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Objective 1.02 Understand economic conditions 1 Topics • Measuring economic activities • Classifying economic conditions 2 Measuring Economic Activities 3 Gross Domestic Product (GDP) • GDP -is the highly used measurement to determine a country’s overall economic output. • GDP is a country’s total dollar value of all final goods and services produced in one year. • Major categories of GDP – – – – Individual spending Business spending Government spending Exports & imports • Name some products or services you have purchased or from which you have received benefits. 4 GDP per capita GDP per capita = output per person GDP per capita is calculated by using the following formula: GDP per capita=_______GDP________ Total Population 5 Labor Activities • Unemployment rate includes the people of the labor force that are unemployed. • People are considered to be “unemployed” if they are looking for work and willing to work but unable to find a job. Productivity means production output per worker. – What can contribute to employees increasing their production? • One example would be that a company could make an improvement in their equipment. 6 Consumer Spending Measurement of consumer spending: • Personal income includes the total wages and salaries plus investment income and government payments to individuals • Retail Sales include the sales of goods and services purchased by consumers. The sales are an indicator of general consumer spending patterns. 7 Investment Activities • Capital projects involve spending by businesses for items such as land, equipment, buildings, etc. • The money used for capital projects comes from three main sources: • Personal savings • The stock market • The bond market 8 How does each investment activity impact economic growth? • Personal Savings: Businesses use money deposited in personal saving accounts to buy equipment or products for their businesses. Savers earn interest on money used by companies and other individuals. • Stock Market: Higher earnings for businesses increases their value, which causes a demand for people wanting to buy the businesses stock. • Bond Market: The bond market make available for businesses and government to borrow money. Bondholders earn interest on money loaned to businesses and government. Borrowing Activities by Government and Businesses … • Governments borrow money to finance projects like schools, public highways, and parks. • Businesses/Companies may borrow money to start up or expand. • How can government borrowing lead to a budget deficit? – If the government spend more money than it collects, then a budget deficit is resulted. • How can using borrowed money wisely impact businesses? – Using borrowed fund efficiently can result in an increase in sales and profits. 10 Project • Your team is to obtain data on the total United States unemployment rate for the last 5 years. Prepare a graph to illustrate the changes in the unemployment rate. • Remember to email me your team roles! • Team leaders should be prepared to meet with me to discuss your completion goal. 11 1.02b Understanding Economic Conditions The Business Cycle • The business cycle is movement from 1 economic condition to another. • Business cycles are the recurring ups and downs of GDP. • The business cycle contains 4 phases: – Prosperity – Recession – Depression – Recovery Prosperity • Occurs at the peak of the business cycle • A period where most people who want to work are working • Businesses are producing goods and services in record numbers • Wages are good and the rate of GDP growth increases Recession • When the economy slows down. • Demand begins to decrease, businesses lower production, unemployment begins to rise, and GDP growth slows for 2 or more quarters of the calendar year. • This phase may not be too serious or last very long, but it often signals trouble for some groups of workers in related businesses. • Some recessions last for long periods as fewer factors of production are used and demand falls. Depression • A phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures. • GDP falls rapidly during a depression. • A nation doesn’t have to go through the depression phase. • Fortunately, our economy hasn’t had a depression for more than 60 years. Great Depression 1930 – 1940. Recovery • Economic downturns don’t last forever. A welcome phase of the business cycle, known as recovery, begins to appear. • Unemployment begins to decrease • Demand for goods and services increases • GDP begins to rise again. • As recovery continues, the nation moves back into prosperity. Individual Project • You are to create a business cycle. Include each phase, characteristics of each phase, examples how it relates to you (your family, community, etc.). • You will be evaluated on the following criteria: – Depth of information – Correctness of information – Creativity 1.02c Understanding Economic Conditions Continuted Think about this…. • Have you ever noticed that packages of some items get smaller while the price stays the same? This affects your buying power. Items that affect your buying power… • Inflation • Deflation • Interest Rates Inflation • An increase in the general level of prices. • In times of inflation, the buying power of the dollar decreases. Example: if prices increase 5% during the last year, items that cost $100 would now cost $105. • It now takes more money to buy the SAME amount of goods and services. • 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. Money, earned or borrowed, is spent for goods/services that are in short supply, prices increase. • Wages typically will increase during inflation; however, the prices of goods/services rise faster than the wage increase. • Business tend to hire fewer workers because they can’t keep up with paying higher wages and paying higher prices for their supplies. Measuring Inflation • Inflation rates vary. • Mild inflation (2%-3%) can actually help stimulate the economic growth. Business are able to hire employees. These employees will be able to spend money. • In the US, one of the most watched measures of inflation is called the Consumer Price Index (CPI). CPI • The Consumer Price Index (CPI) is a number that compares prices in one year with some earlier base year. • Example of prices compared: food, gas, healthcare Deflation • Decrease in the general level of prices • Usually occurs during periods of recession and depression • Prices of products are lower, but people have less money to buy them. Interest Rates • In simple terms, interest rates represent the cost of money. • Like everything else, money has a price. • Companies and Governments that borrow money are affected by interest rates. Higher interest rates mean higher business costs. • People with poor credit ratings pay a higher interest rate than people with good credit ratings. Types of Interest Rates • The prime rate is the rate banks make available to their best business customers. • The discount rate is the rate financial institutions are charged to borrow funds from Federal Reserve banks. • The T-Bill rate is the yield on short term (13-week) US government debt obligations • The treasury bond rate is the yield on long-term (20year) US government debt obligation. • The mortgage rate is the amount individuals pay to borrow for the purchase of a new home. • The corporate bond rate is the cost of borrowing for large US corporations. • The certificate of deposit (CD) rate is the rate for 6 month time deposits at savings institutions. Project • Complete the review sheet located on my desk. Use all notes, PowerPoints, online review to assist you in answering the questions.