SLIDE 1

2-1 Measuring Economic Activity

2-2 Economic Conditions

2-3 Other Measures of Business Activity

2C H A P T E R

Economic Activity

2-1 Measuring Economic Activity Goals

1.Define Gross Domestic Product

2.Describe economic measures of labor

3.Identify economic indicators for consumer spending

Gross Domestic Product (GDP) The total value of all final goods and services

produced in a country during one year.

Other ways to determine how well an economy is doing:Compare output from year to yearGovt collects information from producers and

estimate national output.

Comparison of GDP of Selected Countries

Country Total GDP ($)

GDP Per Capita ($)

Country Total GDP ($)

GDP Per Capita ($)

United States 14.3

Trillion46,400 Mexico 1.5 Trillion 13,500

China 8.8

Trillion6,600 Canada 1.3 Trillion 38,400

Japan4.1

Trillion 32,600 Poland

690.1 Billion

17,900

Germany2.8

Trillion34,100

Saudi Arabia

585.5 Billion

20,400

India 3.6

Trillion3,100 South Africa

495.1 Billion

10,100

Brazil 2.0

Trillion10,200 Nigeria

357.2 Billion

2,400

Components of GDP GDP includes four major categories of economic

activity:

1. Consumer Spending for food, clothing, housing, and other aspects.

2. Business spending for buildings, equipment, and inventory items.

3. Government spending to pay employees and to buy supplies and other goods and services

4. The exports of a country less the imports into the country .

Components of GDP Some goods and services are not included in

GDP like: Value of work you do yourself

Only Final goods such as cars are counted when you measure GDP.

If a GDP increases year to year, this usually signals that an economy is growing and is healthy.

Comparing GDPThe more goods and services that are

produced, the healthier the economy is. GDP Per Capita aka Output per person.

GDP / The total population.

Checkpoint #1 What types of economic activities

are not included in GDP? GDP only applies to reported final goods and

services Money earned for goods and services that are not

reported would not be included. Goods and services used in the manufacture of other

products are only counted once – in the final product

Labor Activities The workers of a country contribute to the

economy in several ways:

1. Labor activities create needed goods

2. The wages they receive are spent to create demand for various items

Employment Today more then 155 million people work in the United

State These members of the Labor Force are employed in

thousands of different jobs. The Labor Force includes all people above the age of 16

who are actively working or seeking work. Unemployment Rate

The portion of people in the labor force who are not working.

Main cause for unemployment is reduced demand for goods and services being provided by various of workers.

Productivity

A vital source of economic growth is an increase in output per workerProductivity - The production output in

relation to a unit of input, such as a worker.Improvements in:

1. Capital Resources

2. Worker Training

3. Management Techniques

Checkpoint #2 How can productivity be

increased? By improvements in capital resources,

worker training, and management techniques

Consumer Spending The money you earn and spend is one of the most

important factors for economic growth Personal Income

Refers to salaries and wages as well as investment income and government payments to individuals.

Retail Sales Sales of durable and non-durable goods bought by

consumers. An indictor of general consumer spending patterns in

the economy

Checkpoint #3 What are the main sources of

personal income?1. Wages

2. Salaries

3. Investment Income

4. Government Payments

2-2 Economic Conditions Change

Goals:1. Describe the four phases of the business

cycle

2. Explain causes of inflation and deflation

3. Identify the importance of interest rates

The Business Cycle Economic and business activity tends to move in

cycles. Business Cycle refers to the movement of the economy from

one condition to another and back again

Business cycles are the recurring ups and downs of GDP and have 4 phases:

1. Prosperity

2. Recession

3. Depression

4. Recovery

Prosperity A period in which most people who want to

work are working, businesses produce goods and services in record numbers, wages are good, and the rate of GDP growth increases. The peak of the business cycle. Does not go on forever

Recession A period in which demand begins to decrease,

businesses lower production, unemployment begins to rise, and GDP growth slows for two or more quarters of a calendar year. May not be too serious or last very long.Often signals trouble for workers in related

businesses Ripple Effect

Depression A phase marked by a prolonged period of

high unemployment, weaker consumer sales, and business failures. Recession deepens and spreads throughout

the entire economyGDP falls rapidly during a depression

Recovery The phase in which unemployment begins to

decrease, demand for goods and services increases, and GDP begins to rise again. People gain employment Consumers regain confidence about their futures

and begin buying again.

