introduction to business © thomson south-western chapterchapter chapter 2 measuring economic...
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Introduction to Business© Thomson South-Western
ChapterChapterChapterChapter
Chapter 2
Measuring Economic Activity
Economic Conditions
Other Measures of Business Activity
Introduction to Business© Thomson South-Western
What is gross domestic product (GDP)? Currency value (such as U.S. dollar) of all
final goods and services produced within a country in a given period
Total income of a nation Measure of nation’s economic well-being Measure of a nation’s economic growth
from one period to the next Most commonly calculated via expenditures
Introduction to Business© Thomson South-Western
Investment
(I)
Personal Consumpti
on Expenditu
res
(C)
Government
(G)
Net Exports
(NX)
Fixed Investment
New Homes
Inventories
Exports Imports
GDP
What are the components of GDP?
GDP = C + I + G + NX
ClothesMoviesGrocerie
sCars
RoadsSchool
sParks
Introduction to Business© Thomson South-Western
What’s not included in GDP?
Intermediate goods Used goods Underground production (black market) Financial transactions Household production Transfer payments
Introduction to Business© Thomson South-Western
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
How much of GDP is each component?
Consumption (PCE) 70 %
Investment 16%
Government 19%
Net Exports -5%
Component % of GDP
GDP 100%
Average Percent of GDP since 2003
Source: Bureau of Economic Analysis
Introduction to Business© Thomson South-Western
Real and nominal GDP Nominal GDP: GDP that is not adjusted for
inflation. The value of goods and services in current prices.
Real GDP: The dollar price of GDP in a base year’s price, used to compare changes in GDP from one year to the next. An increase in real GDP is an increase in economic
growth.
Learn how to figure nominal v real
Introduction to Business© Thomson South-Western
What GDP does not tell us Does not measure income distribution Does not measure non-monetary output or
transactions (e.g., barter, household activities) Does not take into account desirable
externalities, such as leisure or environment Does not measure social well-being Correlates to standard of living but is not a
measure of standard of living
Introduction to Business© Thomson South-Western
Chapter 2
Slide 8
Comparing GDP
GDP per capitaOutput per person
Increase usually means economy is growing
Equation:
GDP/ Population
Introduction to Business© Thomson South-Western
Chapter 2
Slide 9
LABOR ACTIVITIES
Employment Productivity
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Chapter 2
Slide 10
What are ways to increase productivity?
Improvement in equipment
Technology
Training
Management
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Chapter 2
Slide 11
CONSUMER SPENDING
Personal income Salaries – wages – investment income
Retail sales Sales of durable/nondurable goods by
consumers
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Chapter 2
Slide 12
Comparison of GDP in Selected Countries
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Chapter 2
Slide 13
THE BUSINESS CYCLES Prosperity
Period in which most people who want to work are working, products produced in record numbers & GDP increases
Recession Period in which demands begins to decrease,
lower number of products produced, unemployment rises and GDP growth slows for two or more quarters.
Introduction to Business© Thomson South-Western
Chapter 2
Slide 14
THE BUSINESS CYCLES Depression
Phase marked by a prolonged period of high unemployment, weak sales, and business failures. GDP falls rapidly.
Recovery Phase where unemployment begins to
decrease, demand for goods increase, and GDP begins to rise. May be a slow process.
Introduction to Business© Thomson South-Western
Chapter 2
Slide 15
CONSUMER PRICES Inflation: increase in general level of prices. Causes of inflation
Demand > Supply Cost of goods rising faster than wages
Measuring inflation CPI: number comparing prices in one year v. with
another earlier base year.
Deflation: decrease in general level of prices.
Introduction to Business© Thomson South-Western
Chapter 2
Slide 16
INTEREST RATES Interest rates: Cost of Money Types of interest rates
Prime – banks give to best business customers Discount – rate financial institutions are charged
to borrow from the Federal Reserve Bank T-bill – yield on 13week US government debt
Introduction to Business© Thomson South-Western
Chapter 2
Slide 17
Types of interest rates (cont.) Treasury bond – yield on 20yr. US
government debt. Mortgage – what individuals pay to borrow
to purchase a home Corporate bond – cost of borrowing for
large US companies Certificate of Deposit (CD) – rate for six
month deposits
Changing interest rates Saving increases – interest rates decline Borrowing increases – interest rates rise
Introduction to Business© Thomson South-Western
Chapter 2
Slide 18
INVESTMENT ACTIVITIES Capital projects – money spent by business for an
item that will be used for a long period of time Personal savings – savings accounts, CDs,
Money market accounts The stock market – Ownership (equity) in a
business The bond market – Debt for an organization you
become a creditor – you are lending to the business or city
Introduction to Business© Thomson South-Western
Chapter 2
Slide 19
BORROWING Government debt
New schools, public buildings, government services, highways
Budget Surplus – spend less $ than make Budget Deficit – spend more $ than have National Debt – total amount owed by the
federal government
Introduction to Business© Thomson South-Western
Chapter 2
Slide 20
BORROWING Business debt
Loans, bonds, mortgages Efficient borrowing helpful
Consumer debt Credit cards Auto loans Home mortgages
Careful use of credit important for economic growth
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Chapter 2
Slide 21
FUTURE ECONOMIC CHALLENGES Limited access to health care Need for proper housing for many
people Traffic and crime Unemployment