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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)