Chapter 2Chapter 2Economic Economic ActivityActivity

ObjectivesObjectives

Describe Gross Domestic ProductDescribe Gross Domestic Product Identify and describe economic Identify and describe economic

measures of labor.measures of labor. Identify economic indicators for Identify economic indicators for

consumer spending.consumer spending.

TopicsTopics

Measuring Economic ActivityMeasuring Economic Activity Economic Conditions ChangeEconomic Conditions Change Other Measure of Business ActivityOther Measure of Business Activity

Measure Business ActivityMeasure Business ActivityKey TermsKey Terms

Gross Domestic Product (GDP)Gross Domestic Product (GDP) GDP per capitaGDP per capita Unemployment RateUnemployment Rate ProductivityProductivity Retail SalesRetail Sales

Gross Domestic ProductGross Domestic Product

Economic GrowthEconomic Growth Increase in the production of goods and Increase in the production of goods and

services in an economic system.services in an economic system. Measurement of how your economy Measurement of how your economy

is doing from year to year.is doing from year to year. Gross Domestic Product (GDP)Gross Domestic Product (GDP)

Total dollar value of all final goods and Total dollar value of all final goods and services produced in a country during one services produced in a country during one year.year.

Country ComparisonCountry Comparison

Source: CIA World Factbook

Components of GDPComponents of GDP

1.1. Consumer spending for food, Consumer spending for food, clothing, and other needs.clothing, and other needs.

2.2. Businesses buying capital Businesses buying capital resources.resources.

3.3. Government SpendingGovernment Spending

4.4. Exports less than ImportsExports less than Imports

Comparing GDPComparing GDP

Ways to measure economic growth:Ways to measure economic growth: GDP per capita:GDP per capita:

Output per personOutput per person

GDP Per Capita =Total GDP / Total GDP Per Capita =Total GDP / Total PopulationPopulation Increase = Economic GrowthIncrease = Economic Growth

EmploymentEmployment

145 million people work in the U.S.145 million people work in the U.S. Labor Force; 16 years or olderLabor Force; 16 years or older Unemployment RateUnemployment Rate

The portion of people in the labor force The portion of people in the labor force who are not working.who are not working.

United States:United States: High: 10.80 % in November of 1982 High: 10.80 % in November of 1982 Low: 2.50 % in May of 1953Low: 2.50 % in May of 1953 9.60 % in August of 20109.60 % in August of 2010

ProductivityProductivity

Production output in relations to a Production output in relations to a unity of input.unity of input.

Improve upon capital resourcesImprove upon capital resources

Wages = Cost of Producing Goods Wages = Cost of Producing Goods

Consumer SpendingConsumer Spending

Personal IncomePersonal Income Refers to salaries and wages as well as Refers to salaries and wages as well as

investment income and government investment income and government payments to individuals.payments to individuals.

Retail SalesRetail Sales Sales of durable and nondurable goods Sales of durable and nondurable goods

bought by consumers.bought by consumers.

Economic Conditions Economic Conditions ChangeChange

We all go through good and bad We all go through good and bad times.times.

Business Cycle:Business Cycle: Movement of the economy from one Movement of the economy from one

condition to another.condition to another. 4 Phases4 Phases

ProsperityProsperity RecessionRecession DepressionDepression RecoveryRecovery

ProsperityProsperity

Period in which:Period in which: Most people are workingMost people are working Business are producing goods/services Business are producing goods/services

in record numbersin record numbers Wages are goodWages are good GDP increasesGDP increases

RecessionRecession

Period in which:Period in which: Demand decreasesDemand decreases Business lower productionBusiness lower production Unemployment beginsUnemployment begins GDP growth is slow movingGDP growth is slow moving

DepressionDepression

Phased marked by:Phased marked by: High unemploymentHigh unemployment Weak consumer salesWeak consumer sales Business failureBusiness failure

RecoveryRecovery

Phase in which:Phase in which: Unemployment declinesUnemployment declines Demand increasesDemand increases GDP risesGDP rises

