2.00 Understand operations, economics, and professional development.

2.01 Maintain work flow to enhance productivity (Organize and prioritize

work ).

a. Discuss benefits of organizing and prioritizing one’s work.

• Knowing how to prioritize work effectively reduces stress and means you feel on top of things. You do what matters, when it matters.

• You only need to list things that (a) you want to do but (b) could forget. So, for example, you probably don’t need to remind yourself to have lunch.

b. Explain the need to understand work assignments and responsibilities before organizing and prioritizing

that work.

• The first step is organization - so you'll know what your working with and what your tasks are along with any deadlines you have. Then you can figure out which are most important and demand the majority of your attention and energy.

c. Identify factors to consider when organizing and prioritizing work (e.g., time and other resource

constraints; expectations of clients, co-workers, and managers; etc.).

• Start by prioritizing only those things that are deadline driven• Everything else? Give it equal value and do it according to where you are

and how you feel. This gives you a real sense of freedom and flexibility when it comes to the moment of choice.

• Consider time constraints - what absolutely needs to get done today and what can wait until tomorrow or next week.

• Consider people constraints - all things equal, move things that other people are waiting on to the top of the list. If you know that your manager can't finish his proposal without your part, that's more important than the thing that you always do on Wednesday that could just as well be done on Thursday.

• Consider the consequences - are you going to get fired if you don't do something? Is another task going to give you the inside track on that promotion? Those things should be more important than mildly inconveniencing the sales manager by responding to their email a day late.

d. Discuss ways in which an individual’s physical environment impacts his/her ability to organize and

prioritize work.

• Ever look at all the work on your desk and feel overwhelmed? Do you have trouble locating important papers? Do you find yourself trying to remember what you were doing and what you're supposed to do next?

• First, assemble all of your work in one place. You may discover that it's strewn between the office, home, your car, and other coworker's desks.

• Important tools include a day planner/calendar and post-it notes or a scratch pad.

• Begin creating file folders and computers folders. Being organized is half the battle. Use your list to create folders. Once all your paperwork is delegated to its appropriate place, the clutter will stop draining your energy.

e. Describe methods used to organize and prioritize work (e.g., developing a written list of tasks, breaking

work assignments down into smaller tasks, e.g.).

• Create a daily, weekly, and monthly task chart for yourself.

• Note any and all deadlines or quotas. Now break down those deadlines and quotas into weekly and daily goals.

• Determine which is the utmost important and assign it the number one. Work your way through until all of your tasks have been assigned a numerical importance.

2.01 Maintain work flow to enhance productivity.

Coordinate work with that of team members (OP:230)

a. Describe ways in which an organization benefits when its team members coordinate work with each

other (e.g., higher-functioning team members, stronger team results, etc.).

• The major impetus for organizations to embrace the team concept is the effort to improve productivity and quality.

• Some of an organization's major benefits from the use of teams are improved quality of work life for employees, reduced absenteeism and turnover, increased innovation, and improved organizational adaptability and flexibility. Effective implementation of teams can also improve office politics by improving the communication and trust between the team members.

b. Discuss the role of communication when coordinating work among team members.

• Team members must have a clear picture of their roles and responsibilities with respect to the project and deliver accordingly.

• All this is possible only when a team develops and practices effective communication skills.

• Communication ensures that work is not duplicated; allows individuals to gain insights, assistance, and agreement from team members; helps team members to focus on common goal; etc.

c. Explain methods to coordinate work with that of team members.

• If you are working on a new team, be aware that the total time involved in the project will be greater than if you were working with an established team. – The coordination time will be much greater, even if the task time

is pretty much the same. – You'll have to talk it out, and you'll need to do a lot of talking and

sharing. – This need to coordinate the work will also apply with an

established team that is working on a task variant that is different for the team.

• If you are working on an established team, where the task is one that the team members have collectively done before, it is fair to expect that the coordination time will be minimal.

Student Activity:• 2.01-1- f. Demonstrate techniques used to organize and prioritize work.

– Ask each student to read the “how-to” article How to Prioritize Your Work at http://ezinearticles.com/?How-to-Prioritize-Your-Work&id=219970 and follow the steps provided to develop an organized, prioritized list of the tasks and responsibilities that s/he must complete in the coming week. These tasks and responsibilities could include schoolwork, work duties, extra-curricular and/or co curricular work, household chores, etc. Then, students should discuss their lists with partners and explain how they determined which tasks and responsibilities would take priority.

• 2.01-d-d. Demonstrate methods to coordinate work with that of team members.– Ask students to work in pairs to identify activities that require people to work in teams.

(Encourage students to think of the groups that they are part of, either in or outside of school.) These activities could include classes, sports teams, musical groups, CTSOs and other organizations, scout troops, work, etc. After identifying these activities/groups, partners should work together to develop a list of the methods that these teams use to coordinate their work as well as the ways in which the organization benefits when its team members coordinate their work. After sharing these findings, the class should discuss how these methods to coordinate team work can be used in the workplace.

2.02 Acquire knowledge of the impact of government on business activities to make informed economic decisions.

a. Define the following terms: tax, revenue, expenditure, excise tax, income tax, property tax, and

sales tax.Define the term tax:• Legally mandated payment to the government that is not made in exchange for a good or service

– Examples: income tax, sales tax, property tax, excise tax• Taxes are used to fund projects that benefit society.Define the term income tax:• Tax that is based on the amount of money a person earns or receivesDefine the term sales tax:• Tax placed on the retail sale of almost all goods purchased• Certain types of goods (i.e., food, medicine) are sometimes excluded from sales tax.Define the term excise tax:• Tax placed on a specific good• Excise taxes can be used to discourage consumption of a product or to raise some easy money on products

that the government knows people will continue to purchase, regardless of the tax.– Example: gasoline tax, cigarette tax, beer and liquor tax

Define the term property tax:• Tax placed on real estate, and in some cases, on personal possessions (e.g., boats, vehicles, etc.)Define the term revenue:• IncomeDefine the term expenditure.• Money paid out; spending• The term “government expenditures” is often used to refer to spending by the government sector.

b. Explain the importance of taxes in a market economy.

• Taxes are the primary source of revenue for the government sector.

• In a market economy, some services such as national defense, roads, and education can be more efficiently produced by the government instead of private individuals.

• In addition, the government is responsible for creating the infrastructure necessary for commerce. The banking system, national defense, and the transportation system are all part of this infrastructure.

• If taxes did not exist, then these services would likely not exist either.

c. List sources of tax monies paid to different levels of government.

d. Identify ways that tax monies are used by the different levels of government.

Federal Government:• Sources of Tax Monies: Income taxes, Excise taxes• Expenditures: National defense, Education, Transportation systems,• Judicial system, Social Security and Medicare, Medicaid, Veterans services, etc.State Governments:• Sources of Tax Monies: Income taxes, Sales taxes, Excise taxes• Expenditures: State police protection, Education, Operation of state government, etc.Local Governments:• Sources of Tax Monies: Property taxes, Sales taxes, Income taxes• Expenditures: Education, Public health and safety (local fire and police protection), Sanitation, etc.

Explain how certain government expenditures are financed through specific taxes.• Roads, highways, and bridges are financed through the gasoline excise tax.• Only those people who purchase gasoline—those who use the transportation system—pay the

gasoline tax.• The Social Security system, which provides income to retired workers, receives its monies from

retirement taxes.

e. Describe tax structures.

Proportional: A tax structure in which everyone pays the same percentage of income in taxes, regardless of income level. (Few taxes are completely proportional in nature.)

Progressive: A tax structure in which those who earn more pay a higher percentage of income in taxes. In other words, as the income increases, the tax rate increases. The Federal income tax is a progressive tax.

Regressive: A tax structure in which those who earn more income pay a lower percentage of income in taxes. As income increases, the tax rate decreases. Sales and excise taxes are considered to be regressive taxes, because those people with lower incomes ultimately pay a larger percentage of their income in sales and excise taxes.

f. Explain the Internal Revenue Service’s roles.

• To collect federal income taxes• To enforce federal revenue law• To help taxpayers with tax law• To pursue taxpayers who are not in

compliance with tax law

g. Illustrate the impact of taxation on the circular flow of income model.

• The circular flow model illustrates the constant movement of production inputs, goods, services, and money in the economy. For a good introduction on a simple circular flow of income model, have the students watch the flash movie/tutorial The circular flow of income model by Manfred Gartner at http://www.fgn.unisg.ch/eurmacro/tutor/circularflow.html

• (Do NOT continue on to the interactive Java applet—it goes into much more detail than is required for this lesson.)

• After this short introduction to the circular flow model, consider the role of the government—specifically, taxes—in the economy. How does the government fit into the circular flow of income model?– The government sector can be added to the center of the circular flow model,

and taxes are the flow between the household sector and the government sector. The government insists that households divert some monies away from consumption and spending to go toward the government.

Student Activity:

• Direct your students to the AmosWEB website Taxes at http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=taxes for a good illustration of the circular flow model including the government sector and taxes

• h. Explain how government expenditures are financed.– Students should search local newspapers to locate articles in

which individuals or groups are opposed to an increase in taxation. In a written report, each student should identify the nature of the tax, how the monies are to be used, and the nature of the opposition to the tax. Each student should indicate his/her position on the tax increase and provide a rationale for her/his stance.

2.03 Analyze cost/profit relationships to guide business decision-making.

Explain the concept of organized labor and business

a. Define the following terms: labor union, local, national, federation, collective bargaining, strikes,

picketing, boycotts, featherbedding, lockouts, injunctions and strikebreakers.

• A labor union is an organization of wage earners or salary workers established for the purpose of protecting their collective interests when dealing with employers.

