chapter 2 economic activities provide an understanding of measurements commonly used to gauge...

Chapter 2Economic Activities

Provide an understanding of measurements commonly used to gauge economic activity and business conditions in our society.

Section 2-1Measuring 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 atFigure 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


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


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


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 2-2Economic 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 Cyclecon’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


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 Ethicscon’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 Ethicscon’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?


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


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%


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?


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


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


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 2-3Other 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 Activitiescon’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


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


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

chapter 2 economic activities provide an understanding of measurements commonly used to gauge...

Documents

annual gdp

different gdp

dollar value of gdp

economic activitiesprovide

production of goods

production output

economic growth wouldnt

economys output