Download Economic Activites

Chapter 2
Economic Activities
Provide an understanding of measurements
commonly used to gauge economic activity and
business conditions in our society.
Section 2-1
Measuring Economic Activity
 Define gross domestic product
 Describe economic measures of labor
 Identify economic indicators for consumer spending
Gross Domestic Product
(GDP)
 Economic growth – a steady increase in the production of
goods and services in an economic system
 Different ways to measure growth
 One way is to comparing an economy’s output from year to
year
 Most widely used measurement – gross domestic product
(GDP)
 GDP – the total dollar value of all final goods and services
produced in a country during one year
Look at
Figure 2-1
 Why do the countries have different GDP?
Discussion Question
 What items do you think would be included in the
GDP of a country?
Gross Domestic Product
(GDP) con’t…
 Components of GDP
 GDP includes 4 major categories
 Consumer spending – food, clothing, housing, and other
spending
 Business spending – buildings, equipment, and inventory
items
 Government spending – pay for employees, buying supplies
and other goods and services
 Exports and Imports – exports less imports
Gross Domestic Product
(GDP) con’t…
 Components of GDP
 Some goods and services are not included in GDP
 The value of the work you do for yourself
 Examples – mowing the lawn or building a picnic table
 If you buy these things they are included
 ONLY FINAL GOODS
Gross Domestic Product
(GDP) con’t…
 Comparing GDP
 U.S. annual GDP = $11 million
 Healthy economy – more goods and services produced
 Can’t just use dollar value of GDP to measure economic
growth – wouldn’t tell the whole story
 Growth can also be measured with GDP per capita or
output per person
 GDP per capita – output per person, divide GDP by total
population
Gross Domestic Product
(GDP) con’t…
 Comparing GDP con’t…
 If no change in GDP in the last two years, but population
increases
 We now have the same output to divide between more
people
 An increase in GDP per capita means that the economy
is growing
 If it is decreasing, the economy is in trouble
Activity
 Use library references and the Internet to obtain the
GDP and population statistics for three countries.
 Use this data to calculate the GDP per capita.
 Explain the differences among these countries
Labor Activities
 Workers contribute to a countries economy in
several ways
 Their labor activities create the goods and services
needed
 The wages the workers receive are spent and create
demand
Labor Activities con’t…
 Employment
 130 million worker in the U.S.
 Labor force consists of all people above the age of 16 who are
actively working or seeking work
 Unemployment rate another economic statistic of concern
 Unemployment rate – the portion of people in the labor force who
are NOT working
 Considered unemployed when you are looking for work and willing
to work, but unable to find a job
 Main cause of unemployment
 When demand for goods and services decrease
Labor Activities con’t…
 Productivity
 Vital source of economic growth is an increase in output
per worker
 Productivity – the production output in relation to a unit of
input, such as a worker
 Improvements can result in more output per worker
 Examples – improvements in equipment and technology,
worker training and management techniques
 Productivity will always have ups and downs
Labor Activities con’t…
 Productivity con’t…
 If wages increase faster than gains in productivity, cost of
producing increases and so do prices
 Although, workers are earning more, their standard of
living is not improving because of rising prices
 Producing more goods and services allows for fewer
work hours per week
 1890’s – averaged 60 hours per week
 Today – average less than 40 hours per week
Discussion Question
 What motivates you to work harder and faster?
Consumer Spending
 Most important factor of economic growth is the money
we earn and spend
 Personal Income
 People receive money for their participation in production
 Personal income – salaries and wages, as well as,
investment income and government payments to individuals
 These funds provide the foundation for buying goods and
services you need
Consumer Spending con’t…
 Retail Sales
 Monthly the U.S. Department of Commerce measures retail
sales
 Retail sales – sales of durable and nondurable goods bought by
consumers
 Retail sales indicate general consumer spending
 Increasing retail sales indicates economic growth
 Items measured in retail sales
 Automobiles, building materials, furniture, gasoline, clothing,
purchases from restaurants, department stores, food stores,
and drug stores
Section 2-2
Economic Conditions Change
 Describe the four phases of the business cycle
 Explain causes of inflation and deflation
 Identify the importance of interest rates
Focus on Real Life
 As you mature, your abilities increase
 You depend less on your parents and begin to plan for your
future
 Various parts of your life change – there are ups and downs
 Ups and downs also occur in business
 When economic conditions improve, quality of life is
enhanced
 When there is a downward economic trend, there are greater
hardships for workers and consumers
The Business Cycle
 Economic activity moves in cycles
 Economic changes in the U.S. have gone from good
to bad and back to good
 Business cycles are the ups and downs of GDP
 Business cycles – the movement of the economy from
one condition to another and back again
The Business Cycle
 The phases of the business cycle




Prosperity
Recession
Depression
Recovery
Discussion Question
 In what ways are spending habits changed during a
dramatic economic shift?