• Local unions are the building blocks of the labor movement. – Most craft unions began as local unions, which then joined together to form national organizations.

• National unions are composed of the various local unions that they have chartered• A federation is an association of unions. • Collective bargaining consists of negotiations between an employer and a group of employees so as to determine

the conditions of employment. • A boycott is an act of voluntarily abstaining from using, buying, or dealing with a person, organization, or country

as an expression of protest, usually for political reasons. It can be a form of consumer activism.• A picket is a style of protest in which striking workers assemble outside a place of employment to make the public

aware of their cause. • a strike occurs when all the workers in the union stop coming to work • Strikebreakers try to fight back against the union, sometimes through lawsuits and legislation, sometimes with

violent thugs. • Featherbedding used to describe the practice of a labor union requiring an employer to hire more workers than

necessary for a particular task. • A lockout is a work stoppage in which an employer prevents employees from working • An injunction is an equitable remedy in the form of a court order that requires a party to do, or to refrain from

doing, certain acts.

b. Identify reasons that labor unions form.

• The American economy shifted from an agricultural to an industrial base; industrial workers, who were concentrated in urban areas and increasingly shared the same language (English), were thus able to create a common culture that was absent among earlier generations of workers.

• The Depression created a backlash against big business entities, who were viewed as the chief culprits for the country's economic difficulties.

• Changing political dynamics also played an important role. Active support for organized labor was an integral part of Roosevelt's New Deal, and the passage of the National Labor Relations Act (NLRA) in 1935 was a potent new weapon for union organizers. The NLRA provided a means for official recognition of labor unions. Once recognized, an employer was legally bound to bargain with the union, enforceable by government action.

• Economic growth during World War II and in the post-war era was an important facilitator of union growth.

c. Identify types of labor issues.

• If a worker represented by the union believes his or her rights under the union contract have been violated, then the union may intervene on that person's behalf. – Examples of such situations include the discharge of an employee,

failure to promote an employee according to a contract seniority clause, or failure to pay an employee for overtime.

– Virtually any provision of a contract can become a source of contention.

– The local union may try to settle the issue informally. If that effort is not successful, the union may file what is known as a grievance . • This is a formal statement of the dispute with the employer;

most contracts set forth a grievance procedure.

d. Classify types of unions.

• Craft unions represent employees in a single occupation or group of closely related occupations. – The members of craft unions are generally highly skilled workers. Examples

of craft unions include the various skilled trades in the construction industry, such as carpentry, plumbing, and electrical work.

• professional union is generally understood to be an employee with advanced and highly specialized skills, often requiring some credentials, such as a college degree and/or a license. Example: Teachers Union

• An industrial union represents workers across a wide range of occupations within one or more industries. A good example of a typical industrial union is the United Automobile Workers (UAW).

• General unions organize workers across all occupations and industries

e. Describe levels of union organization. f. Describe types of union organization

• Local unions represent members in a specific geographic area, such as a city, state, or region. These local unions make up the base of a national union, which unites all its affiliated local unions under one constitution.

• The Teamsters and the United Steel Workers of America are two examples of large national unions, each uniting many local unions.

• The top level of labor union organization is the federation, such as the AFL-CIO. Such a federation is made up of many national and/or international unions. The purpose of the federation level is to coordinate its affiliated unions, settle disputes between them, and serve as the political representative of the union members.

g. Describe the collective bargaining process.

• Collective bargaining consists of the process of negotiation between representatives of a union and employers (generally represented by management, in some countries by an employers' organization) in respect of the terms and conditions of employment of employees, such as wages, hours of work, working conditions and grievance-procedures, and about the rights and responsibilities of trade unions.

• The parties often refer to the result of the negotiation as a collective bargaining agreement (CBA) or as a collective employment agreement (CEA).

h. Explain types of union negotiation strategies.

Distributive Negotiation• The term distributive means; there is a giving out; or the scattering of

things. By its mere nature, there is a limit or finite amount in the thing being distributed or divided amongst the people involved

Integrative negotiation• The word integrative means to join several parts into a whole.

Conceptually, this implies some cooperation, or a joining of forces to achieve something together. Usually involves a higher degree of trust and a forming of a relationship. Both parties want to walk away feeling they've achieved something which has value by getting what each wants.– Integrative negotiation process generally involves some form or combination

of making value for value concessions, in conjunction with creative problem solving. It is often described as the win-win scenario.

i. Describe types of management negotiation strategies.

• Avoiding Conflict Resolution Style. the manager is not very cooperative in helping the other individuals to achieve their goals, but neither is he/she aggressively pursuing his/her own preferred outcomes in the situation. The original problem, conflict, or situation is never directly addressed or resolved. However, avoiding behavior might be appropriate when the issue is perceived by the manager to be trivial. It might also be an appropriate approach to use when there is no chance of winning or when disruption would be very costly.

• Competing Conflict Resolution Style. The competing style of resolving conflict is also known as the win-lose approach. This approach may be appropriate when quick, decisive action is needed, such as during emergencies. It can also be used to confront unpopular actions, such as urgent cost cutting.

• Accommodating Conflict Resolution Style. A manager using this style subjugates his/her own goals, objectives, and desired outcomes to allow other individuals to achieve their goals and outcomes. This behavior is appropriate when people realize that they are in the wrong or when an issue is more important to one side than the other. This conflict resolution style is important for preserving future relations between the parties.

• Compromising Conflict Resolution Style. Compromise can also be referred to as bargaining or trading. This behavior can be used when the goals of both sides are of equal importance, when both sides have equal power, or when it is necessary to find a temporary, timely solution. It should not be used when there is a complex problem requiring a problem-solving approach.

• Collaborating Conflict Resolution Style is often described as the win-win scenario. Both sides creatively work towards achieving the goals and desired outcomes of all parties involved. The downside of this approach is that the process of collaborating mandates sincere effort by all parties involved and it may require a lot of time to reach a consensus.

Student Activity:

• Ask students to search the Internet for information about unions—their benefits, requirements, pressure strategies, etc. Each student should evaluate the information obtained to determine whether s/he would want to be a union member. Each student should then write a short paper persuading others to support her/his point of view.

j. Explain the effects of unionism on workers.• http://www.minneapolisfed.org/publications_papers/pub_

display.cfm?id=2154• http://www.bls.gov/opub/cwc/cm20050616ar01p1.htmk. Describe the effects of unionism on businesses.• http://businessknowledgesource.com/smallbusiness/how_

unions_affect_small_business_025808.html

2.03 Analyze cost/profit relationships to guide business decision-making.

Analyze the impact of specialization/division of labor on

productivity

a. Define the following terms: specialization of labor, division of labor, depth of jobs and scope of jobs.

Define the term specialization:• The process of making the best use of resources in the production of goods and services• We specialize in the production of certain goods and services and exchange them for other goods and

services.• If you decided to produce all the goods and services you needed, rather than producing some and

trading for others, you would have less time to devote to the production of any one item, resulting in production of fewer items than if you’d specialized.

Explain the scope of jobs.• Defined as the number of different operations you do on the job and the frequency with which you do

them• The lower your task level, the lower the scope of the job• Example:

– Low scope: The job is to put doors on cars on an assembly line.– Higher scope: The job is to put doors on cars, put seats in cars, and check the steering mechanism.

Describe the depth of jobs.• Defined as the amount of control you have over the tasks that you do• Example:

– Low depth: There are strict guidelines you must follow, and you make very few decisions.– High depth: You follow general guidelines and set your own pace.

b. Describe how resources are involved in specialization.

• Natural resources: We locate businesses where they can be the most successful (e.g., ski lodge in the mountains close to the slopes, orange groves in states with warm climates).

• Capital goods: Specialized capital goods contribute to increased production (e.g., use of robots on assembly lines).

• Human resources: This occurs when people use their different skills and abilities in jobs for which they are best suited. People should do what they do best so that the most goods and services can be produced.

c. Identify forms of specialization of human resources. d. Describe specialization by trade or profession.e. Describe specialization by stage of production.

f. Describe specialization by task.

• Specialization by trade or profession: This is the type of work you perform to earn a living (e.g., teachers, farmers, doctors, plumbers, artists, etc.).

• Specialization by stage of production: This form occurs when more than one state of production is needed to change a raw material into a finished product.

• Specialization by task: This form occurs when jobs are so specialized that a worker does only one small part of the total job (e.g., in a textile mill, one worker cleans wool, another spins it into yarn, another dyes the yarn, and another weaves it into a woolen fabric). This type of specialization is also known as division of labor.

g. Explain the relationship between the depth and scope of a job.

Example: How a manager’s scope and depth can change during one day.– The manager chooses advertising design and layout scheme for

an upcoming promotion (high depth, high scope)– The manager makes out the weekly work schedule for

employees (high depth, low scope)– The manager signs employee time cards (low depth, low scope)– The manager evaluates employee performance according to the

owner’s standards (low depth, high scope)• The scope and depth of certain jobs within a company can

change more than that of another employee in the same company.

h. Describe the advantages of specialization.

• Simplified worker training• Increased employee interest and satisfaction• Increased production rates• Increased level of skill• Increased quality of work• Ease of transferring to a similar job

i. Explain the disadvantages of specialization.

• Increased interdependency• Increased boredom on the job• Decreased pride in work• Decreased morale and enthusiasm for the job• Increased chance of obsolescence because of

technological advances• High degree of specialization may cause

difficulty transferring or obtaining another job

j. Describe ways to overcome the disadvantages of specialization.

Explain ways that businesses combat the disadvantages associated with specialization.

• Job enlargement: Management may combine job tasks to restore wholeness (e.g., instead of limiting salespeople strictly to selling merchandise, their jobs may be enlarged to help with displays, restocking merchandise, etc.).

