1. MEASURING ECONOMIC ACTIVITY
CHAPTER 2
MEASURING ECONOMIC ACTIVITY

2. 2-1 MEASURING ECONOMIC ACTIVITY
Gross Domestic Product – (GDP) The total value of all final goods and services produced in a country during one year.

3. 2-1 MEASURING ECONOMIC ACTIVITY
Components of GDP
Consumer spending for food, clothing, housing, and other aspects
Business spending for buildings, equipment, and inventory items
Government spending to pay employees and to buy supplies and other goods and services
The exports of a country less the imports of a country

4. 2-1 MEASURING ECONOMIC ACTIVITY
Some goods and services are NOT included in the GDP
The value of work you do for yourself
Only final goods are included
Intermediate goods used in manufacturing (steel, fabrics) are not included because the value of those goods would be counted twice

5. 2-1 MEASURING ECONOMIC ACTIVITY
Comparing GDP
The more goods and services that are produced, the healthier an economy is considered to be .
GDP per capita – output per person
Divide GDP by total population

6. 2-1 MEASURING ECONOMIC ACTIVITY
Labor Activities
The labor force consists of all people above age 16 who are actively working or seeking work.
Unemployment rate – people who are looking for work and willing to work but unable to find a job.
Causes of unemployment
Reduced demand for the goods and services being provided
Unemployment Rates

7. 2-1 MEASURING ECONOMIC ACTIVITY
Labor Activities
Productivity – is the production output in relation to a unit of input, such as a worker.
Improvements in capital resources, worker training, and management techniques can result in more output per worker.
If wages increase faster than gains in productivity, the cost of producing goods increases and prices rise.

8. 2-1 MEASURING ECONOMIC ACTIVITY
Consumer Spending
Personal Income – salaries and wages as well as investment income and government payments
Retail Sales – The sale of durable (yields utility over time, ex. Car) and nondurable (immediately consumed, ex. Gas) goods bought by consumers.
Measuring retail sales: automobiles, building materials, furniture, gas, clothing, purchases from restaurants, department stores, food stores and drug stores.

9. 2-2 Economic Conditions Change
The Business Cycle – The movement of the economy from one condition to another and back again.
Prosperity
Recession
Depression
Recovery

10. 2-2 Economic Conditions Change
Prosperity
Most people who want to work are working
Businesses produce goods and services in record numbers
Wages are good
The rate of GDP growth is high
The demand for goods and services is high

11. 2-2 Economic Conditions Change
Recession
Demand begins to decrease
Business lower production
Unemployment begins to rise
GDP growth slows (for two or more quarters)
Ripple Effect – A drop in related businesses during a recession.

12. 2-2 Economic Conditions Change
Depression
Recession that deepens & spreads throughout the entire economy
Prolonged period of high unemployment
Weak consumer sales & business failures
: The Great Depression
25% of the U.S. Labor force was unemployed
Many people could not afford to satisfy their basic needs

13. 2-2 Economic Conditions Change
Recovery
Unemployment begins to decrease
Demand for goods and services begin to increase
GDP begins to rise
People gain employment

14. 2-2 Economic Conditions Change
Consumer Prices
What makes prices change?
Inflation – Increase in the general level of prices
It takes more money to buy the same goods and services
Most harmful to those on a fixed income
Causes of Inflation -
When demand is greater that supply
Wages tend to increase when during inflation, but usually not as fast as the prices of goods and services rise

15. 2-2 Economic Conditions Change
Consumer Prices
Measuring Inflation
1950 – 1960: 1-3% (annually)
1970 – 1980: 10-12% (annually)

16. 2-2 Economic Conditions Change

17. 2-2 Economic Conditions Change

18. 2-2 Economic Conditions Change
Measuring Inflation
Mild Inflation (2-3%) can stimulate economic growth
Consumer Price Index (CPI) – A number that compares prices in one year with prices in some earlier base year.
Based on a group of selected items
Food, gas, healthcare

19. 2-2 Economic Conditions Change
Measuring Inflation
Deflation – a decrease in the general level of prices.
Usually occurs in periods of recession and depression
Prices of products are lower, but people have less money to buy them

20. 2-2 Economic Conditions Change
Interest Rates
Represent the cost of money
Types of Interest Rates
Prime Rate
Discount Rate
T-Bill Rate
Treasury Bond Rate
Mortgage Rate
Corporate Bond Rate
Certificate of Deposit Rate

21. 2-2 Economic Conditions Change
Changing Interest Rates
As amounts saved increase, interest rates decline
This occurs because more funds are available
When borrowing increases, interests rates are likely to rise

22. 2-2 Economic Conditions Change
Prime Rate – The rate banks make available to their best business customers, such as large banks. Discount Rate – The rate financial institutions are charged to borrow funds from the Federal Reserve. T-Bill Rate – the yield on short-term (13 weeks) U.S. government obligations. Treasury Bond Rate – the yield on long-term U.S. government debt obligations of up to 30 years. Mortgage Rate – The amount individuals pay to borrow for the purchase of a new home. Corporate Bond Rate – The cost of borrowing for large U.S. corporations. Certificate of Deposit Rate – The rate for time deposits at savings institutions.

23. Group Questions How (who sells) are they sold? Who are they sold to?
What is the intended use of the funds borrowed?
What is the current rate or rates?
What are the average terms for repayment? (give examples)

24. 2-3 Other Measures of Business Activity
Investment Activities
Capital Spending – money spent by a business for an item that will be used over a long period of time.
Capital Projects – spending by businesses for items such as land, buildings, equipment, and new products.
The money for capital projects comes from three main sources: personal savings, stock investments and bonds.

25. 2-3 Other Measures of Business Activity
Personal Savings
Companies use money you deposit in a bank or other financial institutions.
These funds provide the money necessary for buying expensive equipment or creating new products.
In return, savers are paid interest on the money they deposit.
The savings rate of a country is an important factor for economic growth.

26. 2-3 Other Measures of Business Activity

27. 2-3 Other Measures of Business Activity
The Stock Market
Stocks – represent ownership in a corporation.
Stock ownership is commonly called equity (ownership).
If a company has higher earnings, more people will want to buy its stock, causing the value to increase.

28. 2-3 Other Measures of Business Activity
The Bond Market
Bond – represent debt in a corporation.
If you purchase a corporate or government bond, you are a creditor.
In return, bondholders are paid interest for the use of their money.

29. 2-3 Other Measures of Business Activity
Borrowing – Government Debt
Budget surplus – When a government spends less than it takes in. (2001)
Budget deficit – When a government spends more than it takes in.
National Debt – The total amount owed by the federal government.
As of January 8, 2015, the U.S. is 
$18.1 trillion in debt.

30. 2-3 Other Measures of Business Activity

31. 2-3 Other Measures of Business Activity
Borrowing – Consumer Debt
Credit cards
Auto loans
Home mortgages
Student (college) loans

32. 2-3 Other Measures of Business Activity
Current as of August 2015
U.S. household consumer debt profile:
Average credit card debt: $15,706
Average mortgage debt: $156,333
Average student loan debt: $32,953

33. 2-3 Other Measures of Business Activity
In total, American consumers owe:
$11.85 trillion in debt
An increase of 1.7% from last year
$890.9 billion in credit card debt
$8.17 trillion in mortgages
$1.19 trillion in student loans
An increase of 7.1% from last year