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Understand economic conditions

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1 Understand economic conditions
Objective 1.02 Understand economic conditions 1 1

2 Topics Measuring economic activities Classifying economic conditions 2

3 Measuring Economic Activities
3 3

4 Gross Domestic Product (GDP)
GDP -is the highly used measurement to determine a country’s overall economic output. GDP is a country’s total dollar value of all final goods and services produced in one year. Major categories of GDP Individual spending Business spending Government spending Exports & imports Name some products or services you have purchased or from which you have received benefits. 4

5 GDP per capita GDP per capita = output per person
GDP per capita is calculated by using the following formula: GDP per capita=_______GDP________ Total Population 5 5

6 Labor Activities Unemployment rate includes the people of the labor force that are unemployed. People are considered to be “unemployed” if they are looking for work and willing to work but unable to find a job. Productivity means production output per worker. What can contribute to employees increasing their production? One example would be that a company could make an improvement in their equipment. 6

7 Consumer Spending Measurement of consumer spending:
Personal income includes the total wages and salaries plus investment income and government payments to individuals Retail Sales include the sales of goods and services purchased by consumers. The sales are an indicator of general consumer spending patterns. 7

8 Investment Activities
Capital projects involve spending by businesses for items such as land, equipment, buildings, etc. The money used for capital projects comes from three main sources: Personal savings The stock market The bond market 8

9 How does each investment activity impact economic growth?
Personal Savings: Businesses use money deposited in personal saving accounts to buy equipment or products for their businesses. Savers earn interest on money used by companies and other individuals. Stock Market: Higher earnings for businesses increases their value, which causes a demand for people wanting to buy the businesses stock. Bond Market: The bond market make available for businesses and government to borrow money. Bondholders earn interest on money loaned to businesses and government.

10 Borrowing Activities by Government and Businesses …
Governments borrow money to finance projects like schools, public highways, and parks. Businesses/Companies may borrow money to start up or expand. How can government borrowing lead to a budget deficit? If the government spend more money than it collects, then a budget deficit is resulted. How can using borrowed money wisely impact businesses? Using borrowed fund efficiently can result in an increase in sales and profits. 10

11 Project Your team is to obtain data on the total United States unemployment rate for the last 5 years. Prepare a graph to illustrate the changes in the unemployment rate. Remember to me your team roles! Team leaders should be prepared to meet with me to discuss your completion goal. 11 11

12 Understanding Economic Conditions
1.02b Understanding Economic Conditions

13 The Business Cycle The business cycle is movement from 1 economic condition to another. Business cycles are the recurring ups and downs of GDP. The business cycle contains 4 phases: Prosperity Recession Depression Recovery

14 Prosperity Occurs at the peak of the business cycle
A period where most people who want to work are working Businesses are producing goods and services in record numbers Wages are good and the rate of GDP growth increases

15 Recession When the economy slows down.
Demand begins to decrease, businesses lower production, unemployment begins to rise, and GDP growth slows for 2 or more quarters of the calendar year. This phase may not be too serious or last very long, but it often signals trouble for some groups of workers in related businesses. Some recessions last for long periods as fewer factors of production are used and demand falls.

16 Depression A phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures. GDP falls rapidly during a depression. A nation doesn’t have to go through the depression phase. Fortunately, our economy hasn’t had a depression for more than 60 years. Great Depression 1930 – 1940.

17 Recovery Economic downturns don’t last forever. A welcome phase of the business cycle, known as recovery, begins to appear. Unemployment begins to decrease Demand for goods and services increases GDP begins to rise again. As recovery continues, the nation moves back into prosperity.

18 Individual Project You are to create a business cycle. Include each phase, characteristics of each phase, examples how it relates to you (your family, community, etc.). You will be evaluated on the following criteria: Depth of information Correctness of information Creativity

19 Understanding Economic Conditions Continuted

20 Think about this…. Have you ever noticed that packages of some items get smaller while the price stays the same? This affects your buying power.

21 Items that affect your buying power…
Inflation Deflation Interest Rates

22 Inflation An increase in the general level of prices.
In times of inflation, the buying power of the dollar decreases. Example: if prices increase 5% during the last year, items that cost $100 would now cost $105. It now takes more money to buy the SAME amount of goods and services. Inflation is most harmful to people living on fixed incomes. Example: Retired people

23 Causes of Inflation When the demand for goods and services is greater than the supply. Money, earned or borrowed, is spent for goods/services that are in short supply, prices increase. Wages typically will increase during inflation; however, the prices of goods/services rise faster than the wage increase. Business tend to hire fewer workers because they can’t keep up with paying higher wages and paying higher prices for their supplies.

24 Measuring Inflation Inflation rates vary.
Mild inflation (2%-3%) can actually help stimulate the economic growth. Business are able to hire employees. These employees will be able to spend money. In the US, one of the most watched measures of inflation is called the Consumer Price Index (CPI).

25 CPI The Consumer Price Index (CPI) is a number that compares prices in one year with some earlier base year. Example of prices compared: food, gas, healthcare

26 Deflation Decrease in the general level of prices
Usually occurs during periods of recession and depression Prices of products are lower, but people have less money to buy them.

27 Interest Rates In simple terms, interest rates represent the cost of money. Like everything else, money has a price. Companies and Governments that borrow money are affected by interest rates. Higher interest rates mean higher business costs. People with poor credit ratings pay a higher interest rate than people with good credit ratings.

28 Types of Interest Rates
The prime rate is the rate banks make available to their best business customers. The discount rate is the rate financial institutions are charged to borrow funds from Federal Reserve banks. The T-Bill rate is the yield on short term (13-week) US government debt obligations The treasury bond rate is the yield on long-term (20-year) US government debt obligation. The mortgage rate is the amount individuals pay to borrow for the purchase of a new home. The corporate bond rate is the cost of borrowing for large US corporations. The certificate of deposit (CD) rate is the rate for 6 month time deposits at savings institutions. Each day, the cost of money (interest) changes because of various factors.

29 Project Complete the review sheet located on my desk. Use all notes, PowerPoints, online review to assist you in answering the questions.

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