• Job rotation: Managers may also rotate employees periodically so that they learn new job tasks and see how their old tasks relate to the new tasks.

• Job enrichment: Managers add interest to a task to increase a job’s depth, allowing workers to make more decision, set their own pace, and supervise others.

• Job satisfaction: Managers may ask for and use employee suggestions; allow flexible or alternative work schedules; praise work well done; and provide cash incentives, contests, and bonuses.

2.03 Analyze cost/profit relationships to guide business decision-making.

Explain the impact of the law of diminishing returns

a. Define the following terms: stages of production, theory of production, production function, increasing returns, diminishing returns, law of

diminishing returns, law of variable proportions, marginal product, negative returns, marginal cost, total revenue, and marginal revenue.

• Stages of production -Production within an economy can be divided into three main stages: primary, secondary and tertiary.

• Theory of Production deal with the relationship between the factors of production and the output of goods and services

• A production function provides an abstract mathematical representation of the relation between the production of a good and the inputs used. A production function is usually expressed in this general form: Q = f(L, K)

• Increasing returns to scale results if long run production changes are greater than the proportional changes in all inputs used by a firm.

• Diminishing Returns - A yield rate that after a certain point fails to increase proportionately to additional outlays of capital or investments of time and labor.

• Law of Diminishing Returns - (Sometimes also referred to as the law of variable proportions) When increasing amounts of one factor of production are employed in production along with a fixed amount of some other production factor, after some point, the resulting increases in output of product become smaller and smaller.

• Marginal Product - The change in the quantity of total product resulting from a unit change in a variable input, keeping all other inputs unchanged. Example: marginal product = change in total product/ change in variable input

• Negative Returns - This occurs when a company or business has a financial loss or lackluster returns on an investment during a specific period of time.

• Marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good.

• Total revenue is the total receipts of a firm from the sale of any given quantity of output• Marginal revenue (MR) is the extra revenue that an additional unit of product will bring. It is the additional income

from selling one more unit of a good; sometimes equal to price.

b. Explain the stages of production.Primary Production• Primary production involves the extraction of raw materials (e.g. coal, iron, agricultural commodities).• Raw materials can be:

– Extracted – e.g. coal, iron ore, oil, gas and stone– Harvested / collected – e.g. fish– Grown – e.g. timber, cereal crops

• There is little value added in primary production. The aim is usually to produce the highest quantity at lowest cost to a satisfactory standard.

Secondary Production• Secondary production involves transforming raw materials into goods. There are two main kinds of goods:

– Consumer goods – e.g. washing machines, DVD players. As the name implies, these are used by consumers– Industrial / capital goods – e.g. plant and machinery, complex information systems. Industrial and capital goods are

used by businesses themselves during the production process.• In the secondary production sector, value is “added” to the raw material inputs. For example, foodstuffs are transformed

into ready meals for sale in supermarkets; metals, fabrics, and plastics are transformed into motor vehicles.• There are many different industry sectors in secondary production. For example:

– Construction– Electronic instruments– Pharmaceuticals (drugs)– House-building

Tertiary Production• Tertiary production is associated with the provision of services (an intangible product). As with the secondary sector, there

are many tertiary production markets. • Good examples include:

– Hotels– Private healthcare and education– Accountants– Tourism

c. Describe the impact of the law of diminishing returns on production decisions.

• The law of diminishing returns says that adding more of one input while holding other inputs constant results eventually in smaller and smaller increases in added output.

• What the law of diminishing returns says is that as one continues to add workers, eventually one will reach a point where increasing returns stop and decreasing returns set in.

d. Explain how total revenue and marginal revenue are used to determine the amount of output that will

generate the most profit.

• The change in total revenue resulting from a change in the quantity of output sold. Marginal revenue indicates how much extra revenue a firm receives for selling an extra unit of output.

• marginal revenue = change in total revenue/ change quantity

Student Activity:

• Ask students to participate in a small-group activity to construct paper boxes following the instructions on page 5-30 and using the pattern on page 5-31. Determine the number of boxes that can be made by a three-member group in one minute. Continue the construction process, adding one worker at a time and checking productivity at one-minute intervals. Find the point at which the additional person does not increase productivity. Discuss with the class how the principle of diminishing returns relates to productivity.

2.04 Understand economic indicators to recognize economic trends and conditions.

Describe the economic impact of inflation on business

Define the following terms: inflation, inflation rate, deflation, Consumer Price Index, standard of living, targeted inflation rate,

and price stability.

• INFLATION: A persistent increase in the average price level in the economy. Inflation occurs when the AVERAGE price level (that is, prices IN GENERAL) increases over time.

• INFLATION RATE: The percentage change in the price level from one period to the next. The two most common price indices used to measure the inflation are the Consumer Price Index (CPI) and the GDP price deflator.

• DEFLATION: An extended decline in the average level of prices. This is the exact opposite of inflation

• CONSUMER PRICE INDEX: An index of prices of goods and services typically purchased by urban consumers.

• STANDARD OF LIVING: In principle, an economy's ability to produce the goods and services that consumers use to satisfy their wants and needs. In practice, it is the average real gross domestic product per person--usually given the name per capita real GDP.

• PRICE STABILITY: The condition in which the average price level in the economy does not change or changes very slowly.

Describe causes of inflation.

• The two basic types (or causes) of inflation: demand-pull inflation and cost-push inflation.

• Demand-pull inflation, as the name clearly indicates, results when economy-wide shortages are created by increases in aggregate demand.

• Cost-push inflation results when an economy-wide shortages are created by decreases in aggregate supply, which are so named because they are more often than not triggered by increases in production cost.

Explain how inflation impacts the economy.

• INFLATION PROBLEMS: Two notable problems are associated with inflation: uncertainty and haphazard redistribution.

• Inflation, especially inflation that varies from month to month and year to year, makes long-term planning quite difficult. – Prices, wages, taxes, interest rates, and other nominal values that

enter into consumer, business, and government planning decisions can be significantly affected by inflation.

• Moreover, inflation tends to redistribute income and wealth in a haphazard manner; some people win and some people lose. But this redistribution might not that desired by society, failing to promote any of the basic economic goals of efficiency, equity, stability, growth, or full-employment.

Describe the relationship between price stability and inflation.

• Price stability is commonly indicated by the inflation rate, calculated as percentage changes in either the Consumer Price Index (CPI) or the GDP price deflator. However, price stability is more generally the ABSENCE of large or rapid increases or decreases in the price level.

• Inflation results when the AVERAGE of these assorted prices follows an upward trend. Inflation is the most common phenomenon associated with the price level.

Explain problems associated with deflation.

• Like inflation, deflation occurs when the AVERAGE price level decreases over time. While some prices might decrease, other prices could increase or remain unchanged, so long as the AVERAGE follows a downward trend.

• Deflation is a rare bird indeed in our economy and typically happens only when we're in a prolonged period of stagnation. We might see some deflation during a fairly lengthy recession, but more than likely deflation saves itself for the occasional depression that dots our economic landscape.

Discuss reasons why the inflation rate should be above zero.

• When the rate falls below zero, as it did briefly in 1954, average prices actually are falling (deflation). While lower prices may seem ideal at first from a consumer's point of view, deflation leads to rising unemployment and falling production, a situation from which it is extremely difficult to recover. An inflation rate of 1 - 2.5% currently seems to be acceptable by many economists.

Explain how businesses can use the Consumer Price Index & Discuss the purpose of the Consumer Price

Index (CPI). • The CPI is compiled and published monthly by the Bureau of

Labor Statistics (BLS), using price data obtained from an elaborate survey of 25,000 retail outlets and quantity data generated by the Consumer Expenditures Survey.

• The CPI is unquestionably one of the most widely recognized macroeconomic price indexes, running second only to the Dow Jones Industrial Average in the price index popularity contest.

• It is used not only as an indicator of the price level and inflation, but also to convert nominal economic indicators to real terms and to adjust wage and income payments (such as Social Security) for inflation.

Describe how the Consumer Price Index is determined

• The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

http://www.investopedia.com/video/play/what-is-the-consumer-price-index-CPI#axzz1YauKv934

Identify the major kinds of consumer spending that make up the Consumer Price Index.

• The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

• FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)

• HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

• APPAREL (men's shirts and sweaters, women's dresses, jewelry) • TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) • MEDICAL CARE (prescription drugs and medical supplies, physicians' services,

eyeglasses and eye care, hospital services) • RECREATION (televisions, toys, pets and pet products, sports equipment,

admissions); • EDUCATION AND COMMUNICATION (college tuition, postage, telephone services,

computer software and accessories); • OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other

personal services, funeral expenses).

Explain how the Consumer Price Index is used to find the rate of inflation

• The CPI measures the average change over time in the prices paid by urban consumers for a representative selection of consumer goods and services.

• The rate of inflation is a measure of how fast prices are rising. It is computed as the percentage increase in the level of prices between two time periods.

Describe limitations on the use of the Consumer Price Index

• The CPI is subject to both limitations in application and limitations in measurement.

• Limitations of application – The CPI may not be applicable to all population groups. For example, the CPI-U is

designed to measure inflation for the U.S. urban population and thus may not accurately reflect the experience of people living in rural areas. Also, the CPI does not produce official estimates for the rate of inflation experienced by subgroups of the population, such as the elderly or the poor.

– The CPI cannot be used to measure differences in price levels or living costs between one place and another; it measures only time-to-time changes in each place.

• Limitations in measurement – Limitations in measurement can be grouped into two basic types, sampling errors and

non-sampling errors. – Sampling errors. Because the CPI measures price changes based on a sample of items,

the published indexes differ somewhat from what the results would be if actual records of all retail purchases by everyone in the index population could be used to compile the index.

