Measuring Economic Activity Chapter 3

Economic Activity Economic Fluctuations- the ups and downs in economic activity The Business Cycle- repeated rise and fall of economic activity over time Expansion- rise in economic activity, growth Peak- highest level of economic activity, prosperity and expanding New businesses open, production is high, many jobs available Contraction- drop in business activity, slowdown Falling prices, unemployment increasing Trough- lowest level of business activity

Economic Activity Every phase indicates changes to an economy, to industries, and to working people Economic ups and downs of one country can affect other countries We live in a global economy where most countries are interdependent, or their economies are linked together

Patterns of Cycles Recession- period of severe economic decline Spending decreases, fewer G&S are demanded, unemployment rises Depression- very severe recession that lasts several years Recovery- period of economic growth or expansion following a recession or depression

Patterns of Cycles Black Thursday October 24, 1929 Peak of economic prosperity in summer ’29 Stock prices collapsed, starting Great Depression(1929-1939) Investors lost millions, huge decline in production and employment Factories shut down, businesses and banks failed, people lost jobs By 1932, 12 to 15 million people were unemployed (25-30% of workforce)

Patterns of Cycles WWII Production and employment increased to support the war Several recessions since WWII, all followed by recoveries

Measuring Economic Activity Overall objective of an economy is to produce G&S that satisfy people’s needs Economic Indicators- important data or statistics that measure economic activity and business cycles GDP- dollar value of all final G&S produced in the nation in a single year Sum of G&S in four main areas:consumer G&S, business G&S, gov’t G&S, G&S sold to other countries

Measuring Economic Activity GDP (cont) Change in GDP from year to year is a way to determine economic growth Also look at rate of growth—may be growing, but at a slower rate Standard of Living- measure of how well people in an economic system live Depends on amount and kinds of G&S the people of a country enjoy

Measuring Economic Activity Inflation- prolonged rise in level of prices for G&S Prices for most G&S continue to rise over a long period of time Reduces “purchasing power” of your money Your money buys less Fixed income problem As income increases, inflation also increases cost of living

Measuring Economic Activity Inflation (cont) Inflation Rate- percentage by which the average level of prices in an economy rises; usually expressed as percentage per year Speed at which prices in general are rising Unemployment Rate- percentage of the unemployed workforce looking for jobs Usually compared with previous month or year Business & gov’t leaders want to know how many new jobs the economy is creating

The Federal Government & Economic Stability Changes in economy are expected, but too many are not wanted Recessions – gov’t tries to prevent a depression and bring about a recovery During prosperity – gov’t tries to maintain it Gov’t tries to keep inflation rate down

The Federal Government & Economic Stability Gov’t influences on economy Fiscal Policy- using gov’t spending and taxation to influence the economy Stimulate or dampen economy by ways of collecting taxes and how it spends its money Cutting taxes is one way to indirectly increase spending More take home pay may lead to more spending To slow economy, gov’t may cut its spending, increase taxes (takes money out of the economy)

The Federal Government & Economic Stability Gov’t influences on economy (cont) Monetary Policy- controlling the supply of money and credit (cost of borrowing) to influence the economy To slow economy, tighten money supply and credit available to businesses and individuals To stimulate, may expand money supply All done through the Federal Reserve System

Understanding Inflation Inflation reduces the value of your money b/c it means you can buy less than you could earlier for the same amount of money Inflation has nothing to do with the goods themselves As long as your wages rise at the same rate as inflation, you will be able to buy and save as much as you did before

Understanding Inflation Effects of inflation on people Fixed income people able to buy less Individuals and banks suffer reduction in purchasing power of their money when they receive payment on a loan Make necessary purchases quickly, then cut back on spending Interest rates rise and discourage people from borrowing and spending People lose jobs as businesses lay off workers

Understanding Inflation Effects of inflation on the economy Workers ask for wage increase to keep up w/ inflation Business owners raise prices of G&S to pay for wage increases Increasing inflation reduces consumers’ ability to buy G&S Reduction in quantity of products sold leads to unemployment and a downturn in the economy Interest rates rise discouraging businesses from borrowing and spending to expand