Chapter 3

4 Types of Economy in USA 1. Agricultural – during Colonial era, people lived off the land and were primarily farmers 2. Service – also in Colonial Eras, colonists working together and often bartered for necessary services 3. Industrial - rooted in mid-1800’s during Industrial Revolution when society relied more on machinery to produce goods 4. Information - Boomed around mid-1900s as the Internet became integral part of doing business

Measuring Economic Activity Just like baseball stats measure a players performance …….. figures are used to measure economic performance. GDP Unemployment Rate Rate of Inflation National Debt

Gross Domestic Product (GDP) The production of goods and services is the result of all the economic activity in the country. Measure the final output of an economy… Measure productivity - how many goods/services country produces during a certain period of time Measure the value of the goods/services, to calculate the GDP, Economists compute the sum of G/S in 4 areas: Consumer goods and services Business goods and services Government goods and services Goods and services sold to other countries

Gross Domestic Product (GDP) GDP does not include G/S not reported ….babysitting, mowing lawns, daycare… or US owned plants made in other countries The USA has a very high GDP compared to other countries Higher Standard of Living – is the amount of G/S the average citizen can buy 1990’s –GDP grew from $5.5 Trillion to $9 Trillion

Unemployment Rate Measures the number of people who are able to work but don’t have a job during a given period of time. Not as serious: Seasonal unemployment Serious unemployment: changes in industry New technology replaces workers, requires new skills Companies merge or restructure and downsize Worst type: entire economy slows down. Millions of people in every industry lose their jobs, unemployment may last until economy recovers

Rate of Inflation The increase in the cost of goods/services

Rate of Inflation WHY??? Different reasons…. Economy too productive, more people working with money …the more they spend…as demand goes up…producers raise their prices….workers demand higher wages….wages go up …producers raise prices if this spirals out of control it may lead to hyperinflation Government allows too much money to circulate in the economy Deflation – when supply of goods is greater than the demand

Rate of Inflation The USA tries to maintain a slow but steady rate of economic growth to avoid inflation and deflation. By controlling productivity and keeping a certain number of people unemployed Less risk of producers making too many goods or workers demanding higher wages.

National Debt Source of income are taxes Government spends more for programs like defense, education, and social programs than it collects in taxes…the difference is a Budget Deficit. The gov’t borrows money from public, banks and foreign countries….the total amount of money the gov’t owes is the National Debt. Budget Surplus – gov’t’s revenue exceeds the expenditures…but it will probably use the surplus to decrease National Debt, decrease taxes, or increase social programs

The Business Cycle The rise and fall of economic activity over time

The Business Cycle Prosperity – peak economic activity Unemployment is low, production high, new businesses open, people are spending, demand high Recession – Economic activity slows down Spending decreases, demand decreases, businesses produce less…workers get laid off..GDP declines Ripple Effect – one industry’s recession can effect others….car industry slow down hurts car part manufacturers, loan officers….

The Business Cycle Depression – A deep recession that affects the entire economy and lasts for several years High unemployment, low production…..can spread to other countries Stock Market Crash 10/20/29 “Black Tuesday” …GDP fell 50%, unemployment rose 800%, 1 out of 4 were unemployed, wages drastically dropped, money supply fell by 1/3 rd. No FDIC- depositors were not protected, people panic withdrawals…”bank holiday” March 1933 gov’t closed banks for several days many never reopened.

The Business Cycle Recovery – A rise in business activity after recession or depression Production starts to increase, employment increase opportunities New demand for goods/services stimulates GDP Companies may spend to innovate new products, new way of performing a task. Business innovation helps gain an edge on competition. Costs go down, sales increase, costs go down, profits increase, business grows, economic activity soars