– Non sampling errors. Nonsampling errors are caused by problems of price data collection.

2.04 Understand economic indicators to recognize economic trends and conditions.

Discuss the measure of consumer spending as an economic indicator

Define the term Consumer Confidence Index (CCI)

• The Conference Board defines the Consumer Confidence Survey as “a monthly report detailing consumer attitudes and buying intentions, with data available by age, income and region.”

Describe how consumer spending reacts to shifts in the well-being of the economy

• Since consumer spending is so important to the nation's financial health, the Consumer Confidence Index is one of the most accurate and closely watched economic indicators. The index is based on a survey of five questions posed to 5,000 households, measuring their optimism on the health of the economy. The CCI, however, is a lagging indicator, so, whatever the survey says, remember that it doesn't tell us what is going to happen, but what has happened and if it can be expected to continue.

Explain how the Consumer Confidence Index functions

• Each month the Conference Board surveys 5,000 U.S. households. The survey consists of five questions that ask the respondents' opinions about the following:

Current business conditions. – Business conditions for the next six months. – Current employment conditions. – Employment conditions for the next six months. – Total family income for the next six months. Survey participants are

asked to answer each question as "positive", "negative" or "neutral". •

The results from the Consumer Confidence Survey are released on the last Tuesday of each month at 10am EST.

Describe how businesses use and react to changes in the Consumer Confidence Index• Manufacturers, retailers, banks and the government monitor

changes in the CCI in order to factor in the data in their decision-making processes. While index changes of less than 5% are often dismissed as inconsequential, moves of 5% or more often indicate a change in the direction of the economy.

• A month-on-month decreasing trend suggests consumers have a negative outlook on their ability to secure and retain good jobs. Thus, manufacturers may expect consumers to avoid retail purchases, particularly large-ticket items that require financing. Manufacturers may pare down inventories to reduce overhead and/or delay investing in new projects and facilities. Likewise, banks can anticipate a decrease in lending activity, mortgage applications and credit card use.

Discuss government’s options when the Consumer Confidence Index indicates a decreasing trend

• When faced with a down-trending index, the government has a variety of options, such as issuing a tax rebate or taking other fiscal or monetary action to stimulate the economy.

• Conversely, a rising trend in consumer confidence indicates improvements in consumer buying patterns.

• Manufacturers can increase production and hiring. Banks can expect increased demand for credit. Builders can prepare for a rise in home construction and government can anticipate improved tax revenues based on the increase in consumer spending.

2.04 Student Activity

• Ask students to interpret the Consumer Price Index over a 10-year period and draw conclusions about the prices of food, clothing, and medical care. Each student should collaborate with a classmate to discuss the pair’s findings and conclusions

• CPI Calculator: Online Consumer Price Index Calculatorwww.cpi.memphiscapital.com/

• http://inflationdata.com/Inflation/Inflation_Calculators/Inflation_Calculator.asp#calcresults

2.04 Understand economic indicators to recognize economic trends and conditions.

Explain the concept of Gross Domestic Product (GDP)

Define the following terms: • Gross Domestic Product (GDP) : The total market value of all final goods

and services produced within the political boundaries of an economy during a given period of time, usually one year. This is the official measure of the aggregate output produced by the economy.

• Personal consumption expenditures: the official government measure of consumption expenditures undertaken by the household sector. It seeks to quantify that portion of gross domestic product that is purchased by the household sector and which is used, in theory at least, to satisfy wants and needs.

• Gross Private Domestic Investment: The official measure of investment expenditures on gross domestic product by the business sector. Gross private domestic investment averages about 15 percent of gross domestic product. These expenditures come in two broad categories: (1) fixed investment and (2) changes in private inventories.

• GOVERNMENT PURCHASES OF GOODS AND SERVICES: Expenditures on final goods and services (that is, gross domestic product) undertaken by the government sector. Government purchases are used to operate the government (administrative salaries, etc.) and to provide public goods (national defense, highways, etc.). These are expenditures on final goods by all three levels of government: federal, state, and local governments.

Define the following terms: • Net Exports of Goods and Services: The official measure of net exports of gross

domestic product by the foreign sector, which is the difference between exports and imports. Net exports of goods and services average about 2 percent of gross domestic product, with exports and imports individually in the range of about 10 percent.

• TRADE DEFICIT: Formally termed a balance of trade deficit, a condition in which a nation's imports are greater than exports. In other words, a country is buying more stuff for foreigners than foreigners are buying from domestic producers.

• TRADE SURPLUS: Formally termed a balance of trade surplus, a condition in which a nation's exports are greater than imports. In other words, a country is buying less stuff from foreigners than foreigners are buying from domestic producers.

• Uncounted production: Items that do not go through the standard markets and are not counted.

• Underground economy: the exchange of goods and services which are hidden from official view. Examples of such activities range from babysitting “off the books” to selling narcotics.

• Double counting results if the value of an intermediate good is included in the gross domestic product more than once. Such double counting would seriously overstate gross domestic product.

Identify the categories of goods and services that make up GDP

• The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending, in a nation's economy"G" is the sum of government spending"I" is the sum of all the country's businesses spending on capital"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

Describe problems encountered in calculating GDP

• Critics of using GDP as an economic measure say the statistic does not take into account the underground economy - transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.

Explain the importance of a country's GDP

Describe ways to increase GDP

• There are really only 2 ways you can increase GDP.

• First, have more people working. • Second, have people work more efficiently

Describe how the government responds to changes in GDP

• A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

• As a result of such a wide-spread global recession, the economies of virtually all the world's developed and developing nations suffered extreme set-backs and numerous government policies were implemented to help prevent a similar future financial crisis.

Describe ways that businesses respond to changes in GDP

• When GDP and other economic indicators are on the rise, producers become hopeful about the future, and they buy new equipment, build new facilities, or expand their current operations.

• This increase in capital-goods investment encourages the expansion of other economic activities. Producers continue to encourage this expansion by increasing their inventory levels to be prepared for the increase in demand that they anticipate.

2.04 Understand economic indicators to recognize economic trends and conditions.

Discuss the impact of a nation’s unemployment rates

Define the following terms: • UNEMPLOYMENT RATE: The proportion of the civilian labor force 16 years or older that is actively seeking

employment, but is unemployed and not engaged in the production of goods and services. • FRICTIONAL UNEMPLOYMENT: Unemployment attributable to the time required to match production

activities with qualified resources. Frictional unemployment essentially occurs because resources, especially labor, are in the process of moving from one production activity to another. Employers are seeking workers and workers are seeking employment, the two sides just have not matched up.

• STRUCTURAL UNEMPLOYMENT: Unemployment caused by a mismatch between workers' skills and the skills needed for available jobs. Structural unemployment essentially occurs because resources, especially labor, are configured (trained) for a given technology but the economy demands goods and services using another technology.

• CYCLICAL UNEMPLOYMENT: Unemployment attributable to a general decline in macroeconomic activity, especially expenditures on gross domestic product, that occurs during a business-cycle contraction. When the economy dips into a contraction, or recession, aggregate demand declines, so less output is produced and fewer workers and other resources are employed.

• SEASONAL UNEMPLOYMENT: Unemployment attributable to relatively regular and predictable declines in particular industries or occupations over the course of a year, often corresponding with the climatic seasons.

• TECHNOLOGICAL UNEMPLOYMENT (e.g. due to the replacement of workers by robots) might be counted as structural unemployment. Alternatively, technological unemployment might refer to the way in which steady increases in labor productivity mean that fewer workers are needed to produce the same level of output every year.

• FULL EMPLOYMENT: The state that occurs when all of the economy's resources are engaged in the production of output. In practice, an economy is considered to be at full employment when the unemployment rate is around 5 to 5 1/2 percent and the capacity utilization rate of capital is about 85 percent.

Discuss individual costs of unemployment.

• Unemployment creates personal hardships for the owners of the unemployed resources. When resources do not produce goods, their owners do not earn income. The loss of income results in less consumption and a lower living standard.

• The personal hardships suffered by the unemployed are of concern to government leaders for reasons that are both in the common good and somewhat more selfish. – In terms of the common good, the unemployed are members of society just like everyone

else and deserve the opportunities to enjoy the fruits of a productive economy. An affluent society "should" be able to provide for everyone. In addition, social problems that cause personal hardships to other members of society tend to increase with the personal hardships of the unemployed, including crime, divorce, suicides, etc.

– Government leaders are also concerned with the personal hardships of the unemployed for more selfish reasons. When the voting public is unhappy, they tend to elect new leaders and toss the old ones out of office. There are few things that voters like less than suffering the personal hardships that come with unemployment. Presidential elections have been decided on a few million votes. A typical business-cycle contraction can add four to five million workers to the ranks of the unemployed, enough votes to change the "employment" status of any incumbent President seeking re-election.

Describe economic benefits of unemployment.

• The general purpose of the unemployment compensation system is the provide financial assistance to unemployed workers. The modern system, however, has two interrelated functions.

• Financial Assistance: First, it does provide needed financial assistance to workers who are involuntarily unemployed. This need tends to be most acute during business-cycle contractions, but it is valuable during all periods. Without such assistance, workers who are unemployed only temporarily are likely encounter serious financial and personal hardships (bankruptcy, home foreclosure, etc.) from which they might never recover.

• Economic Stability: Second, it helps stabilize the macroeconomy during business-cycle contractions. Because unemployed workers continue to receive income, they are able to continue consumption expenditures, which prevents aggregate production from dropping as much as it might have otherwise. This, as such, prevents the economy from slipping deeper into a business-cycle contraction.

