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Chapter 2 Economic Activity Lessons:  Economic Activity  Economic Conditions  Investing & Borrowing EQ: How do we measure the state of the economy?

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Presentation on theme: "Chapter 2 Economic Activity Lessons:  Economic Activity  Economic Conditions  Investing & Borrowing EQ: How do we measure the state of the economy?"— Presentation transcript:

1 Chapter 2 Economic Activity Lessons:  Economic Activity  Economic Conditions  Investing & Borrowing EQ: How do we measure the state of the economy?

2 Gross domestic product (GDP)  The total dollar value of all final goods and services produced in a country during a year. Intermediate goods (steel to build a car) are not included in GDP, just the final product-the car. Components of GDP: 1.Consumer spending for food, clothing, housing 2.Business spending for buildings, equipments, and inventory items 3.Government spending to pay employees and to buy supplies 4.The exports of a country less the imports into the country 2-1

3 GDP per capita output per person Calculated by dividing GDP by total population increase in GDP=growing economy decrease in GDP=struggling economy 2-1

4 Labor activities  The workers of a country contribute to the economy in several ways the labor activities create needed goods and services the wages they receive are spent to create demand for various items 2-1

5 Unemployment Rate  Measures the number of people who are able to work but don’t have a job during a given period of time  Changes in the unemployment rate show whether an economy is picking up or slowing down  Labor force consists of all people above age 16 who are actively working or seeking work (does not include students, retired people, and others who cannot work)  Main cause of unemployment: reduced demand for goods or services 2-1

6 Productivity  A main source of economic growth is an increase in output per worker  What increases output per worker: better equipment and technology training management  production output in relation to a unit of input, such as a worker 2-1

7 Consumer Spending The money you earn and spend is one of the most important factors for economic growth Personal income-refers to salaries and wages as well as investment income and government payments to individuals. Retail sales-the sales of durable and nondurable goods bought by consumers. Theses sales are an indicator of general consumer spending patterns in the economy. 2-1

8 Consumer Prices Inflation-increase in the general level of prices Buying power of dollar decreases Ex. 5% 2013: $100 2014:$105 Measuring inflation – Consumer Price Index (CPI): Number that compares prices in one year with prices from an earlier base year 2-2

9 Consumer Prices cont. Cause of Inflation: demand is greater than supply Inflation is most harmful to people on fixed incomes –retired people –people whose income does not change Even though wages tend to increase during inflation, prices usually rise faster and the wage earner loses purchasing power. Deflation: decrease in the general level of prices - prices of production are lower, but people have less money to spend, usually occurs in periods of recession and depression 2-2

10 Economic Conditions Change The movement of the economy from one condition to another and back again is called a business cycle. 2-2 prosperity depression recovery recession

11 Business Cycle 1.Prosperity-peak most of the people who want to work are working businesses produce goods and services in record numbers wages are good GDP growth increases 2. Recession-economy slows down demand begins to decrease businesses lower production unemployment begins to rise GDP growth slows for two or more quarters 2-2

12 Business Cycle 3.Depression-recession deepens and spreads throughout the entire economy Prolonged periods of high unemployment weak consumer sales business failures GDP falls rapidly 4.Recovery-economy starts to improve Unemployment decreases demand for goods increase GDP begins to rise again 2-2

13 Borrowing  Government debt: used to provide citizen services (ex. schools, highways, parks, police, firefighters)  Business debt: used to expand sales and profits (ex. loans, bonds, mortgages)  Consumer debt: extend purchasing power (ex. credit cards, auto loans, home mortgages) 2-3

14 Investment Activities  Capital spending: money spent by a business for an item that will be used over a long period of time  Capital project: spending by businesses for items such as land, buildings, equipment and new products  Money for these project come from: - personal savings - stocks - ownership in a corporation - bonds - debt for the corporation (borrow money and pay back with interest) 2-3

15 Interest Rate Interest rates represent the cost of money anyone who borrows money is affected higher interest rates mean higher business costs each day, the cost of money (interest) changes based on supply and demand 2-2

16 Types of Interest Rates 1.Prime rate - rate banks give for best business customers (ex. large corporations) 1.Discount rate - rate banks are charged to borrow funds from Federal Reserve banks 3.Mortgage rate - the amount individuals pay to borrow for the purchase a new home 4.Certificate of Deposit rate -rate for time deposits at savings institutions 2-2

17 Government Debt  budget surplus: government spends less than it takes in  budget deficit: government spends more that it takes in  national debt: the total amount owed by the federal gov’t. http://www.usdebtclock.org/ 2-3


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