 How does this affect small business owners?
The Business Cycle
con’t…
 Prosperity
 The peak of the business cycle
 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
 Demand for goods and services is high
 Does not go on forever
The Business Cycle
con’t…
 Recession
 Economy slows down
 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
 May not be too serious or last long
 May signal trouble for some workers in related businesses
 The ripple effect is a drop in related businesses
 Some last for long periods as fewer factors of production are
used and the total demand falls
The Business Cycle
con’t…
 Depression
 If and when a recession deepens and spreads through the
entire economy, we move into a depression
 Depression – a phase marked by a prolonged period of high
unemployment, weak consumer sales, and business failures
 GDP falls rapidly
 Great Depression – 1930-1940
 Approx. 25% of the work force was unemployed
 Couldn’t even afford basic needs
 Difference between a recession and a depression is the
severity of economic difficulties
Discussion Question
 Does anyone know what happened to cause the
Great Depression?
 Also what helped to bring us out of it?
A Question of Ethics
 Ethical Analysis Guidelines
 Most business decisions are viewed in different ways
 The situations these decisions make create ethical
problems
 Ethics are principles of right and wrong that guide
personal and business decisions
A Question of Ethics
con’t…
 There are three guidelines for business ethic situations
 Is the action legal?
 Laws vary among states and in different countries
 Managers consider other factors, such as professional
standards and the effect of the action on society
 Does the action violate professional or company standards?
 Professional and company standards will frequently exceed the
law
 Ensures decisions will be made in the best interest of the
company and the society it operates in
 Who is affected by the action and how?
 Decision makers should consider possible effects on
employees, consumers, competitors, and the environment
A Question of Ethics
con’t…
 What are some examples of situations faced by
workers and consumers that require ethical
decisions?
 Describe the effect on business activities if no ethical
guidelines existed.
 How have recent ethical situation affected workers,
investors, and others?
The Business Cycle
con’t…
 Recovery
 Downturns in the economy do not last forever
 Recovery – the phase in which unemployment begins to
decrease, demand for goods and services increases, and
GDP begins to rise again
 People gain employment, consumers regain confidence
about their futures and they begin to buy again
 Recovery may be slow or fast
 As it continues, the nation will move into prosperity
Discussion Question
 When were these prices different?
 Is there something you buy regularly that has
increased in price while decreasing in size?
 How does this affect your decision to purchase the
item?
Consumer Prices
 Our money has what we call buying power, but our
buying power changes
 Examples
 When we buy something that has gotten smaller in size,
but the price has stayed the same
 When we buy technology products that are now less
expensive than before
Consumer Prices con’t…
 Inflation
 Inflation is a problem most nations have to cope with
 Inflation – increase in the general level of prices
 The buying power of the dollar decreases
 It takes more money to buy the same amount of goods and
services
 Inflation is most harmful to people on a fixed income
Consumer Prices con’t…
 Causes of Inflation
 Inflation can occur when the demand for goods and service is
greater than the supply
 Demand > Supply
 Even though wages increase they do not increase as fast as
the cost of goods and services
 Consumers pay higher prices, therefore they have to work
harder to maintain the same standard of living
 Producers receive higher prices, but if wages go up faster
than prices, businesses hire fewer workers and
unemployment gets worse
Consumer Prices con’t…
 Measuring Inflation
Inflation rates vary
Mild inflation can actually stimulate economic growth
Wages rise more slowly than the prices of products
The producer makes higher profits and tends to expand production
and hire more people
 New employees increase spending and the total demand of the
economy increases
 Most watched measure of inflation is the Consumer Price Index
(CPI)
 Price index – a number that compares prices in one year with
some earlier base year
 Can be deceptive because CPI is based on a select group of items




Consumer Prices con’t…
 Deflation
 Deflation – is a decrease in the general level of prices
 Deflation usually happens during recessions and
depressions
 Prices of products are lower, but we have less money
 Prices decline 25%
Consumer Prices con’t…
 Interest Rates
 Interest rates represent the cost of using money
 Interest rates have a strong influence on business
activities
 Anyone who borrows money is affected by interest rates
 Higher interest rates means higher business costs
Discussion Question
 What advantages are there to using a loan to make a
purchase?
