropertyPrivate Property
Business Ownership/ ProfitsBusiness Ownership/ Profits
Freedom of CompetitionFreedom of Competition
Freedom of ChoiceFreedom of Choice
1111
Free-Market CompetitionFree-Market Competition
SellersSellers
OneOne ManyMany
MonopolyMonopoly
OligopolyOligopoly
Monopolistic Monopolistic
CompetitionCompetition
Perfect Perfect CompetitionCompetition
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Monopolistic Competition:Monopolistic Competition: Many Sellers With Many Sellers With PerceivedPerceived
DifferencesDifferences
Fast FoodFast Food
CollegesColleges
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Limits of Free-MarketsLimits of Free-Markets
Inequality of Wealth- Inequality of Wealth- Causes National & World Causes National & World TensionTension
Greed Compromises EthicsGreed Compromises Ethics
Limitations Push Country Limitations Push Country towards Socialism = towards Socialism = Government RegulationGovernment Regulation
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Number of Workers perNumber of Workers perSocial Security RecipientSocial Security Recipient
0
1
2
3
4
5
6
1960 2000 2075(Est.)
Source: Investors.com
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Industrialized Nations’ Industrialized Nations’ Top Individual Tax RateTop Individual Tax Rate
0% 10% 20% 30% 40% 50% 60% 70%
Denmark
Austria
France
Spain
Italy
Germany
Japan
U.S.
Source: www.worldwide-tax.com, May 9, 2006
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SocialismSocialism
Private & Public Ownership Private & Public Ownership
Some Choices are LimitedSome Choices are Limited
• Creates Social EqualityCreates Social Equality
• Reduces Individual Incentive Reduces Individual Incentive - Brain Drain- Brain Drain
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CommunismCommunism
Public OwnershipPublic Ownership Almost all major factors of Almost all major factors of
productionproduction
Central Planning/Controlled Central Planning/Controlled EconomyEconomy
• Shortages of food and other products Shortages of food and other products may developmay develop• Lack of motivation to work hard for Lack of motivation to work hard for business peoplebusiness people
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Mixed EconomiesMixed EconomiesFree-Market Economy = CapitalismFree-Market Economy = Capitalism
Command EconomyCommand Economy SocialismSocialism CommunismCommunism
Trend Results in Blend/MixTrend Results in Blend/Mix Capitalism > SocialismCapitalism > Socialism Socialism > CapitalismSocialism > Capitalism
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Why is the U.S. Why is the U.S. an Economic Success?an Economic Success?
Major ReasonMajor Reason PercentPercent**
ConstitutionConstitution 8585
Free ElectionsFree Elections 8484
Free Enterprise SystemFree Enterprise System 8181
Abundant ResourcesAbundant Resources 7878
Cultural DiversityCultural Diversity 7171* Respondents could choose more than one.* Respondents could choose more than one.
Source: Investors Business Daily Survey
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U.S. EconomyU.S. EconomyKey Economic IndicatorsKey Economic Indicators
Productivity in the U.S.Productivity in the U.S.
Productivity in the Service SectorProductivity in the Service Sector
Business CyclesBusiness Cycles RecessionRecession DepressionDepression RecoveryRecovery
StabilizationStabilization Fiscal PolicyFiscal Policy National DebtNational Debt
Economic Growth through Monetary PolicyEconomic Growth through Monetary Policy
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Key Economic IndicatorsKey Economic Indicators
Gross Domestic Product Gross Domestic Product (GDP)(GDP)
Unemployment RateUnemployment Rate
Price IndexesPrice Indexes Consumer Price Index (CPI)Consumer Price Index (CPI) Producer Price Index (PPI)Producer Price Index (PPI)
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U.S. Gross U.S. Gross Domestic ProductDomestic Product
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1940 1950 1960 1970 1980 1990 2000 2002 2005
In Billions of U.S. $In Billions of U.S. $
Source: U.S. Dept. of Commerce, Bureau of Economic Analysis
***
19751975 20042004G-8 CountriesG-8 Countries 55 55 4444U.S. onlyU.S. only 2222 2121ChinaChina 5 5 1313IndiaIndia 3 6 3 6 Latin AmericaLatin America 7 7 66AfricaAfrica 3 333
Share of World GDP(%)Share of World GDP(%)
Source: www.dlc.org/ppi, July 6, 2005
2-26
2727
U.S. Unemployment (%)U.S. Unemployment (%)
Source: U.S. Bureau of Labor Statistics
0
2
4
6
8
10
12
14
16
1940 1950 1960 1970 1980 1990 2000 2002 2005
Source:Source: U.S. Bureau of Labor Statistics
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What Makes Up TheWhat Makes Up TheConsumer Price Index?Consumer Price Index?
