2 Economic Activity 2-1 Measuring Economic Activity C H A P T E R 2 Economic Activity 2-1 Measuring Economic Activity 2-2 Economic Conditions Change 2-3 Other Measures of Business Activity

2-1 Measuring Economic Activity Goal 1 Define gross domestic product. Goal 2 Describe economic measures of labor. Goal 3 Identify economic indicators for consumer spending.

KEY TERMS Gross Domestic Product (GDP) GDP per capita unemployment rate productivity personal income retail sales

GROSS DOMESTIC PRODUCT (GDP) Components of GDP Consumer spending Business spending Government spending Exported goods – imported goods Exclusions Things you do for yourself Intermediate goods

GDP PER CAPITA Comparing GDP More accurate to compare GDP per capita Divide GDP by total population Who has the best? If population grows, but GDP doesn’t then economy is shrinking

COMPARISON OF GDP IN SELECTED COUNTRIES

COMPARING GROSS DOMESTIC PRODUCT

Checkpoint  What types of economic activities are not included in GDP? GDP only applies to reported final goods and services. Money earned for goods or services that are not reported would not be included. Goods and services used in the manufacture of other products are only counted once—in the final product.

LABOR ACTIVITIES Employment Labor force = 16+ people working or actively seeking jobs Unemployment increases when demand for current goods and services decreases

LABOR ACTIVITIES Productivity – output in relation to input Increase with fewer workers and same or increased output Can decrease if wages grow, but output doesn’t Improved equipment/technology More skills/training Better management techniques (motivation)

Checkpoint  How can productivity be increased? Productivity can be increased by improvements in capital resources (equipment and technology), worker training, and management techniques.

CONSUMER SPENDING Personal income Retail sales Salaries/wages Investment income Government payments Retail sales Dictates general health of economy What’s included?

Checkpoint  What are the main sources of personal income? Sources of personal income include wages, salaries, investment income, and government payments.

2-2 Economic Conditions Change Goal 1 Describe the four phases of the business cycle. Goal 2 Explain causes of inflation and deflation. Goal 3 Identify the importance of interest rates.

KEY TERMS business cycle prosperity recession depression recovery inflation price index deflation

THE BUSINESS CYCLE What factors are evaluated? GDP, demand for products/services, employment rate, wages Prosperity – highest point Recession – economy shrinking Depression – prolonged recession Recovery – jobs increase, demand increases, GDP rises

Checkpoint  What are the four phases of the business cycle? Prosperity Recession Depression Recovery

CONSUMER PRICES Inflation Causes of inflation Bad for fixed incomes Supply < demand for products Wages increase slower than product prices

CONSUMER PRICES Measuring inflation Deflation Some inflation is good If businesses make more $, they can hire more people Consumer Price Index (CPI) – measures inflation (based on selected products) Deflation Recession/depressions Can result from improved technoogy

Checkpoint  What are the main causes of inflation? Inflation is an increase in the general level of prices that occurs when the demand for goods and services is greater than supply.

INTEREST RATES Types of interest rates Changing interest rates Prime rate, discount rate, T-bill rate, treasury bond rate, mortgage rate, corporate bond rate, certificate of deposit rate Changing interest rates High amount saved  lower demand for $  Lower interest rates Higher spending  more demand  higher interest rates

Checkpoint  How do interest rates affect business activities in our economy? Interest rates can encourage or discourage borrowing and spending. Lower interest rates allow consumers greater spending power, which increases demand, productivity, and employment. Businesses often pass on the cost of higher interest rates to consumers.

2-3 Other Measures of Business Activity Goal 1 Discuss investment activities that promote economic growth. Goal 2 Explain borrowing activities by government, business, and consumers. Goal 3 Describe future concerns of economic growth.

KEY TERMS capital project stock bond budget surplus budget deficit national debt

INVESTMENT ACTIVITIES These activities provide funds for capital projects Personal savings Low risk, low return (usually <1%) The stock market – ownership in corporations Higher potential risk for higher potential return Prices determined by supply and demand The bond market – loans to corps./govt.

Checkpoint  Name some examples of capital projects. Capital projects include the purchase of any item a business will use over an extended period of time such as land, buildings, and equipment.

BORROWING Government debt – necessary to fund projects Business debt Surplus vs. deficit Surplus helps chip away at national debt Business debt Loans, bonds, mortgages Consumer debt Overly convenient or necessary evil?

Checkpoint  What is the cause of a budget deficit? A budget deficit occurs when a government or organization spends more than it takes in.

FUTURE ECONOMIC CHALLENGES Emerging markets What is an emerging market right now? Weak economies Stronger ones usually help Consumer preferences and behavior Know your target market

Checkpoint  What economic challenges do countries face in the future? Future economic concerns for any country include the ability to increase its output and provide a means for its citizens to meet the basic needs of food and shelter, adequate health care, education, transportation, employment, and safety.