Checkpoint #4 What are the 4 phases of the

business cycle?1. Prosperity

2. Recession

3. Depression

4. Recovery

Consumer Prices A problem with which most nations have to

cope is INFLATION. An Increase in the general level of prices. Buying power decreases

Inflation is the most harmful to people living on fixed incomes. Income does not change

Causes of Inflation 1. When demand for goods and services is

greater than the supply When a large supple if money, earned or borrowed,

is spent for goods that are in short supply, prices increase

2. Prices of goods and services usually rise so fast

3. Wages go up faster than prices, businesses tend to hire fewer workers

Measuring Inflation Inflation rates vary Mild inflation (2 or 3 percent a year) can

stimulate economic growth. Wages rise slowly than the prices of products

Consumer Price Index (CPI) A number that compares prices in one year with

prices in some earlier base year.

Deflation A decrease in the general level of prices.

Occurs in periods of recession and depression. Products of prices are lower, but people have less

money to buy them.

The Great Depression of the 1930s Cost of computers

Checkpoint #5 What are the main causes of

inflation?Inflation is an increase in the general level

of prices that occurs when the demand for goods and services is great than supply.

Interest Rates The cost of money Have a strong influence on business

activities Companies and governments that borrow

money and consumers are affected by interest rates. People with poor credit rating pay a higher

interest rate than people with good credit

Types of Interest Rates Prime Rate – the rate the banks make available

to their best business customers. Discount Rate – the rate financial institutions are

charged to borrow funds from Federal Reserve Banks

T-Bill Rate – the yield on short term (13 week) U.S. debt obligations

Treasury Bond Rate – the yield on long-term U.S. government debt obligations of up to 30 years.

Types of Interest RatesMortgage Rate– the amount individuals

pay to borrow for the purchase of a new home.

Corporate Bond Rate – the cost of borrowing for large U.S. corporations

Certificate of Deposit Rate– the rate for time deposits at savings institutions.

Checkpoint #6How do interest rates affect

business activities in our economy?Interest rates can encourage or

discourage borrowing or spending. Lower interest rates allow consumers

greater spending power

2-3 Other Measures of Business Activity

Goals:1. Discuss investment activities that promote

economic growth

2. Explain borrowing activities by government, business, and consumers

3. Describe future concerns of economic growth

Investment Activities Investing for the future can happen in several

waysCapital Spending

Refers to money spent by a business for an item that will be used over a long period of time.

Capital Projects Involve spending by businesses for items such as

land, buildings. Equipment, and new products.

Personal Savings Major source of investment funds

Provide the money necessary for buying expensive equipment or creating new products

Interest is paid on the money they deposit

The savings rate of a country is an important factor for economic growth

The Stock Market Many people invest by becoming part

owners of a corporation. Stock – represents ownership in a corporation

Stock ownership is also known as EQUITY

The value of shares of affected by many factors.Supply and Demand Company has higher earnings

The Bond Market Sales of Bonds

Bond represents debt for an organization Creditor

When you purchase corporate or government bond

You lent money to money to the organization Bond holders are paid interest for the use of

their money.

Checkpoint #7Name some examples of capital

projects?The purchase of any item a business will

use over an extended period of time such as land, buildings, and equipment.

Borrowing “Buy now, pay later”Borrowing occurs by:

1. Government

2. Businesses

3. Consumers

Government Debt People expect services from federal, state,

and local governments. Government uses borrowing to finance

various projects. (Schools, highways) Budget Surplus

Government spends less than it takes in Government may reduce taxes or increase

spending in various programs

Government Debt Budget Deficit

Government may spend more than it takes in.The total amount owed by the government

National Debt

Business DebtLoans, bonds, and mortgages are

common borrowing methods used by businesses

Efficient use of borrowing can be helpful to companies Using the funds of others can help expand

sales and profits

Consumer Debt People commonly use credit cards, auto

loans, home mortgages to finance their purchases

Careful use of credit cards can be important for economic growth.

Checkpoint #8What is the cause of a budget

deficit ?When the government or organization

spends more than it takes in.

Economic Challenges and Adopting to Current Markets

Global business growth is occurring in emerging markets Places where consumer incomes and buying

power are increasing because of economic expansion

Quality of life improves

Countries lack the technology, education, and business systems