Consumer Prices con’t…
 Types of Interest Rates
 Many types of interest rates
 These rates represent the cost of money for different
groups in different settings
 Prime rate – rate banks make available to their best business
customers
 Discount rate – rate financial institutions are charged to
borrow funds from Federal Reserve banks
 T-bill rate – yield on short-term U.S. government debt
obligations
Consumer Prices con’t…
 Types of Interest Rates con’t…
 Treasury bond rate – the yield on long-term U.S.
government debt obligations
 Mortgage rate – the amount individuals pay to borrow for
the purchase of a new house
 Corporate bond rate – the cost of borrowing for large U.S.
corporations
 Certificate of deposit rate – the rate for six-month time
deposits at savings institutions
Consumer Prices con’t…
 Changing Interests Rates
 The cost of money or interest changes because of
various factors
 Supply and demand for money is a major influence on
the level of interest rate
 As amounts saved increase, interest rates decline, this is
because there is more funds available
 When borrowing increases, interest rates are to follow
Section 2-3
Other Measures of
Business Activity
 Discuss investment activities that promote economic
growth
 Explain borrowing activities by government,
business, and consumers
 Describe future concern of economic growth
Investment Activities
 Investing happens in many ways
 Time in school, buying buildings, and equipment
 Capital spending is the money spent by a business
for an item that will be used over a long period
 Capital projects – spending by businesses for items such
as, buildings, equipment, and new products
 Money for capital projects comes from three sources
 Personal savings
 Stock investments
 bonds
Investment Activities
con’t…
 Personal savings
 Major source of investment funds
 Companies use money you deposit in a bank or other
financial institution
 Used for buying expensive equipment or creating new
products
 In return you are paid interest
 The U.S. personal savings rate is less than one percent
 This low rate can cause economic concerns for the future
Investment Activities
con’t…
 The stock market
 Invest by becoming part owner of corporations
 Stock – represents ownership in a corporation
 Stock ownership is commonly called equity or ownership
 Many factors affect the value of shares of stock
 Demand and supply
 When a company has high earnings, people want to buy its
stock
 The value of the stock, therefore goes up
Investment Activities
con’t…
 The bond market
 The sale of bonds is an investment
 Bond – represents debt for an organization
 If you buy a corporate or government bond, you become
a creditor
 Means you have lent money to the organization, so then
in return bondholders are paid interest for the use of your
money
Borrowing
 “Buy now, pay later”
 Borrowing by the government, businesses, and
consumers can have economic influence
Borrowing con’t…
 Government debt
 Expect services from federal, state, and local
governments
 Borrows to finance these projects
 Examples: new schools, public buildings, highways, and
parks
 May spend less than they take in, causing a budget
surplus
 Budget surplus – when government spends less than they
bring in
Borrowing con’t…
 If surplus occurs, may cut taxes or increase
spending
 Spending more than it takes in, causes a budget
deficit
 Budget deficit – when government spends more than
they bring in
 Deficits build up
 National debt – total amount owed by the federal
government
Borrowing con’t…
 Business debt
 Loans, bonds, and mortgages are ways for businesses to
borrow money
 Borrowing can be helpful
 Can help expand sales and profits
 Poor debt management can result in companies going
out of business
Borrowing con’t…
 People often use credit cards, auto loans, and home
mortgages to finance purchases
 Credit can be convenient, but overuse leads to
financial problems
 Careful use of credit can be good for economic
growth
Future Economic
Challenges
 The ability to produce output determines its growth
 Various economic problems exist and need to be
solved
 Examples: adequate health care, traffic, crime, and
unemployment
 Don’t know what the future economic situation will be
 Economic growth is needed to maintain or increase
the standard of living and prevent unemployment