1. 2 Economic Activity 2-1 Measuring Economic Activity
C H A P T E R 2
Economic Activity
2-1 Measuring Economic Activity
2-2 Economic Conditions
2-3 Other Measures of Business Activity

2. 2-1 Measuring Economic Activity
Goals
Define Gross Domestic Product
Describe economic measures of labor
Identify economic indicators for consumer spending

3. 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 year
Govt collects information from producers and estimate national output.

4. Comparison of GDP of Selected Countries
Country
Total GDP ($)
GDP Per Capita ($)
United States
14.3 Trillion
46,400
Mexico
1.5 Trillion
13,500
China
8.8 Trillion
6,600
Canada
1.3 Trillion
38,400
Japan
4.1 Trillion
32,600
Poland
690.1 Billion
17,900
Germany
2.8 Trillion
34,100
Saudi Arabia
585.5 Billion
20,400
India
3.6 Trillion
3,100
South Africa
495.1 Billion
10,100
Brazil
2.0 Trillion
10,200
Nigeria
357.2 Billion
2,400

5. Components of GDP
GDP includes four major categories of economic activity:
Consumer Spending for food, clothing, housing, and other aspects.
Business spending for buildings, equipment, and inventory items.
Government spending to pay employees and to buy supplies and other goods and services
The exports of a country less the imports into the country .

6. 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.

7. Comparing GDP
The more goods and services that are produced, the healthier the economy is.
GDP Per Capita aka Output per person.
GDP / The total population.

8. 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

9. Labor Activities
The workers of a country contribute to the economy in several ways:
Labor activities create needed goods
The wages they receive are spent to create demand for various items

10. 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.

11. Productivity
A vital source of economic growth is an increase in output per worker
Productivity - The production output in relation to a unit of input, such as a worker.
Improvements in:
Capital Resources
Worker Training
Management Techniques

12. Checkpoint #2 How can productivity be increased?
By improvements in capital resources, worker training, and management techniques

13. 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

14. Checkpoint #3 What are the main sources of personal income? Wages
Salaries
Investment Income
Government Payments

15. 2-2 Economic Conditions Change
Goals:
Describe the four phases of the business cycle
Explain causes of inflation and deflation
Identify the importance of interest rates

16. 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:
Prosperity
Recession
Depression
Recovery

17. 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

18. 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

19. Depression
A phase marked by a prolonged period of high unemployment, weaker consumer sales, and business failures.
Recession deepens and spreads throughout the entire economy
GDP falls rapidly during a depression

20. 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.

22. Checkpoint #4 What are the 4 phases of the business cycle? Prosperity
Recession
Depression
Recovery

23. 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

24. Causes of Inflation
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
Prices of goods and services usually rise so fast
Wages go up faster than prices, businesses tend to hire fewer workers

25. 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.

26. 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

27. 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.

28. 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

29. 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.

30. Types of Interest Rates
Mortgage 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.

31. Checkpoint #6
How 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

32. 2-3 Other Measures of Business Activity
Goals:
Discuss investment activities that promote economic growth
Explain borrowing activities by government, business, and consumers
Describe future concerns of economic growth

33. Investment Activities
Investing for the future can happen in several ways
Capital 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.

34. 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

35. 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

36. The Bond Market Sales of Bonds Creditor
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.

37. Checkpoint #7 Name 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.

38. Borrowing “Buy now, pay later” Borrowing occurs by: Government
Businesses
Consumers

39. 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

40. Government Debt Budget Deficit
Government may spend more than it takes in.
The total amount owed by the government
National Debt

41. Business Debt
Loans, 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

42. 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.

43. Checkpoint #8 What is the cause of a budget deficit ?
When the government or organization spends more than it takes in.

44. 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