Presentation on theme: "Economic Activity in a Changing World"— Presentation transcript:
1 Economic Activity in a Changing World Chapter 3Economic Activity in aChanging World
2 Measuring Economic Activity Economic indicators are figures used to measure economic performance.Economic indicators measure things like how much a country is producing, whether its economy is growing, and how it compares to other countries.
3 Gross Domestic Product (GDP) One way of telling how well an economy is performing is to determine how many goods and services it produces during a certain period of time.An important measure of a country’s economic health is its level or productivityThe total value of the goods and services produced in a country in a given year is called its gross domestic product (GDP).
4 Gross Domestic Product (GDP) To calculate the GDP, economists compute the sum of goods and services.Economists include four main areas in calculating the GDP:1.Consumer goods and services2.Business goods and services3.Government goods and services4.Goods and services sold to other countries
5 Gross Domestic Product (GDP) The GDP doesn’t include the goods and services that aren’t reported to the government.The United States produces so much more than other countries that it has a higher standard of livingThe standard of living is the amount of goods and services the average citizen can buy.
6 Gross Domestic Product (GDP) The gross domestic product (GDP) is the output of goods and services produced in a country.
7 Unemployment RateThe unemployment rate measures the number of people who are able to work but don’t have a job during a given period of time.There are different reasons for being unemployed, including:1. Frictional (Temporary)2. Seasonal3. Structural (Changes in industry)4. Cyclical (Economic slowdown)
8 Unemployment Rate Frictional (Temporary) Seasonal This is where if you just quit your job or graduated from school and looking for work.This type of unemployment has little effect on the economySeasonalIf you harvest crops or work in a retail during the holiday season, you may only work a certain part of the time
9 Unemployment Rate Structural (Changes in Industry) This is where new technology replaces workers or required new skillsCyclical (Economic slowdown)This is the worst type of unemployment and occurs when the entire economy slows downThis type lasts until the economy recovers, which can take years.
10 Unemployment RateChanges in the unemployment rate show whether an economy is picking up or slowing down.In 2003 rate was 5.2%During Great depressionWent from 3.7% to 8.7%Currently 7.2%
11 Unemployment Rate How do you calculate the Rate Unemployment rate = (# of Unemployed/labor force) x 100Labor force = (# of employed) + (# of unemployed)Unemployed = 8 millionEmployed = 125 million
12 Rate of InflationAnother important measure of economic strength is the rate of inflationInflation is a general increase in the cost of goods and services.Inflation can happen when an economy actually becomes too productive.The more people are employed, the more people spend.
13 Rate of InflationAs the demand for goods goes up, producers raise their prices.To pay the higher prices, workers demand higher wages.When wages go up, producers raise prices again to pay for the higher wages, and so on.This situation can spiral out of control and lead to hyperinflation.
14 Rate of InflationDeflation is a general decrease in the cost of goods and services.When an economy produces more goods than people want, it has to lower prices and cut production.As a result, people have less money to buy goods so the demand continues to go down.
15 Rate of InflationThis is what happened to some of the Asian countries like Japan and Taiwan in the 90’s.The United States tries to maintain a slow but steady rate of economic growth to avoid both inflation and deflation.This is done by controlling productivity and keeping a certain number of people unemployed.That way there is less risk of producers making too many goods or workers demanding higher wages
16 National Debt Countries can run up large debts The main source or income for any government is taxesIt uses taxes to pay for programs like defense, education, and social services.When the government spends more on programs than it collects in taxes, the difference in the amount is called the budget deficit.
17 National DebtIn the 1980’s the government ran up a huge deficit when it cut taxes while increasing spending on programsTo pay for the difference the government borrows money from the public, banks, and even other countries
18 National DebtThe total amount of money a government owes is its national debtIf the debt gets too large, a nation can become dependent on other nations or unable to borrow any more money.If a nation spends less than its income, it has a budget surplus..The government will probably use a surplus to cut taxes, reduce the national debt, or increase spending for certain programs.
19 The National Debt on January 1st 1791 was just $75 million dollars The National Debt on January 1st 1791 was just $75 million dollars. Today, it rises by that amount every hour or so. The following graph shows how the National Debt has grown year by year since 1940 in actual dollar amounts, uncorrected for inflation:
21 The Business CyclesOnce you enter into the workforce you’ll experience many ups and downsEconomies go through ups and downs as a result of wars, foreign competition, and changes in technology.Over long periods of time economic changes seem to form patterns.For example the U.S economy went though slumps in the 30’s, 50’s, and the 70’s
22 The Business CyclesThe rise and fall of economic activity over time is called the business cycle.Four cycles of the business cycle can be identified1. Prosperity2. Recession3. Depression4. Recovery
23 The Business CyclesEvery phase indicates changes to an economy, to industries, and to working people.In a global economy, in which several countries are trading goods and services with one another, one country’s economy can affect its trading partners’ economies.Exp: if the US economy is in a period of economic expansion, the U.S. will purchase goods and services from other countries promoting expansion
24 Prosperity Prosperity is a peak of economic activity. Unemployment is low, production of goods and services is high, and new businesses open.Wages are usually higher so there is a greater demand for goods to be purchased.
25 ProsperityThe 1990’s was a record of prosperity, which was due to the low rate of inflation and the internet creating new opportunities for business opportunitiesProsperity, however, does not last. Any number of things can changeCompanies produce too much, people stop buying, or inflation rises dramatically.
26 Recession During a recession, economic activity slows down. Spending decreases and so does the demand for productsBusinesses produce less so they need fewer workersThe unemployment rate then increases so people have less to spend
27 RecessionThere is a general drop in the total production declines. of goods and services, so the GDPA recession can affect only one industry, related industries, or spread to the entire economy.The ripple effect is when a recession in one industry leads to a recession in other industries.
28 RecessionExp: if there is a recession in the auto making industry, it leads to a recession in industries that make parts for the carsLike steel, and rubberIn 1970 an oil shortage in the U.S. caused gas prices to increaseGas is used for every kind of activity, from driving to work, to transporting goods to marketAs a result the price of everything went up and led to a major recession
29 DepressionA deep recession that affects the entire economy and lasts for several years is called a depression.During a depression there is high unemployment, low production of goods and services, and excess capacity in manufacturing plants.A depression can be limited to one country but usually spreads to related countries.
30 DepressionThe stock market crash on October 29, 1929, or “Black Tuesday,” marked the beginning of the Great Depression.Between 1929 and 1933, GDP fell from approximately $103 billion to $55 billion.A decline of 50%During the Great Depression, the number of people out of work rose nearly 800 percent.From 1.6 to 12.8 million
31 DepressionDuring the worst years of the depression 1 out of every 4 workers where joblessThe average manufacturing wage was a .55 cents an hour but fell to .05 cents an hourMany banks failed and FDIC did not exist, so depositors where not protected.The money supply fell by 1/3Currency was in such a short supply that towns and counties, resorted to printing their own money
32 RecoveryA rise in business activity after a recession or depression is called a recovery.During a recovery:Production starts to increasePeople start going back to work and have money to spend againThe new demand for goods and services stimulates more productionThe GDP growsNew businesses open
33 Recovery A recovery can take a long time or it can happen quickly. During World War II, the United States recovered from the Great Depression much faster because of the demand for war production.During a recovery businesses might start to innovate a new product or a new way of performing a task
34 RecoveryWhen a business innovates, it often gains and edge on its competition b/c its costs goes down or its sales go upProfit increases, business grows, and economic activity soars.