• Unemployment may have advantages as well as disadvantages for the overall economy. Notably, it may help avert runaway inflation, which negatively affects almost everyone in the affected economy and has serious long term economic costs. As in the Marxian theory of unemployment, special interests may also benefit: some employers may expect that employees with no fear of losing their jobs will not work as hard, or will demand increased wages and benefit. According to this theory, unemployment may promote general labour productivity and profitability by increasing employers monopsony like power (and profits).

Explain theories of the causes of unemployment• The five key reasons for unemployment are: (1) job losers, (2) job leavers, (3) those of have completed

temporary jobs, (4) re-entrants, and (5) new entrants. • Job Losers: A job loser is an unemployed person who has been involuntarily terminated or laid off from a

job. More specifically, a job loser is: – A person who has been permanently terminated from a job and is actively seeking employment.– A person who has been temporarily laid off from a job and is not actively seeking employment due

to expectations being called back to work within six months.• Job Leavers: A job leaver is a person who has voluntarily quit one job and is actively seeking employment

elsewhere. • Completed Temporary Job: An unemployed person can also be one who has recently completed a

temporary job and is actively seeking employment elsewhere.• Re-entrants: A re-entrant is a person who had previously been classified as an employed person, but has

been out of the labor force for a period of time before actively seeking employment once again.• New Entrants: A new entrant is a person who has never before been employed and is actively seeking

employment for the first time.• The causes of unemployment are complex. Some kinds are long term: technical unemployment happens

when people's skills are made redundant. Some are medium term: cyclical unemployment happens because there is inadequate demand to keep production going. Some are short term: frictional unemployment happens because people change jobs or locations. Seasonal work, casual employment and subemployment are patterns of work which lead to people being employed only for short periods at a time.

• Exclusion from the labour market takes many forms: some people can opt for early retirement, further education or domestic responsibility, and others cannot. If poor people are unemployed more, it is not just because they are more marginal in the labour market; it is also because they have fewer choices, and because people who become classified as 'unemployed' are more likely to be poor.

Explain why the unemployment rate understates employment conditions

• A couple of measurement problems exist that could cause the official unemployment rate to be understated or overstated.

• Understated: Anyone with a paying job is officially counted as being employed. Unfortunately, this includes those working part-time, who want to work full-time. – In theory, a person working 20 hours a week, who is willing and able to work 40 hours

a week should be considered as "half employed." The official unemployment rate calculation only considers such workers as employed.

– Moreover, to be officially counted as unemployed a person must be actively seeking a job. Unfortunately, this excludes discouraged workers who have stopped looking for employment. They are willing and able to work, and in principle should be considered as unemployed, but they have simply stopped looking.

– The official unemployment rate calculation does not consider these workers as unemployed nor part of the labor force.

• Including both part-time workers and discouraged workers would tend to increase the unemployment rate.

Describe the costs of unemployment for a nation

• We know that high unemployment is not a good thing, but you may not be aware of all of the reasons. Unemployment clearly has costs for the person who is jobless, but the true costs extend beyond the individual or the family affected.

• Unemployment costs the economy as a whole. If we are experiencing unemployment, then we are not using all of our labor resources.

• Unemployment has a domino effect as well: As people lose their jobs, they cut back on spending, which causes other workers to lose their jobs. Unemployed people will likely postpone the purchase of a new car, and not go out to eat. This may cause auto workers and waiters to lose their jobs as well.

• Unemployment increases government expenditures on unemployment benefits, food stamps, etc., while decreasing income tax revenue, potentially creating a budget deficit.

• Probably the most serious and most difficult to quantify are the personal costs. Higher unemployment is associated with increasing rates of suicide, domestic violence, drug abuse, and health problems.

Student Activity• Ask students to assume that the United States is in a recessionary

period and that consumers are worried about losing their jobs and experiencing a reduction in wages. Each student should explain in a brief paragraph how this fear among consumers will be reflected in GDP.

Or • Instruct students to determine the current unemployment rate in

their state, and compare this with the national unemployment rate. Students should then identify ways that the state’s fiscal policy might account for the differences identified. Engage the students in a class discussion about their findings.

• http://www.investopedia.com/ask/answers/199.asp• http://www.search.com/reference/unemployment

2.04 Understand economic indicators to recognize economic trends and conditions.

Explain the economic impact of interest-rate fluctuations

Define the following terms:

• The interest rate is the yearly price charged by a lender to a borrower in order for the borrower to obtain a loan. This is usually expressed as a percentage of the total amount loaned.

• The nominal interest rate, is one where the effects of inflation have not been accounted for. Changes in the nominal interest rate often move with changes in the inflation rate, as lenders not only have to be compensated for delaying their consumption, they also must be compensated for the fact that a dollar will not buy as much a year from now as it does today.

• Real interest rates are interest rates where inflation has been accounted for.• The interest-rate fluctuation are interest rate changes due to changes in supply and

demand for bonds.• DEFAULT RISK: The probability that a borrowing agent will not pay in full the agreed

interest and/or principal.• liquidity risk is the risk that a given security or asset cannot be traded quickly

enough in the market to prevent a loss (or make the required profit).• Maturity risk refers to the risk that is associated with uncertainty of interest rate.

Discuss causes of interest-rate fluctuations.

• The Federal Reserve directs interest rates as a means of controlling economic growth in the U.S. If the economy grows too fast, it will experience inflation. That's when prices rise so high that no one can afford anything.

• The following are some of the factors that affect a country's economic growth: • The financial stability of major companies • The financial stability of consumers and whether or not they feel comfortable

spending money • The amount of national debt • Stock and bond market valuations • The amount of money pouring into investments • Consumer confidence in the current presidential administration • When the Federal Reserve instructs the central banks to raise the Treasury bill or

prime rate, banks make money on the increased margin. However, since consumers cut back on their spending, banks extend fewer loans and credit lines, so their profits may experience a decline.

Explain the impact of interest rate fluctuations on an economy.

• Interest rates are determined by the Federal Reserve Board, which meets on a regular basis throughout the year to review how the economy is performing.

• During slowing economies, or recessions, the Federal Reserve will lower interest rates to encourage consumer spending.

• When the economy is booming, the board may raise rates to capitalize on your spending and keep inflation in check.

Describe the relationship between interest rates and the demand for money

• Money generally pays very little interest (and in the case of paper currency, none at all) but it can be used to purchase goods and services.

• Bonds do pay interest, but cannot be used to make purchases, as the bonds must first be converted into money. If bonds paid the same interest rate as money, nobody would purchase bonds as they are less convenient than money.

• Since bonds pay interest, people will use some of their money to purchase bonds. The higher the interest rate, the more attractive bonds become. So a rise in the interest rate causes the demand for bonds to rise and the demand for money to fall since money is being exchanged for bonds.

• So a fall in interest rates cause the demand for money to rise.

Describe the relationship between inflation and interest rates

• There is a strong correlation between interest rates and inflation.

• Interest rates reflect the cost of money, such as the rate you pay when you borrow money to buy a house or spend on your credit card.

• Inflation is the cost of things. • Most of the time, when inflation increases, so

do interest rates.

Discuss factors that create differences in the amount of interest charged on credit transactions

• Typical credit cards have interest rates between 7 and 36% in the U.S., depending largely upon the bank's risk evaluation methods and the borrower's credit history, levels and kinds of risk, borrowers’ and lenders’ rights, and tax considerations).

Describe kinds of risk associated with variances in interest rates (i.e., default, liquidity, and maturity).

• Interest rate risk is the risk (variability in value) borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa. Interest rate risk is commonly measured by the bond's duration.

Explain how fiscal policies can affect interest rates.

• Expansionary fiscal policy pushes interest rates up, while contractionary fiscal policy pulls interest rates down.

• Expansionary: When output increases, the price level tends to increase as well.

• Contractionary: When output decreases, the price level tends to fall as well.

Student Activity

• Direct students to read articles about trends in interest rates. Students should summarize the articles, identifying the nature of the trends and reasons that they are occurring. Students should also determine the impact that these trends are having on local businesses and discuss their findings with the class.

• Websites: CNN Money, Wall Street Journal, MSN Money

2.04 Understand economic indicators to recognize economic trends and conditions.

Determine the impact of business cycles on business activities

Define the following terms:

• Define business cycles. – The ups and downs in economic activity – Business fluctuations – Periods of expansion and contraction in economic

activities (i.e., production, consumption, exchange, and distribution)

– They affect all aspects of our economy, including employment, prices, incomes, and production.

Explain the phases of business cycles.

• Expansion: The growth part of the cycle; a time of economic prosperity; everyone has a hopeful economic outlook and spends more money (i.e., consumers buy more durable goods; producers invest in new equipment that enables them to produce more goods and services); demand, therefore, is increasing which requires more workers to be hired and more factories and businesses to be built; more money is put into the circulation and interest rates are decreased by the Federal Reserve System.

• Peak: The high point of the economic prosperity that has existed; demand begins to exceed production capacities, and producers raise prices to offset the high demand; interest rates begin to rise; demand for all resources exceeds their availability; everyone has a less hopeful economic outlook, and consumers begin to save more so that their spending decreases; economic activities level off.

• Contraction: The demand for goods/services begins to fall and unemployment rises; a bad time for businesses since consumers are spending less and saving more; businesses’ bottom lines suffer, and some are experiencing losses to the point that they are forced to close; demand continues to fall, and production is decreased; inventories build up causing workers to lose their jobs, thereby further decreasing the demand for goods and services; prices decrease to attract customers; interest rates decrease. When a contraction lasts for six months, it’s considered a recession. If a recession continues and is severe, it’s a depression; many people lose their jobs, and businesses fail.

• Trough: The final phase of a business cycle; reached when economic activities stop their decline. This is the low point of economic activity when unemployment is very high, and even more businesses fail. This phase stays in effect until consumers and producers become more hopeful about the economy and start to buy more goods and services.