Economy moves closer to ProsperityEconomy moves closer to Prosperity

InflationInflation

Increase in the Increase in the general level of general level of prices.prices. 5% increase5% increase

$100 => $105$100 => $105

Causes:Causes: High demand for High demand for

Goods/ServicesGoods/Services Low supply Low supply

Measure InflationMeasure Inflation

Consumer Price Index (CPI):Consumer Price Index (CPI): A number that compares prices in one A number that compares prices in one

year with prices in some earlier yearsyear with prices in some earlier years Cost of necessities may increase fast Cost of necessities may increase fast

than non-necessitiesthan non-necessities Necessities (Food, Gas, Health Care)Necessities (Food, Gas, Health Care)

DeflationDeflation

Means a decrease in the general Means a decrease in the general level of prices.level of prices.

Price of production is low, but Price of production is low, but people have less money to spend.people have less money to spend.

Interest RatesInterest Rates

Cost of spending money.Cost of spending money. Higher interest rates = Higher business costHigher interest rates = Higher business cost Types of Interest Rates:Types of Interest Rates:

Prime Rate: Rate available to the best business Prime Rate: Rate available to the best business customer.customer.

Discount Rate: Money used by financial Discount Rate: Money used by financial institutions.institutions.

Mortgage Rate: Amount borrowed to purchase a Mortgage Rate: Amount borrowed to purchase a home.home.

Corporate Bond Rate: Amount used by a large. Corporate Bond Rate: Amount used by a large. U.S. Corporation.U.S. Corporation.

Other MeasuresOther MeasuresKey TermsKey Terms

Capital ProjectCapital Project StockStock BondBond Budge SurplusBudge Surplus Budget DeficitBudget Deficit National DebtNational Debt

Investment ActivitiesInvestment Activities

Think about where you want to be in Think about where you want to be in the future?the future? College or Work ForceCollege or Work Force

Capital Projects:Capital Projects: Involves spending by businesses for Involves spending by businesses for

capital resources and products/services.capital resources and products/services. Main Sources:Main Sources:

Personal SavingsPersonal Savings Stock InvestmentStock Investment BondsBonds

Personal SavingsPersonal Savings

Money deposited from a bank or Money deposited from a bank or financial institution.financial institution.

Earn interest on money depositedEarn interest on money deposited Key element in economic growth.Key element in economic growth.

The Stock MarketThe Stock Market

Ownership in a corporation.Ownership in a corporation. or also called “Equity”or also called “Equity”

Value towards shares of stockValue towards shares of stock Affected by Supply and DemandAffected by Supply and Demand Higher earnings of a companyHigher earnings of a company

The Bond MarkedThe Bond Marked

Represents Represents debtdebt for an organization. for an organization. Purchasing of a corporate or Purchasing of a corporate or

government bond (Creditor)government bond (Creditor) Pay interest on the money usedPay interest on the money used

BorrowingBorrowing

Government DebtGovernment Debt Borrowing to produce Schools, Building, Borrowing to produce Schools, Building,

Highways, etc…Highways, etc… Budget Surplus:Budget Surplus:

Spending less than it takes in.Spending less than it takes in. Budget Deficit:Budget Deficit:

Spending more than it takes in.Spending more than it takes in. National Debt:National Debt:

Amount owed to the Federal Amount owed to the Federal Government.Government.

BorrowingBorrowing

Business DebtBusiness Debt Loans, bonds, and mortgages are used Loans, bonds, and mortgages are used

to finance businesses.to finance businesses. Debt Debt Poor Decisions Poor Decisions

#1 reason for business failure.#1 reason for business failure.

BorrowingBorrowing

Consumer DebtConsumer Debt Credit Cards, Auto, Mortgage, College Credit Cards, Auto, Mortgage, College

Loans, etc…Loans, etc… Using cautious methods can help Using cautious methods can help

improve our economy growth.improve our economy growth.