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CHAPTER 2
Economic Activity
MEASURING ECONOMIC
ACTIVITY
 Economic growth is the steady increase in the production
of goods and services in an economic system.
 One way to measure this is through Gross Domestic
Product (GDP)
• Gross Domestic Product- the total dollar value of all
final goods and services produced in a country during
one year.
COMPONENTS OF GDP
 4 major categories of economic activity
• Consumer spending on food, clothing, housing, and other spending
• 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
 Work you do for yourself is not included in GDP
 Only the final product is included in GDP
COMPARING GDP
GDP per Capita– output by person
• Calculated by dividing GDP by the total
population
An increase in GDP per capita means the
economy is going and a decrease means it could be
in trouble
LABOR ACTIVITIES
 People’s labor creates the needed goods and services
 The wages they receive are spent to create demand
 The labor force is made up of 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
PRODUCTIVITY
 Productivity– the production output in relation to a unit of input
 If wages increase faster than gains in productivity, the cost of
producing goods increases and prices rise.
 The ability to produce more goods and services makes it possible
to reduce the number of hours in a work week
CONSUMER SPENDING
 Personal income– salaries and wages as well as investment
income and government payments to individuals
 Retail Sales– the sales of durable and nondurable goods bought
by consumers
• Retail sales are an indicator of general consumer spending patterns in
the economy
 The main items measured for retail sales are:
 Automobiles, building materials, furniture, gasoline, and clothing
THE BUSINESS CYCLE
 Business Cycle– the movement of the economy from one
condition to another and back again
 The four phases of the business cycle are:
•
•
•
•
Prosperity
Recession
Depression
Recovery
PROSPERITY
 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
 Demands for goods and services is high.
RECESSION
 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 the calendar year
 Recession usually doesn’t last too long but it may signal trouble for
some groups of workers
DEPRESSION
Depression– a phase marked by a prolonged
period of high unemployment, weak consumer
sales, and business failures
GDP falls rapidly during a depression
RECOVERY
 Recovery– the phase in which unemployment begins to decrease,
demand for goods and services increases, and GDP begins to rise
again
 Consumers regain confidence about their futures and begin buying
again
 Recovery may be slow or fast
CONSUMER PRICES
 Inflation– an increase in the general level of prices
 During times of inflation, the buying power of the dollar
decreases.
 Inflation is most harmful to people living on fixed incomes
• Example: Retired People
CAUSES OF INFLATION
 When the demand for goods and services is greater than the
supply.
 During inflation, prices of goods and services usually rise so fast
that the wage earner never seems to catch up
 Consumers have to pay higher prices for the things they buy.
MEASURING INFLATION
 Mild inflation can actually stimulate the economy
 In the U.S. one of the most watched measures of inflation is called
the Consumer Price Index (CPI)
 Price index– a number that compares prices in one year with some
earlier base year.
DEFLATION
 Deflation– a decrease in the general level of prices.
 Usually occurs in periods of recession and depression
 Prices of products tend to be lower, buy people have less money
to buy them.
TYPE OF INTEREST RATES
 Prime Rate– the rate banks make available to their best business
customers such as large corporations
 Discount Rate– the rate financial institutions are charged to
borrow funds from Federal Reserve banks.
 T-Bill Rate– the yield on short-term U.S. government debt
obligations
TYPES OF INTEREST RATES
 Treasury Bond Rate– the yield on long-term U.S. government debt
obligations
 Mortgage Rate-- the amount individuals pay to borrow money to
purchase a new home
 Corporate Bond Rate– the cost of borrowing for large U.S.
corporations
 Certificate of Deposit Rate– the rate for sic-month time deposits at
savings institutions
INVESTMENT ACTIVITIES
 Capital spending– money spent by a business for an item that will
be used over a long period of time
 Capital projects— spending by businesses for items such as land,
buildings, equipment, and new products
 A major source of investment fund is personal savings
INVESTMENT ACTIVITIES
 Corporations are a major type of business organization
 Many people invest by becoming part owners of a corporation
 Stock– ownership in a corporation
 Stock ownership is called equity
 Supply and demand are the major influences of buying stock in a
corporation
THE BOND MARKET
 Bond– represents debt for an organization
 If you purchase a corporate or government bond, you are a
creditor
• This means you have lent money to the organization
 Bondholders are then paid interest for the use of their money
GOVERNMENT DEBT
 Often times, the government uses borrowing to finance various
projects
•
•
•
•
New schools
Public buildings
Highways
Parks
GOVERNMENT DEBT
 Budget surplus– when the government spends less than it takes in
• If this occurs, the government may reduce taxes or increase spending
on different programs
 Budget deficit– when the government spends more than they take
in
 National debt– the total amount owed by the federal government
BUSINESS AND CONSUMER
DEBT
 Loans, bonds, and mortgages are common borrowing methods
used by businesses.
 Efficient use of borrowing can be helpful to companies because
they can use the funds to expand sales and profits
 Consumes commonly use credit cards, auto loans and home
mortgages to finance their purchases