1. Measuring Economic Activity
Chapter 3

2. 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

3. 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

4. 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

5. Patterns of Cycles Black Thursday October 24, 1929
Peak of economic prosperity in summer ’29
Stock prices collapsed, starting Great Depression( )
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)

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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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)

13. 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

14. 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

15. 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

16. 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