1. Introduction to Business © Thomson South-Western ChapterChapter Economic Activity 2-1 2-1Measuring Economic Activity 2-2 2-2Economic Conditions Change 2-3 2-3Other Measures of Business Activity 2

2. Introduction to Business © Thomson South-Western Chapter 2 Slide 2 GROSS DOMESTIC PRODUCT (GDP) - the dollar value of all final goods & services produced in a country during one year. Components of GDP 1.Consumer spending for food, clothing, housing and other spending 2.Business spending for buildings, equipment, and inventory items 3.Government spending to pay employees and to buy supplies and other goods and services 4.The exports of a country less the imports into the country Comparing GDP – per capita or output per person. GDP per capita is calculated by dividing GDP by the total population.

3. Introduction to Business © Thomson South-Western Chapter 2 Slide 3 Comparison of GDP in Selected Countries

4. Introduction to Business © Thomson South-Western Chapter 2 Slide 4 Many nations do not have abundant resources and experience economic bad times. An increase in GDP per capita means that an economy is growing.

5. Introduction to Business © Thomson South-Western Chapter 2 Slide 5 >> C H E C K P O I N T What types of economic activities are not included in GDP? Only final goods, such as cars, are counted when you measure GDP. Intermediate goods used in manufacturing, such as steel and fabrics, are not included.

6. Introduction to Business © Thomson South-Western Chapter 2 Slide 6 LABOR ACTIVITIES Employment – more than 130 million people work in the United States. Unemployment rate is the portion of people in the labor force who are not working. People are considered to be “unemployed” if they are looking for work and willing to work but unable to find a job. Productivity- is the production output in relation to unit of input, such as a worker. The main cause of unemployment is reduced demand for the goods and services being provided by various workers.

7. Introduction to Business © Thomson South-Western Chapter 2 Slide 7 >> C H E C K P O I N T What are ways to increase productivity? Improvements in capital resources (equipment and technology), worker training, and management techniques can result in more output per worker.

8. Introduction to Business © Thomson South-Western Chapter 2 Slide 8 CONSUMER SPENDING Personal income – refers to salaries and wages as well as investment income and government payments to individuals. Helps buy goods & services. Retail sales – sales of durable & nondurable goods bought by consumers. Is an indicator as to consumer spending patterns in the economy.

9. Introduction to Business © Thomson South-Western Chapter 2 Slide 9 >> C H E C K P O I N T What are the main items measured for estimating retail sales? AutomobilesRestaurants Building MaterialsDepartment Stores FurnitureFood Stores GasolineDrug Stores Clothing

10. Introduction to Business © Thomson South-Western Chapter 2 Slide 10 THE BUSINESS CYCLE – The movement of the economy from one condition to another and back again. Prosperity - the period in which most people who want to work are working, businesses produce goods & services in record numbers, wages are good, and the rate of GDP growth increases. Recession - the period in which demand begins to decrease, businesses lower production, unemployment begins to rise, and GDP growth slows for two or more quarter of the calendar year.

11. Introduction to Business © Thomson South-Western Chapter 2 Slide 11 Depression – the phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures. – (Great Depression was in 1930-1940) Recovery – the phase where unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again.

12. Introduction to Business © Thomson South-Western Chapter 2 Slide 12 CONSUMER PRICES Inflation – the increase in the general level of prices. Buying power of dollar decreases. Most harmful if living on fixed incomes. Inflation can sometimes occur when the demand for goods and services is greater than the supply – this cans sometimes stimulate economic activity if it is kept relatively low. Causes of inflation – Demand for goods is greater than supply. When a large supply of money, earned or borrowed, is spent for goods that are in short supply – prices increase. Measuring inflation – mild inflation 2 or 3% can stimulate economic growth.

13. Introduction to Business © Thomson South-Western Chapter 2 Slide 13 Consumer price index is the number that compares prices in one year with some earlier base year. Deflation – decrease in the general level of prices. Occurs during periods of recession and depression. Prices of products are lower, but people have less money to buy them.

14. Introduction to Business © Thomson South-Western Chapter 2 Slide 14 INTEREST RATES Types of interest rates Prime rate – banks make available to their best business customers, such as large corporations Discount rate – financial institutions are charged to borrow funds for the Federal Reserve Bank – T-bill rate – yield on short-term (13 week) U.S. government debt obligations Treasury bond rate – yield on long-term (20 year) U.S. Government debt obligations

15. Introduction to Business © Thomson South-Western Chapter 2 Slide 15 Mortgage rate – amount borrowed for purchase of new home Corporate bond rate – cost of borrowing for large U.S. Corporations Certificate of Deposit rate – is the rate for six- month deposits at savings institutions. Changing interest rates – changes because of many factors – the supply and demand for money is the major influence. When borrowing by consumers, businesses, and government increases, interest rates will likely rise.

16. Introduction to Business © Thomson South-Western Chapter 2 Slide 16 INVESTMENT ACTIVITIES Personal savings The stock market The bond market A well-run business may need to borrow money!

17. Introduction to Business © Thomson South-Western Chapter 2 Slide 17 >> C H E C K P O I N T Name some examples of capital projects. Businesses spend money on: land, buildings, equipment, and new products. Money comes from three main sources: personal savings – in United States personal savings rate is low. stock investments or equity – ownership in a corporation Bonds – represents debt for an organization – you buy bond – you are creditor. You have lent money to the organization. The bondholders are paid interest for the use of their money. What business sells stock? A Corporation

18. Introduction to Business © Thomson South-Western Chapter 2 Slide 18 BORROWING Government debt – Budget surplus – Gov. spends less than takes in. Budget deficit – Gov. spends more than takes in. National debt – The total amount owed by the federal government Business debt – loans, bonds, and mortgages Consumer debt – credit cards, auto loans, home mortgages

19. Introduction to Business © Thomson South-Western Chapter 2 Slide 19 FUTURE ECONOMIC CHALLENGES Limited access to health care Need for proper housing for many people Traffic and crime Unemployment

20. Introduction to Business © Thomson South-Western Chapter 2 Slide 20 Words to Know…. Unemployment rate Productivity Personal income Depression Inflation Prosperity Stock Recession