1.02 ~ ECONOMIC ACTIVITIES AND CONDITIONS CHAPTER 2 MEASURING ECONOMIC ACTIVITY

ECONOMIC ACTIVITIES Economic Activities are measured to determine the condition of an economy. There are several economic activities that can be measured.

GROSS DOMESTIC PRODUCT (GDP) The total dollar value of all final goods and services produced in a country during one year. Chapter 2Slide 3

COMPONENTS OF GDP Consumer spending for food, clothing, housing, and other spending Business spending for buildings, equipment, and inventory items Government spending to pay employees and to buy supplies and other goods and services The EXPORTS of a country LESS the IMPORTS into a country. Chapter 2Slide 4

NOT INCLUDED IN GDP Value of the work you do for yourself Intermediate goods used in manufacturing, such as steel and fabrics. Chapter 2Slide 5

GDP PER CAPITA GDP per capita output per person = GDP ÷ Total Population Increase in GDP per capita means economy is growing Decrease in GDP per capita may mean economy is having trouble 6

LABOR ACTIVITIES The workers of a country contribute to an economy in several ways: Create needed goods and services Wages received are spent to create demand for various items Chapter 2Slide 7

LABOR ACTIVITIES ~ EMPLOYMENT Labor force consists of all people above age 16 who are actively working or seeking employment. Students, retired people, and others who cannot or do not wish to work are not part of the labor force. Unemployment rate Portion of people in the labor force who are not working (must be looking for work and able and willing to work) Main cause: reduced demand for goods and services As of July 2011, US Unemployment Rate = 9.1% (Bureau of Labor Statistics) /empsit.nr0.htmhttp:// /empsit.nr0.htm Chapter 2Slide 8

LABOR ACTIVITIES ~ PRODUCTIVITY A vital source of economic growth is an increase in output per worker. Productivity the production output in relation to a unit of input. Can be increased by: Improvements in capital resources (equipment and technology) Worker training Management techniques Chapter 2Slide 9

CONSUMER SPENDING The money you earn and spend is one of the most important factors for economic growth. Personal income The salaries and wages as well as investment income and government payments to individuals. Chapter 2Slide 10

CONSUMER SPENDING Retail sales The sales of durable and nondurable goods bought by consumers. Main items measured include: Automobiles, Building Materials, Furniture, Gasoline, Clothing Purchases from Restaurants, Department Stores, Food Stores, Drug Stores Measured on a monthly basis by the U.S. Department of Commerce Chapter 2Slide 11

LESSON 2-2 LESSON 2-2 ECONOMIC CONDITIONS CHANGE Goals Describe the four phases of the business cycle. Explain causes of inflation and deflation. Identify the importance of interest rates. Chapter 2Slide 12

THE BUSINESS CYCLE Our economy has its ups and downs; seems to run in cycles Good times Bad times Good times This movement of the economy from one condition to another and then back again is called a Business Cycle. Four phases Chapter 2Slide 13

Prosperity Employment rate and demand for products and services are high. Businesses continue making profits. Recession Unemployment rate is increasing and demand for products and services are lowering. Businesses must strategize to stimulate demand for products & services. Depression Unemployment rate is high and demand for products and services is lowering. Businesses try to maintain profits or break even to avoid going out of business. Recovery Unemployment rate is lowering and demand for products and services is increasing. Business may increase human capital. 14

CONSUMER PRICES Chapter 2Slide 15 Inflation An increase in the general level of prices. Demand for goods and services is greater than supply causing prices to rise faster than wages Buying power of the dollar decreases It now takes more money to buy the same amount of goods and services Most harmful to people living on fixed incomes – retirees and disabled persons

Deflation A 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 Significant deflation occurred in the U.S. during the Great Depression of the 1930s, when prices declined about 25%. Chapter 2Slide 16

ECONOMIC CONDITIONS CHANGE What is Consumer Price Index ( CPI )? CPI (Consumer Price Index) is a number that compares prices in one year with some earlier base year How is CPI inflation rate calculate? Change in price index Inflation rate = –––––––––––––––––– X 100 Initial price index 17

Year 123 Income Income percent change from year 1 $36,000 n/a $38, % $21, % Gallon of milk cost Gallon of milk cost percent change from year 1 $2.49 n/a $ % $ % Over a three-year period, how has the income been impacted by the cost of a gallon of milk? 18

LESSON 2-3 LESSON 2-3 OTHER MEASURES OF BUSINESS ACTIVITY Chapter 2 Slide 1 Goals Discuss investment activities that promote economic growth. Explain borrowing activities by government, business, and consumers. Describe future concerns of economic growth.

INVESTMENT ACTIVITIES Chapter 2Slide 20 Your time in school is an investment in your future Companies buying buildings and equipment Capital spending – money spent by a business for an item that will be used over a long period Investing for the future can happen in several ways.

INVESTMENT ACTIVITIES, CONT’D. Chapter 2Slide 21 Capital projects involve spending by businesses for items such as land, buildings, equipment, and new products. Comes from 3 main sources: Personal savings Stock investments Bonds

What are interest rates? Interest rates represent the cost of borrowing money. How do interest rates impact businesses? Higher interest rates for businesses usually mean higher business cost. When borrowing increases, interest rates are likely to rise. ECONOMIC CONDITIONS CHANGE 22

PERSONAL SAVINGS Chapter 2Slide 23 Personal savings rate of the U.S. has been quite low in recent years – as little as one percent Why does this raise concerns? There is less money available for use by borrowers. Factor for Economic Growth Companies use the money you deposit to purchase expensive equipment or for creating new products. In return, savers are paid interest for the use of this money.

THE STOCK MARKET Chapter 2 Slide 24 Many people invest by becoming part owners of a corporation. Investors are issued stock to represent this ownership. Supply and demand are major influencers in stock prices If a company has higher earnings, more people will want to buy its stock, which causes the value to increase

THE BOND MARKET Chapter 2 Slide 25 Another investment activity involves the sale of bonds. A bond represents debt for an organization. When you purchase a corporate or government bond, you have become a creditor. In return, you are paid interest for the use of your money.

GOVERNMENT DEBT Chapter 2 Slide 26 Credit is often referred to as “Buy now, pay later” Borrowing can have an important economic influence People expect services from federal, state, and local governments. New schools Highways Public buildings Parks

GOVERNMENT DEBT, CONT’D. Chapter 2 Slide 27 A government may spend less than it takes in – a budget surplus is the result. May cause a reduction in taxes or increased spending A government may spend more than it takes in – a budget deficit is the result. May cause an increase in taxes or reduced spending

DECISION-MAKING Chapter 2Slide 28 Economic decision-making plays a major role in how well companies (both large and small) will manage their debt. Borrowing can be helpful when funds are used to expand sales and profits. Poor decision- making can lead to debt problems and business failure.

>> C H E C K P O I N T Chapter 2 Slide 29 What is the cause of a budget deficit?

FUTURE ECONOMIC CHALLENGES Chapter 2 Slide 30 Limited access to health care Need for proper housing for many people Traffic and crime Unemployment

>> C H E C K P O I N T Chapter 2Slide 31 What are future economic concerns for a country’s economy?