Explain that when studying business cycles, economists examine fluctuations in the level of an economy’s total output. • Total output is based on real

gross domestic product (GDP). • Real GDP is GDP that has been

adjusted for inflation. • As a country’s real GDP

increases, economic activities increase; the

• economy grows. • As a country’s real GDP

decreases, so do its economic activities; the economy declines.

Explain the benefits of a growing economy.

• Provides a higher standard of living

• Creates new and additional jobs

• Enables the government to fulfill its duties more thoroughly

• Resolves domestic problems

Describe the unpredictability of business cycles.

• There’s no exact way to predict the length or severity of a business cycle.

• Some have lasted two years, others 10 years.

• It’s difficult to predict the beginning and end of cycles.

• This heightens the uncertainty of producers and consumers.

Discuss the importance of understanding business cycles.

• Businesspeople can take steps to avoid the extreme ups and downs of the cycle by anticipating changes needed in employment, production, pricing, and purchasing.

Discuss internal causes of business cycles that take place within the economic system itself.

• Aggregate demand: This is the total demand for an economy’s goods and services and can pull GDP up or down to cause business cycles. When it’s rising, businesses increase production, more workers are hired, and employees earn more to spend on goods and services. If aggregate demand continues to grow to the point that production can’t meet demand, prices will rise rapidly—known as inflation, and consumers have to pay more to buy the same goods and services. If aggregate demand decreases, production and employment will decrease, and production will slow. Recessions or depressions result when aggregate demand stays too low for a long time. Once it starts rising again, expansion and prosperity return.

Discuss internal causes of business cycles that take place within the economic system itself.

• Money supply: This is the total quantity of money that exists at one time in a nation, and as it goes up or down, so does the economy. The federal government restricts the flow of money by raising taxes, raising the interest rates to borrow money, and purchasing fewer goods and services to run the government. The amount of money in circulation can be increased when the federal government spends more, lowers interest rates, and lowers taxes. When interest rates are low, more money can be borrowed to build houses, office buildings, and industrial plans. Greater production results in more available work and lowered unemployment rates. This is a period of expansion. When money is in short supply, unemployment will be high, business activities slow down, and a period of contraction begins.

Discuss internal causes of business cycles that take place within the economic system itself.

• Investment in capital goods: When producers are hopeful about the future of business, they buy new equipment and build or expand their business facilities. This investment encourages the expansion of economic activities. When producers decrease their investment in capital goods, economic activities contract.

Discuss internal causes of business cycles that take place within the economic system itself.

• Inventory levels: When producers are optimistic about business activity, they increase their inventory levels to be prepared for the increase in demand, thereby expanding economic activities. When they feel less hopeful, they decrease their buying of new goods and try to sell the ones on hand, thereby causing the economy to contract.

Explain external causes of business cycles that take place outside the economic system.

• Political changes: A change in the political party in power can cause changes in economic activities. For example, if the elected officials support business interests, economic activities are likely to expand.

• Climatic changes: Many jobs are affected by climatic conditions. Extreme weather conditions, such as droughts, floods, and blizzards, can negatively affect many economic activities.

• International relations: The interaction of our country with other countries can expand or contract economic activities. For example, a war or conflict may increase the production of defense materials, thereby expanding our economic activities. When the conflict ends, the same quantity of defense materials will no longer be needed, thereby contracting economic activities.

• Discoveries and innovations: The discovery of new products, techniques, and resources can stimulate economic activities. Large sums of money must be invested to develop and improve the products, and a variety of new jobs is created. Since these occur irregularly, they contribute to changes in economic activities.

2.05 Understand and follow company rules and regulations to maintain employment

Follow chain of command

Discuss the importance of following the chain of command.

• Chain of Command – the line of authority within an organization

• The Chain of Command begins with the Chief Executive Officer (CEO) followed by senior managers, mid-level managers, then lower-level managers

Discuss the use of the chain of command to resolve issues or problems. • This kind of organization

means that problems are addressed at the lowest possible level. Only problems that cannot be handled by an immediate supervisor are brought to the attention of higher-level managers.

Explain possible consequences of failing to follow the chain of command• When employees frequently ignore the chain of command, it may affect the morale of

supervisors and managers. Companies without a clear chain of command can create an atmosphere of uncertainty and chaos, which affects the morale of all workers in the organization. Poor company morale may lead to high employee turnover and lower productivity.

The worker may be viewed as:• having no respect for the structure that is in place.• is a troublemaker.• is looking to advance in the company without following procedures or earning the

position.• is a back-stabber.Consequences:• Engenders a lack of trust among co-workers and higher-ups.• Overlooked for promotions or better assignments.• Work environment becomes tense.• Reputation earned is not positive.• Other department supervisors won't accept a lateral transfer

Describe situations in which bypassing the chain of command is appropriate

• An abusive manager may be reported through affidavits and documentation to the human resources personnel, who in turn will pass the information to the manager's supervisor. If corrective action is not taken in a timely manner, there are additional steps to document and submit that now involve more people in the chain of command.

• However, if the situation escalates to different levels without resolution, an employee may be forced to go beyond the company's walls to remedy the problem.

Going beyond the company's walls: • For safety violations and endangerment: OSHA• For discrimination, civil rights violations, sexual harassment: Legal Firm, Attorney

General• For fraud involving government funding: Department of Justice, U.S. Office of Special

Counsel.• The Media.• There are law firms that specialize in serving whistle blowers, but be aware that not all

these firms are created equal, some are a scam and others have serious conflicts of interest depending on the companies involved.

Student Activity:

• Demonstrate techniques used to follow a chain of command• Ask each student to develop a short report about the chain

of command for a school-based enterprise, her/his employer, or some other local business. S/he should identify and draw the chain of command, explain the importance of following it, provide specific examples of when and how employees should follow the chain of command at that business, describe situations in which it might be appropriate for an employee to bypass the chain of command, and discuss techniques used to work through the chain of command on a daily basis.

2.06 Utilize critical-thinking skills to determine best options/outcomes.

Use time-management skills (PD:019

Define the terms

• Time management is the act or process of exercising conscious control over the amount of time spent on specific activities, especially to increase efficiency or productivity.

• Stress - In psychology, a state of bodily or mental tension resulting from factors that tend to alter an existent equilibrium.

• In psychology, procrastination refers to the act of replacing high-priority actions with tasks of low-priority, and thus putting off important tasks to a later time.

• Free time - Freedom from time-consuming duties, responsibilities, or activities.• Weekly Master List - a simple weekly planner to manage and protect your planned

activities; manage your time by managing your activities by protecting the time slots you plan for your tasks. EXAMPLE: http://www.businessballs.com/timemanagement.htm

• To-Do Lists are prioritized lists of all the tasks that you need to carry out. They list everything that you have to do, with the most important tasks at the top of the list, and the least important tasks at the bottom.

• ABC principle - “A” section for tasks to be done that day; “B” to be done within the week; “C” for things within the month.

List benefits of time management. • Be more effective in your work• Organize your life• Make better decisions• Set and achieve inspiring goals• Enjoy a better work-life balance• Create habits that work for you• Manage your workload• Do more... or less• Appreciate the value of your time• Know what matters to you• Do what matters to you• Achieve what you 'keep meaning to'

Explain the time-management process

• The first step to physically managing your time is to know where it's going now and planning how you're going to spend your time in the future.

• You should start each day with a time management session prioritizing the tasks for that day and setting your performance benchmark.

Use time-management principles.

Learn to delegate and/or outsource.• For effective time management, you need to let other people carry some of the load. Establish routines and stick to them as much as possible.• While crises will arise, you'll be much more productive if you can follow routines most of the time.Get in the habit of setting time limits for tasks.• For instance, reading and answering email can consume your whole day if you let it. Instead, set a

limit of one hour a day for this task and stick to it.Be sure your systems are organized.• Are you wasting a lot of time looking for files on your computer? Take the time to organize a file

management system. Is your filing system slowing you down? Redo it, so it's organized to the point that you can quickly lay your hands on what you need.

Don't waste time waiting.• it's impossible to avoid waiting for someone or something. But you don't need to just sit there

and twiddle your thumbs. Always take something to do with you, such as a report you need to read, a checkbook that needs to be balanced, or just a blank pad of paper that you can use to plan your next marketing campaign. Technology makes it easy to work wherever you are; your PDA and/or cell phone will help you stay connected.

• You can be in control and accomplish what you want to accomplish - once you've come to grips with the time management myth and taken control of your time.

Describe ways to manage time.

'Must have' time management tools• Planners. Whether they're electronic or paper based, daily planners should form the backbone of personal

organizational skills. Bear in mind that you’ll only ever be as effective as the quality, planning and execution of the contents in yours.

• Pen and paper. Small enough to keep with you -- you never know when a thought or idea will strike, so make it a habit to keep them with you. This is particularly true if you're committed to keeping a time management log. A pocket notepad and pen mean you can jot down pretty much anything you want to act on, or commit to, later.

• Computer. A double edged sword, this one. Your PC or notebook can do many things, online and off. How many save you time? As many as you want. Time spent improving your data storage and access by organizing computer files is time well spent. Manage you computer well and it will serve you. Don’t, and it will start to own you.

• Timer. Use a timer to establish limits on whatever you want to do more or less of (visual timers are particularly useful). For example, if you're habitually wasting time online, use a timer to help you put limits on the amount you do it. On the other hand, when you're having difficulty overcoming procrastination set it for a short time to get you going.

• Digital voice recorder. When you’re travelling, taking notes isn’t always possible. Using a voice recorder allows you to capture thoughts and ideas when you’re on the go. These really are portable, whether you’re waiting, walking, driving, or even running (well you may be able to; you may end up sounding like a crank caller when you play it back later).

