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Chapter 2-Economic Activity
Gross Domestic Product
 Gross domestic product: the total dollar value of all final goods and
services produced in a country in one year
 Economic growth refers to a steady increase in the production of goods and
services
 One way to find out how well an economy is doing is to compare output
from year to year
 The most widely used methods to compare output is to measure the gross
goods and services produced in a country during one year
Components of GDP
 There are 4 major categories of economic activity
1. Consumer spending
2. Business spending
3. Government spending
4. The exports of a country less the imports to a country
 Some goods and services are not included in the GDP measurements
 Any kind of work you do for yourself, example of fixing
something or building your own picnic table
 Only final goods, such as cars, are counted when you measure GDP
 Intermediate goods like, steel and fabrics are not counted either
 If the GDP increases from year to year that is a good sign that the
economy is growing and healthy
Comparing GDP
 The U.S. annual GDP is about 16.7 trillion in recent years
 Just referring to the dollar value of the GDP as a measure of growth
doesn’t tell the whole story
 So another measurement tool is to measure the GDP per capita
o GDP per capita: output per person
 GDP per capita is figured by taking the GDP and dividing it by the
population
 An increase in GDP per capita means the economy is growing.
 A decrease in GDP per capita means the economy is facing some
difficulties
Labor Activities
 Workers contribute to the economy in several ways
 The labor activity (job) that they do produces the needed goods and
services
 Then the wages they earn from their job are spent to create demand for
various other items
Employment
 Today more than 158 million people work in the United States
 They are employed in thousands of different jobs
 The labor force consists of all people above the age of 16 who are
working or seeking employment
 Students, retired people and others who cannot or do not wish to work
are not part of the labor force
 One area of economic concern is the statistic of the unemployment
rate
o Unemployment rate: the portion of people in the labor force who
are not working
 People are considered “unemployed” if they are looking for work and
willing to work but unable to find a job
 Unemployment rates vary from year to year and in different areas of
the country
 The main cause of unemployment is reduced demand for a good or
service
Productivity
 A vital source of economic growth in and increase in output per
worker hour
o Productivity: the production output in relation to a unit of input,
such as a worker
 Improvements in equipment and technology, worker training, and
management training have resulted in more output per workder
 If an increase in wages is faster than the gains in productivity, the cost
of production goes up and so does the price
 Even though a worker can earn more, that doesn’t mean they have
improved their standard of living
 Strong attention is being focused on way to motivate workers to
increase productivity
 An increase in the capital resources mentioned earlier has made it
possible to produce more goods and services in less hours in the work
week.
 In 1890 that average worker worked about 60 hours in a week
 Today an average work week is 40 hours or less, for factory and union
contracted jobs
 In many industries, even though employees are working fewer hours
they are producing and earning more
 This is contributed to better technology and more efficient work
methods
Consumer Spending
Personal Spending
 The money you earn and spend is one of the most important factors for
economic growth
 Everyday people receive money for their jobs
o Personal income: the salaries and wages as well as investment
income and government payments to individuals
 This is the foundation for buying needed goods and services
Retail Sales
 Retail sales: the sales of durable and nondurable goods bought by
consumers
 Retail sales are an indicator of general consumer spending patterns
 Increased retail sales usually points toward economic growth
 These items are the ones whose sales are measured for estimating retail
sales:
 Cars
 Building materials
 Furniture
 Gas
 Clothing
 Restaurants
 Department stores
 Food stores
 Drug stores
 **Do assessment questions pg.37 (1-3)
The Business Cycle
 The economy has a tendency to move in cycles
 All nations experience good times and bad times
 However, over time bad conditions disappear and good conditions return
o Business cycle: the of the economy from one condition to another
and back again
 There are 4 phases to the business cycle
1. Prosperity
2. Recession
3. Depression
4. Recovery
Prosperity
 The highest point of the business cycle
o Prosperity: a period in which most people who want to work are
working, business produce goods and services in record numbers,
wages are good and the rate of GDP growth increases
 Demand is high in this stage of the cycle
 This stage doesn’t last forever, and the economy eventually cools off
Recession
 This is when the economy begins to slow down
o Recession: a period in which demand begins to decrease, business
lower production, unemployment begins to rise and GDP growth
slows for two or more quarters
 This phase may not be too serious or last too long, but it often signals
trouble for workers in certain areas
 Some recessions last for longer periods of time as fewer factors of
production are used and total demand falls
Depression
 This is when the recession deepens and spreads to the entire economy
o Depression: a long period of high unemployment, weak consumer
sales, and business failures
 The GDP will fall rapidly during a depression
 We have not had a depression in more than 70 years
 1930-1940 is the span of the Great Depression
 Approximately 25% of the U.S labor force was unemployed
 Most people during this time could not afford to satisfy their very basic
needs
Recovery
 Recovery: a phase in which unemployment begins to decrease, demand
for goods and services goes up, and the GDP begins to rise
 People will gain employment and consumers will begin to spend again
with confidence about their futures
 Recovery can be slow or fast
Consumer Prices
 Have you ever notice that the package of items gets smaller but the price
remains the same?
 Ever bought new technology and paid less than you paid for the earlier
versions?
