1. Chapter 4 ECONOMICS MEASUREMENTS

2. Goals  EXPLAIN how Gross Domestic Product (GDP), GDP per capita, and labor productivity are used as measurements of economic performance.  DESCRIBE the four phases of the business cycle.  DEFINE inflation and deflation.

3. Measuring Economic Growth Gross Domestic Product Gross Domestic Product GDP Per Capita GDP Per Capita Labor Productivity Labor Productivity

4. GDP – Gross Domestic Product  GDP includes three (3) major categories of expenditures: 1.What consumers spend for food, clothing and housing; 2.What businesses spend for building, equipment, and supplies; and 3.What government agencies spend to pay employees and buy supplies.

5. GDP Per Capita The more goods and services we produce, the healthier hour economy gets The more goods and services we produce, the healthier hour economy gets To calculate GDP per capita: To calculate GDP per capita: GDP Total Population

6. Labor Productivity  Productivity occurs when:  Quality of capital resources (primarily equipment)  Worker training  Management techniques

7. The Business Cycle Prosperity Prosperity Recession Recession Depression Depression Recovery Recovery

8. Prosperity A phase of the business cycle when most people who want to working are working and businesses produce goods and services in record numbers A phase of the business cycle when most people who want to working are working and businesses produce goods and services in record numbers

9. Recession A period where demand begins to decrease, businesses lower production of goods and services, unemployment begins to ride, and GDP growth slows for two or more quarters of the calendar year. A period where demand begins to decrease, businesses lower production of goods and services, unemployment begins to ride, and GDP growth slows for two or more quarters of the calendar year.

10. Depression A depression is a phase marked by a prolonged period of high unemployment, weak sales of goods and services, and business failures. A depression is a phase marked by a prolonged period of high unemployment, weak sales of goods and services, and business failures.

11. Recovery The phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again. The phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again.

12. Inflation Inflation is a sustained increase in the general level of price. Inflation is a sustained increase in the general level of price. Scenario 1: Good and services are greater than the supply Scenario 1: Good and services are greater than the supply Example: When a large supply of money, earned or borrowed, is spent for goods that are in short supply, prices increase. Example: When a large supply of money, earned or borrowed, is spent for goods that are in short supply, prices increase. Result 1: Even though wages increase, the price of goods and services rise faster and the wages cannot catch up. Result 1: Even though wages increase, the price of goods and services rise faster and the wages cannot catch up. Result 2: If wages go up faster than prices, businesses tend to hire fewer workers so unemployment worsens. Result 2: If wages go up faster than prices, businesses tend to hire fewer workers so unemployment worsens.

13. Inflation Inflation is a sustained increase in the general level of price. Inflation is a sustained increase in the general level of price. Scenario 2: Mild inflation (2%-3%) can stimulate economic growth. Scenario 2: Mild inflation (2%-3%) can stimulate economic growth. Example: Wages rise slower than the prices of products. The price of the products sold are high in relation to the cost of labor. Example: Wages rise slower than the prices of products. The price of the products sold are high in relation to the cost of labor. Result 1: The producer makes higher profits and tends to expand production and hire more people. Result 1: The producer makes higher profits and tends to expand production and hire more people. Result 2: The newly employed workers increase spending, and the total demand in a economy increases. Result 2: The newly employed workers increase spending, and the total demand in a economy increases.

14. Deflation A decrease in the general level of prices A decrease in the general level of prices Usually occurs in periods of recession and depression. Usually occurs in periods of recession and depression.