• PDA (Personal Digital Assistant). More a luxury than a necessity? Some say they are. Do they justify the costs? Many people say they do. Discover the advantages of PDA tools for time managementto decide for yourself.

Student Activity

• write a one-page essay reflecting on the results of the quiz.

• In the essay, each student should – describe his/her time-management strengths and

weaknesses,– identify ways to improve her/his time-

management skills, – and discuss the need for effective time-

management skills in business.

2.07 Determine global trade’s impact on business decision-making to acquire insight into the global forces affecting business.

Explain the nature of global

Explain the role of imports, exports, importers, and exporters in international trade.

• Imports: Goods or services purchased from other countries

• Exports: Goods and services sold by businesses and industries in one country to individuals, manufacturers, or governments in other countries

• Importers: Individuals, businesses, or governments that purchase and import goods or services manufactured in other countries

• Exporters: Businesses and industries that sell goods or services manufactured in one country for delivery to other counties

Explain the difference between absolute advantage and comparative advantage

• Absolute advantage: The advantage achieved when a nation can produce a good or service for less than another nation

• Comparative advantage: The advantage achieved by a nation from specializing in and producing goods and services at which it is relatively most efficient

Define the terms domestic trade and international trade• Domestic trade: The buying and

selling of goods and services within a country

• International trade: The buying and selling of goods and services between nations

Discuss why nations engage in international trade

To obtain needed resources Examples: o Access to raw materials o Up-to-date technology

Summarize the benefits of international trade.

• Increased variety of products • Access and availability of

scarce resources • Lower prices for products due

to increased competition § Possible exchange of ideas and technology among countries

• Increased income for the shipping and/or airline industries due to increased shipping and tourism

Discuss issues associated with international trade.

Identify ways that a nation’s balance of payment affects its balance of trade.

o Components of a nation’s balance of payment include exports, imports, foreign aid, business investment abroad, and money spent by tourists.

o Explain how a trade surplus and a trade deficit occur.

Discuss techniques (protectionism) that governments use to control international trade.

o Tariffs o Quotas o Licenses o Product standards o Embargoes

Identify methods that governments use to support international trade.

Organizations: • The European Union: Unifies European

countries for trading power • World Trade Organization: Handles disputes and

facilitates negotiations Trade agreements to reduce trade barriers: • North American Free Trade Agreement (NAFTA)

§ General Agreement on Tariffs and Trade (GATT)

Other: • Trade centers • Trade missions • Trade talks Explain why multinational corporations (MNCs)

engage in international trade and how they facilitate it.

o Lower labor costs o Geographic location o Natural resources o Hold influence in host countries

2.07 Determine global trade’s impact on business decision-making to acquire insight into the global forces affecting business.

Discuss the impact of cultural and social environments on global trade

Describe Hofstede's dimensions of national cultures

• Understanding cultural differences is essential for companies involved in international business. Countries vary across several dimensions, affecting workplace values.

• When it comes to international business, understanding cultural differences and promoting cultural sensitivity will help ensure that communication across borders is effective and that business transactions are successful.

• Each country has its own cultural standards of being, thinking, and acting, and these cultural differences strongly influence workplace values and business communication. What may be considered perfectly acceptable and natural in the workplace of one country, can be considered confusing or even offensive in the workplace of other country.

• Business representatives involved in the international business arena should be aware of how other cultures differ across the following dimensions. Many of these dimensions are based on Geerte Hofstede's framework for assessing culture.

Describe Hofstede's dimensions of national cultures

Power Distance• In some countries, such as the Arab nations and many Latin American countries, people recognize and

respect differences in power. In these high power distance cultures, bypassing a supervisor or any other superior would be considered insubordination. In low power distance countries, such as America, the lines between superiors and subordinates are often blurred. It is perfectly acceptable in America, for example, that supervisors can mingle with subordinates as equals within a social setting.

Explicit Versus Implicit• In some countries, such as America and Germany, people tend to be explicit in communication. Ideas are

fully spelled out, and when trying to understand a message, people will depend on what has been actually said or written. In other countries, such as Japan, people tend to speak and communicate in an implicit and indirect manner. In this case, people depend on common understanding in knowledge and etiquette to extract the underlying message.

Monochronic Versus Polychronic• Monochronic cultures prefer to focus on one task at a time. They emphasize order and do not favor

interruptions. For these people, time is a precious commodity. Schedules and timetables are greatly valued and are meant to be strictly followed. Polychronic cultures, on the other hand, like to multi-task and are generally less stringent when it comes to establishing or following an agenda. In this setting, the concept of time is more fluid, and the pace of life is more relaxed.

Describe Hofstede's dimensions of national cultures

Individualism Versus Collectivism• In individualist cultures, such as America, individuality, independence, and self-determination are valued. In

collectivist cultures, such as Japan, people are expected to identify with and work well in groups. In exchange for their loyalty and compliance, people receive a sense of security, protection, and shared responsibility.

Masculinity Versus Femininity• The cultures that are more masculine, such as Japan, value competitiveness, assertiveness, ambition, and

the accumulation of wealth. On the other hand, feminine cultures, such as Sweden, place more emphasis on relationships, compassion, and the general quality of life.

Uncertainty Avoidance • This dimension concerns the level of uncertainty and ambiguity that members of a culture are comfortable

with. Cultures that are high in uncertainty avoidance prefer rules and structured circumstances. Within their structured environment, these people tend to be more emotional and expressive. Cultures that are comfortable with uncertainty avoid rules and in general are less emotionally expressive and pragmatic.

• Every culture possesses a unique mixture of attitudes, values, and social expectations. When conducting business across countries, it is vital that business representatives are provided with an understanding of the cultural differences and are able to be sensitive to them.

Explain why business subcultures shape the behaviors of businesspeople.

• In North America, we have traditionally been more comfortable doing business with people we don’t know than with people from other world regions. In some local situations, we may have no personal relationship with our customer, it is “strictly business.” In others, we may develop a more personal relationship once we have been doing business for a while.

• Much of the world’s population however, is used to personal relationships preceding any business relationship. Internet-based business would seem to be as about impersonal as it can get.

• Yet one Alberta-based business claims that its growth in international business coming via their Internet site is precisely due to personal customer service. This company makes a point of making telephone contact with everyone who contacts them via their web site. Needs are better understood, rapport is built and a personalized customer relationship is developed. They have figured out how essential working on building a relationship is to continued business success worldwide.

• Alberta’s business style is also rule-based. Legal contracts once drawn up and are considered the cornerstone of the business relationship. Success is seen to come from following the contract to the letter.

• This objective and rational approach is seen to serve everyone’s interest the best. In many other countries, while rules are important, it is the relationship that is viewed as more important. Contracts may be seen as helpful guidelines that can easily be modified as circumstances change. Success is seen to come from placing the relationship first.

• This process can be very subjective.

Explain how language impacts knowing when and how business will be conducted.

• It would be convenient for us if our global customers would communicate with us and do business with us in English. But the golden rule in business is not what is best for us, but rather what is best for the customer. What does the customer want? If s/he has a choice of 5 suppliers for a product or service, what will the decision-making criteria be? Price, quality and service will all be factors. But so will less tangible qualities like comfort, satisfaction and trust.

• According to analysts from Forrester Research “people are twice as likely to stay at a given site, and three times as likely to do business there if the site communicates content in their own language and culture.”

Explain how culture influences communication.

Direct and Indirect Communication• Of the world’s cultures, Canada tends to line up on the more direct end of the communication

continuum. While we may be proud of “getting to the point” and not “beating around the bush” as a sign of effective communication, others may find us blunt to the point of rudeness.

• Doing global e-business, the balance must be found between being politely clear and concise in our message versus sounding blunt and aggressive.

Expressiveness of Communication• Some of the world’s people prefer expressive, personal communication, while others use a

more controlled and impersonal style. In face-to-face conversation, an expressive approach might include voices raised in joy or anger, large arm gestures and a smaller distance separating two speakers.

Formal and Informal Communication• This is reflected in dropping official titles, using first names and preferring a round of golf with a• client rather than a fancy dinner. Following protocol is much more important in many parts of

the world. Showing respect by using proper titles and greetings provide an important foundation for a business relationship.

Student Activity • Using the following sites groups will research:• http://www.cyborlink.com/• http://www.celt.iastate.edu/international/CulturalDifferences3.html• http://www.kwintessential.co.uk/resources/country-profiles.html

– Group # 1 - India • Discuss how the interrelationship of business law and religion impacts international business activities. • Identify ways to overcome issues with the crossover of business law and religion in international business

activities. • Describe how corruption impacts international business activities. • Explain how a country's level of involvement impacts international trade.

– Group #2 – India• Discuss how culture can hamper international trade. • Explain how culture can impact trade partner selection. • Describe how culture can impact negotiations in international trade. • Discuss how culture can impact product delivery in international trade.

– Group #3 - Egypt• Discuss how the interrelationship of business law and religion impacts international business activities. • Identify ways to overcome issues with the crossover of business law and religion in international business

activities. • Describe how corruption impacts international business activities. • Explain how a country's level of involvement impacts international trade.

– Group #4 – Egypt• Discuss how culture can hamper international trade. • Explain how culture can impact trade partner selection. • Describe how culture can impact negotiations in international trade. • Discuss how culture can impact product delivery in international trade.

Student Activity (con’t)– Group # 5 - Japan

• Discuss how the interrelationship of business law and religion impacts international business activities. • Identify ways to overcome issues with the crossover of business law and religion in international business

activities. • Describe how corruption impacts international business activities. • Explain how a country's level of involvement impacts international trade.