 These are examples of the changes in the buying power of your money
Inflation
 Most nations have to cope with this problem
o Inflation: an increase in the general level of prices
 During inflation the buying power of the dollar decreases
o Example: lets say there was a price increase of 5% during the last
year. That means that items that use to cost $100 now cost $105.
So you are getting the same product but it costs you more money
 Inflation is the most harmful to those people who are living a fixed
income
 Inflation is caused when demand is greater than the supply
 Wages will increase during an inflation but so do the prices for the
items being sold
 Inflation rates vary, during the 50’s and early 60’s the annual inflation
rate was between 1-3%
 During the 70’s and 80’s the cost of living increased 10-12% annually
 Mild inflation (2-3%) can actually stimulate the economy
 During mild inflation wages will rise more slowly than the prices of
products. The prices of products sold are higher but cost of labor is less
 With that the producer makes more profit and tends to expand
productivity and hire more workers. These newly employed workers
increase spending and the total demand in an economy increases
 The most watched measure of inflation in the Consumer Price Index
o Consumer price index (CPI): a number that compares prices in
one year with the prices in some earlier year
 CPI is based on a group of selected items
Deflation
 Deflation: a decrease in the general level of prices
 This usually happens during periods of recession and depression
 Prices of products will be lower, but people also have less money to buy
them
 Significant deflation occurred during the Great Depression. Between
1929-1933 prices declined about 25%
 In recent years the price for computers and other electronic products
have declined mainly to improved technology
Interest Rates
 Interest rates represent the cost of money
 Interest rates have strong influence on business activities
 Companies and governments that borrow money are affected by interests
rates
 Higher interest rates means higher cost of business costs
 As a consumer you are also affect by interest rates, in the earnings you
receive as a saver
 Consumers also borrow, people with poor credit ratings will pay higher
interest than people with good credit ratings
Types of Interest Rates
 The rates represent the cost of money for different groups in different
settings
 There are 7 kinds of interest rates:
1. Prime rate: this is the rate the banks make to their best
customers, such as large corporations
2. Discount rate: is the rate that financial institutions are charged
to borrow from the Federal Reserve Bank
3. T-bill rate: the yield on short-term (13 week) U.S. government
debt obligations
4. Treasury bond rate: the yield on long-term (20 year) U.S.
government debt obligations
5. Mortgage rate: the amount individuals pay to borrow for the
purchase of a new home
6. Corporate bond rate: the cost of borrowing for large U.S.
corporations
7. Certificate of deposit rate: the rate for time deposits at savings
institutions
Changing Interest Rates
 Each day the cost of money changes because of various factors
 The supply and demand for money is a major influence on the level of
interest rates
 As amounts saved increase, the interests rates begin to decline
 This happens because more funds are available
 Increased borrowing=increased interest rates
 **Do assessment questions on pg.42 (1-3)
Investment Activities
 Investing in your future can happen in many ways
 Your time in school is an investment in your future
 Capital spending refers to money spent by a business for an item that will
be used over a long period
o Capital projects: spending by businesses for items such as land,
buildings, equipment and new products
 The money for capital projects comes from 3 main areas:
1. Personal Savings
2. Stock Investments
3. Bonds
Personal Savings
 Companies use the money you deposit into a bank to buy expensive
equipment or create new products
 In return, the savers are paid interest on the money they deposit
 The savings rate of a country is an important factor for economic
growth
 In years, the personal savings rate has been quite low, often below 1%
The Stock Market
 Many people invest by becoming part owners of a corporation
o Stock: represents ownership in a corporation
 Stock ownership is commonly called “equity”
 If a company has higher earnings, more people will want to buy its
stock and this causes the value to increase
The Bond Market
 Another investment option is the sale of bonds
o Bond: debt for an organization
 If you purchase a corporate or government bond, you have lent
money to the organization.
 In return bondholders are paid interest for the use of their money
Borrowing
 It is the “buy now pay later” approach
 Borrowing by governments, businesses and consumers can have an
important economic influence
Government Debt
 We all expect services from the different branches of government
 The government has to borrow to do various projects like; new schools,
highways and parks.
 A government may spend less than it takes in, if this happens you have
a budget surplus
 When a government spends more than it takes in that is a budget deficit
 When a deficit builds over time the amount owed by the government is
called the national debt
Business Debt
 Loans, bonds and mortgages are common borrowing methods by
businesses
 Efficient use of borrowing can be helpful to companies
 Using the funds of others can help expand sales and profits
 When poor decisions are made about debt that creates problems
 Poor debt management can result in the company going out of business
Consumer Debt
 People commonly used credit cards, auto loans and home mortgages to
finance their purchases
 Credit can be convenient, but overuse can result in financial difficulties
for individuals and families
 Careful use of credit can be important for economic growth
Economic Challenges & Adapting to New Markets
 Global business growth happens in emerging markets
 Emerging Markets: places where consumer incomes and buying power are
increasing because of economic expansion
 More jobs mean more income for workers=quality of life improved
 There are countries that lack economic success for various reasons
 There are companies out there trying to help these countries by providing
training, technology, loans and other assistance to help solve problems like;
hunger, disease, unsafe water and poverty
 Researching the culture, economic condition and political environment are
key for successful business activities in these countries
 **Do assessment questions on pg.47 (1-3)