Transportation18%
Other5%
Medical Care6%
Food & Beverage
16%
Housing & Util.39%
Recreation6%
Medical Care/ Insurance
7%
Apparel5%
Source:Source: U.S. Bureau of Labor Statistics
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Consumer Price IndexConsumer Price Index
0
50
100
150
200
250
1940 1950 1960 1970 1980 1990 2000 2002 Apr.2006
1982-84 = 1001982-84 = 100
Source: U.S. Dept. of Labor, Bureau of Labor Statistics
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Percent Change in Labor Percent Change in Labor Productivity- U.S.Productivity- U.S.
-10123456789
1950 1960 1970 1980 1990 2000 2002 Q1 -2006
Source: U.S. Dept. of Commerce, Bureau of Labor Statistics
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Where Does the Where Does the Government Get Its Money?Government Get Its Money?
Source: Office of Management & Budget, 2002Source: Office of Management & Budget, 2002
4%4%
9%
40%
43%
Individual IncomeTaxes
Social Security &Payroll Taxes
Corporate Taxes
Excise Taxes
Other
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Federal SpendingFederal Spending
0%5%
10%15%20%25%30%35%40%45%50%
Medicare &Medicaid
SocialSecurity
Interest Defense Other
1966
2006
Source: Congressional Budget OfficeSource: Congressional Budget Office
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Biggest Economic Biggest Economic ChallengesChallenges
Over the Next 3-5 years the U.S. can Over the Next 3-5 years the U.S. can be expected to face these challenges:be expected to face these challenges:
Pension & Health care costsPension & Health care costs The Federal DeficitThe Federal Deficit High Energy and Commodity CostsHigh Energy and Commodity Costs Balance of paymentsBalance of payments TerrorismTerrorism
Source: Investors Business Daily January 9, 2006
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Healthcare Expenditure Healthcare Expenditure Projections Projections
(Percent of National GDP)(Percent of National GDP)
14.00%
14.50%
15.00%
15.50%
16.00%
16.50%
17.00%
17.50%
18.00%
2004 2006 2008 2010 2012
% of GDP
Source: FORTUNE May 3, 2004
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Rising U.S. Trade DeficitRising U.S. Trade Deficit
-800000
-700000
-600000
-500000
-400000
-300000
-200000
-100000
0
1980 1985 1990 1995 1999 2001 2003 2005
Deficit inMillions
Source: US Dept of Commerce, Bureau of Economic Analysis
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Where are the Homeland Where are the Homeland Security Dollars Spent?Security Dollars Spent?
0
2
4
6
8
10
12
14
Border & PortSecurity
Aviation Security ImmigrationEnforcement
BioDefense InfrastructureProtection
Source: Business Week June 14, 2004Source: Business Week June 14, 2004
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The debt has reached $8.36 The debt has reached $8.36 trillion+ (May 2006)trillion+ (May 2006)
If $1,000 bills were stacked:If $1,000 bills were stacked: $1 Million = 4.29 $1 Million = 4.29 InchesInches $1 Billion = $1 Billion = 357.5357.5 FeetFeet $1 Trillion = 67$1 Trillion = 67 MilesMiles
The debt is equal to The debt is equal to 560.1 miles560.1 miles in $1,000 billsin $1,000 bills
National Debt Clock- National Debt Clock- http://http://www.brillig.com/debt_clockwww.brillig.com/debt_clock//
What is the National Debt?What is the National Debt?