– Group #6 - Japan• Discuss how culture can hamper international trade. • Explain how culture can impact trade partner selection. • Describe how culture can impact negotiations in international trade. • Discuss how culture can impact product delivery in international trade.

– Group #7 • http://www.theglobalist.com/StoryId.aspx?StoryId=3490 • Explain how positive/negative experiences with a culture can update one's beliefs. • Describe how culture can impact the selection of trade goals in international trade.

2.07 Determine global trade’s impact on business decision-making to acquire insight into

the global forces affecting business.

Describe the determinants of exchange rates and their effects on

the domestic economy

Define the terms

• Exchange Rate - The exchange, also termed foreign exchange rate, is the price of one currency in terms of another. The currencies of different nations are regularly traded for each other over foreign exchange markets. The price established for this exchange of currencies is the exchange rate.

• Exchange rate quotation - is given by stating the number of units of a price currency that can be bought in terms of 1 unit currency. For example, in a quotation that says the EUR-USD exchange rate is 1.2 USD per EUR, the price currency is USD and the unit currency is EUR.

• Free Floating Currency - a currency that uses a floating exchange rate as its exchange rate regime.

• Pegged Currency - A currency that is controlled by the central bank in a country so that it keeps the same value against other currencies

• Foreign exchange market - is a market that trades the domestic currency of one nation for the domestic currency of another nation.

• Weak dollar - is weak in comparison to other paper currencies• Strong dollar – is strong compared to other currencies. (They're all WEAK, since none of

them are backed by anything, and are mere pieces of paper with ink on them.)

Distinguish between direct and indirect exchange-rate quotations.

• Direct quotation is where the cost of one unit of foreign currency is given in units of local currency

• Indirect quotation is where the cost of one unit of local currency is given in units of foreign currency.

Your local currency is EUR:- Direct exchange rate: 1USD = 0.92819 EUR- Indirect exchange rate: 1EUR = 1.08238 USD

Interpret exchange rates.

• If, for example, someone in the United States is willing to pay two dollars to purchase one British pound, making the price of a British pound $2, then the exchange rate between dollars and pounds is 2 dollars for 1 pound.

• These assorted currency exchange rates indicate the relative values of the currencies exchanged. A British pound price of $2, and exchange rate of 2 for 1, generally indicates that the one British pound is twice as valuable as one U.S. dollar. Currency traders give up TWO dollars for ONE pound.

• Compare this to the "exchange rate" between a U.S. dime and U.S. nickel. Two nickels can be exchanged for one dime, an exchange rate of 2 nickels per dime, and generating a "price" of 2 nickels. This price clearly indicates that a dime is twice as valuable and can purchase twice as many goods and services, as a nickel. The exchange rate between different national currencies has much the same interpretation.

Identify factors that increase demand for currencies

• A reduction in the interest rate.• A rise in the demand for consumer spending.• A rise in uncertainty about the future and future opportunities.• A rise in transaction costs to buy and sell stocks and bonds.• A rise in inflation causes a rise in the nominal money demand

but real money demand stays constant.• A rise in the demand for a country's goods abroad.• A rise in the demand for domestic investment by foreigners.• A rise in the belief of the future value of the currency.• A rise in the demand for a currency by central banks (both

domestic and foreign).

Explain factors that cause a currency to lose value relative to other currencies.

• A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).

• A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher, if the country's level of output is expected to decline, or if a country is troubled by political uncertainty.

Discuss how economic factors affect exchange rates

An exchange rate is determined by supply and demand factors. These are the various factors which determine the demand and supply of a currency.

• 1. InflationIf inflation in the UK is lower than elsewhere, then UK exports will become more competitive and there will be an increase in demand for pounds. Also foreign goods will be less competitive and so UK citizens will supply less pounds to buy foreign goods. Therefore the rate of pound will tend to increase.

• 2. Interest RatesIf UK interest rates rise relative to elsewhere, it will become more attractive to deposit money in the UK

• 3. SpeculationIf speculators believe the pound will rise in the future, they will demand more now to be able to make a profit. This increase in demand will cause the value to rise.Therefore movements in the exchange rate do not always reflect economic fundamentals, but are often driven by the sentiments of the financial markets.

• For example, if markets see news which makes an interest rate increase more likely, the value of the Pound will probably rise in anticipation.

• 4. Change in competitivenessIf British goods become more attractive and competitive this will also cause the value of the Exchange Rate to rise. This is important for determining the long run value of the Pound.

• 5. Relative strength of other currencies Between 1999 and 2001 the pound appreciated because the Euro was seen as a weak currency.

• 6. Balance of PaymentsA large deficit on the current account means that the value of imports is greater than the value of exports. If this is financed by a surplus on the financial / capital account then this is OK. But a country who struggles to attract enough capital inflows will see a depreciation in the currency. (For example current account deficit in US of 7% of GDP was one reason for depreciation of dollar in 2006-07)

Explain how market psychology can affect exchange rates.

Market psychology along with the perception of currency traders are also one of the important determinants of currency market rates. These factors influence the currency trading market in following ways.

1.Flights to quality: This phenomenon of currency exchange market states that the various international events taking place in different nations of the world affect the foreign exchange rates. A ‘flight to quality’ means the traders moving their capital away from the risky investments to the safer investment options. In other words, traders look forward to safer economic currencies and prefer that currency investment where the demand is on higher side thus resulting in a higher price for currencies. The safest currency is considered to be The Swiss franc during the times of political or economic uncertainty.

2. Long-term trends: The foreign exchange currency trading markets usually move in visible long-term trends. These trends are analyzed and studied by currency exchange professionals to predict the effect of these events on the future currency rates.

3. Economic numbers: The economic numbers are determinants of currency market rates as they are based on economic reports of a country thus indicating the economic condition of a particular company. These economic numbers greatly influence the market psychology and they may affect the short-term market moves.

4.Technical trading considerations: Technical trading considerations such as the price charts are also determinants of market exchange rate. Because many investors analyze these price charts in order to identify various pattern over the period of time. It is an important foreign exchange currency rate determinant.

Describe how political conditions can influence exchange rates

• Political conditions are important determinants of currency market rates of foreign exchange rates. International political conditions, internal and regional events within a country affect the currency markets greatly. All exchange rates are sensitive to political instability and speculations about the new ruling party. Political upheaval and instability can play a negative role in a nation's economy.

• Similarly, any country facing financial difficulties, is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may initiate positive or negative interest in a neighboring country. And in the process, affect its currency rates.

Distinguish between free-floating and pegged currency

• A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged.

• Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting", as any differences in supply and demand will automatically be corrected in the market. Take a look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing.

• In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency does reflect its true value against its pegged currency, a "black market", which is more reflective of actual supply and demand, may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market. In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation; however, it is less often that the central bank of a floating regime will interfere.

Describe factors that influence free-floating currency.

• A free-floating system has the advantage of being self-regulating. There is no need for government intervention if the exchange rate is left to the market.

• Market forces also restrain large swings in demand or supply. • Suppose, for example, that a dramatic shift in world preferences led

to a sharply increased demand for goods and services produced in Canada. This would increase the demand for Canadian dollars, raise Canada’s exchange rate, and make Canadian goods and services more expensive for foreigners to buy. Some of the impact of the swing in foreign demand would thus be absorbed in a rising exchange rate.

• In effect, a free-floating exchange rate acts as a buffer to insulate an economy from the impact of international events.

Identify institutions that utilize the foreign exchange market

• Governments• Banks• Importers• Exporters• Investors• Consumers

Discuss types of financial instruments used in foreign exchange markets

Spot• A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar,

Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.

Forward• One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not

actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.

Swap• The most common type of forward transaction is the FX swap. In an FX swap, two parties exchange currencies for a

certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.

Future• Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is

roughly 3 months. Futures contracts are usually inclusive of any interest amounts.Option• A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not

the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

Explain the advantages/disadvantages of a strong U.S. dollar

Strengthening Dollar • Advantages • Consumer sees lower prices on foreign products/services • Lower prices on foreign products/services help keep inflation low • U.S. consumers benefit when they travel to foreign countries • U.S. investors can purchase foreign stocks/bonds at "lower" prices • Disadvantages • U.S. firms find it hard to compete in foreign markets • U.S. firms must compete with lower priced foreign goods • Foreign tourists find it more expensive to visit U.S. • More difficult for foreign investors to provide capital to U.S. in time of

heavy U.S. borrowing

Describe the advantages/disadvantages of a weak U.S. dollar

Weakening Dollar • Advantages • U.S. firms find it easier to sell goods in foreign markets • U.S. firms find less competitive pressure to keep prices low • More foreign tourists can afford to visit the U.S. • U.S. capital markets become more attractive to foreign investors • Disadvantages • Consumers face higher prices on foreign products/services • Higher prices on foreign products contribute to higher cost-of-living • U.S. consumers find traveling abroad more costly • Harder for U.S. firms and investors to expand into foreign markets

Explain the risks of speculating on the price of foreign currency

• Speculation is an attempt to profit by trading on expectations about prices in the future.

–In the foreign exchange market, one speculates by taking position on a currency and then closing that position after the exchange rate has moved.

–A profit results only if the rate moves in the direction that was expected

Student Activity

• Ask the students to imagine that they are U.S. importers who are trying to decide among three countries from which to obtain goods. Each student should select a product and the three countries of interest. The product that each student selects should be one of interest to her/him, and the countries identified should actually export the item. Each student should write a memorandum to the company’s owner recommending one of the countries based on exchange rates. After completing his/her memorandum, each student should compare and discuss it with a classmate

• http://www.x-rates.com/cgi-bin/cgicalc.cgi?value=1&base=USD• Test next class