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Chapter 2 Economic Activity 2-1 Measuring Economic Activity 2-2 Economic Conditions Change 2-3 Other Measures of Business Activity Introduction to Business © Thomson South-Western The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total. The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports. As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession. Chapter 2 Slide 2 Introduction to Business © Thomson South-Western LESSON 2-1 Measuring Economic Activity Goals Define gross domestic product. Describe economic measures of labor. Identify economic indicators for consumer spending. Chapter 2 Slide 3 Introduction to Business © Thomson South-Western Gross Domestic Product (GDP) The total $ value of all final goods & services produced in a country during one year. Why final, what does that mean? Don’t want to count things twice. The stuff used to make the final product The costs are in it. What doesn’t it include? The value of what you do for yourself Cut lawn, build swing set Yearly increases are signs of a healthy, growing economy Chapter 2 Slide 4 Introduction to Business © Thomson South-Western Gross Domestic Product (GDP) Components of GDP 4 categories of economic activity 1. Consumer spending for food, clothing, housing and other spending 2. Business spending for buildings, equipment & inventory 3. Govt. spending to pay employees and buy supplies and other G & S. 4. The exports of a country less the imports in. Chapter 2 Slide 5 Introduction to Business © Thomson South-Western Comparing GDP GDP isn’t always the whole story GDP PER CAPITA What’s this? Output Per Person GDP / total Population Chapter 2 Slide 6 Introduction to Business © Thomson South-Western Comparison of GDP in Selected Countries Chapter 2 Slide 7 Introduction to Business © Thomson South-Western LABOR ACTIVITIES Employment Those older than 16 who are actively working or seeking work. Students, retired people and those who can’t or don’t wish to are excluded Unemployment rate The portion of people in the labor force who are not working Those who wish to work. Chapter 2 Slide 8 Introduction to Business © Thomson South-Western LABOR ACTIVITIES Productivity Output per worker How to increase this? Technology – capital resources Training – capital & human resources together Can decrease after a while We’ve got to get the most out of the new technology Chapter 2 Slide 9 Introduction to Business © Thomson South-Western LABOR ACTIVITIES Problems Wages increase faster than gains in productivity Then what? Price must go up Why? It costs more to produce the goods Chapter 2 Slide 10 Introduction to Business © Thomson South-Western LABOR ACTIVITIES Technology increase productivity since the turn of the last century 60 hour work week then Now? 40 How? Technology and efficiency Chapter 2 Slide 11 Introduction to Business © Thomson South-Western Consumer Spending What items are measured? Autos Building materials Furniture Gasoline clothing Chapter 2 Slide 12 Restaurants Department stores Food stores Drug stores Introduction to Business © Thomson South-Western Retail Sales Personal Income Salaries, wages, investment income and govt. payments to individuals How we buy the G & S Retail Sales The sales of durable and nondurable goods bought by consumers Chapter 2 Slide 13 Introduction to Business © Thomson South-Western LESSON 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. Chapter 2 Slide 14 Introduction to Business © Thomson South-Western THE BUSINESS CYCLE Prosperity People who want to work, are Goods & services are being produced in record numbers Wages are good GDP increases Demand for G & S is high Chapter 2 Slide 15 Introduction to Business © Thomson South-Western THE BUSINESS CYCLE Recession Economy slows Demand begins to decrease Production lowers Unemployment begins to rise GDP slows for 2 or more quarters Signals trouble ahead Ripple effect One problem trigger another Chapter 2 Slide 16 Introduction to Business © Thomson South-Western THE BUSINESS CYCLE Depression Recession deepens High unemployment Weak consumer spending Businesses fail GDP falls rapidly The Great depression When? Chapter 2 Slide 17 Introduction to Business © Thomson South-Western THE BUSINESS CYCLE Recovery Unemployment begins to decrease Demand for G & S increases again GDP begins to rise Confidence in the economy increases Back to prosperity! Chapter 2 Slide 18 Introduction to Business © Thomson South-Western CONSUMER PRICES Inflation An increase in general level of prices Buying power decreases Who does it hurt the most? Fixed income Prices stay same and packages shrink? Examples Ice Cream Current Inflation rate??? Chapter 2 Slide 19 Introduction to Business © Thomson South-Western CONSUMER PRICES WIN Causes of inflation Demand exceeds supply Measuring inflation Late 70’s – early 80’s It hit 10- 12 % MODERATE CAN BE GOOD NIM 2–3$ Helps stimulate economy Chapter 2 Slide 20 Introduction to Business © Thomson South-Western Consumer Price Index (CPI) Compares prices in one year with a base year A select group of items Some can go up while others go down Necessities going up can have a greater impact Gas, heating oil prices WHAT’S IT AT NOW Chapter 2 Slide 21 Introduction to Business © Thomson South-Western Deflation Price go down Occurs during recession or depression Prices are lower but… People probably have less $$ Chapter 2 Slide 22 Introduction to Business © Thomson South-Western INTEREST RATES The cost to borrow money Markup on $$$ Types of interest rates Prime Banks rate to best business customers Discount Rate financial institutions are charged by the Federal Reserve Chapter 2 Slide 23 Introduction to Business © Thomson South-Western INTEREST RATES T-Bill Short term (13-week) U.S. Govt. Debt. Obligations Treasury bond Long term (20-week) U.S. Govt. Debt. Obligations Mortgage Individuals pay for home purchase CD 6-month time deposits at savings institutions. Chapter 2 Slide 24 Introduction to Business © Thomson South-Western Chapter 2 Slide 25 Introduction to Business © Thomson South-Western LESSON 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. Chapter 2 Slide 26 Introduction to Business © Thomson South-Western Capital Projects Capital spending Money spent for something that will benefit the business for a long period of time Like? Land, buildings, equipment Sources of Capital Personal savings—you know this one Stock investments bonds Chapter 2 Slide 27 Introduction to Business © Thomson South-Western Capital Stock Ownership in a company Equity Right or claim against something Shares of a business Chapter 2 Slide 28 Introduction to Business © Thomson South-Western D i s n e y Chapter 2 Slide 29 Introduction to Business © Thomson South-Western Capital Bonds Like a loan It is debt to the business Those who buy them are your creditors Chapter 2 Slide 30 Introduction to Business © Thomson South-Western Borrowing/ Debt budget surplus Spend less than it takes in budget deficit Spend more national debt Chapter 2 Slide 31 Introduction to Business © Thomson South-Western >> C H E C K P O I N T Name some examples of capital projects. Chapter 2 Slide 32 Introduction to Business © Thomson South-Western >> C H E C K P O I N T What is the cause of a budget deficit? Chapter 2 Slide 33 Introduction to Business © Thomson South-Western FUTURE ECONOMIC CHALLENGES Limited access to health care Need for proper housing for many people Traffic and crime Unemployment Chapter 2 Slide 34 Introduction to Business © Thomson South-Western