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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