1. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 1 2-1 2-1Measuring Economic Activity 2-2 2-2Economic Conditions Change 2-3 2-3Other Measures of Business Activity 2 C H A P T E R Economic Activity

2. © 2012 Cengage Learning. All Rights Reserved. SLIDE 2 2-1Measuring Economic Activity Goal 1Define gross domestic product. Goal 2Describe economic measures of labor. Goal 3Identify economic indicators for consumer spending.

3. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 3 KEY TERMS ●Gross Domestic Product (GDP) ●GDP per capita ●unemployment rate ●productivity ●personal income ●retail sales

4. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 How Does One Measure Growth? ●What is economic growth? ●The steady increase in production of goods and services in an economic system ●Measurements ●Compare output from year to year ●Most widely used measure is the Gross domestic product or GDP ●Total value of all final goods and services produced in a country during one year SLIDE 4

5. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Components of the 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 into the country SLIDE 5

6. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 GDP continued ●What’s not included? ●Work you do yourself such as cutting the lawn or working in the garden ●Only final products are included. ●Cars, but not the materials to make the cars such as steel or fabric ●If the GDP increases, the economy is growing and healthy SLIDE 6

7. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 7 Comparing GDP ●Just measuring totally monetary GDP doesn’t tell the whole story ●GDP per capita ●Output per person ●GDP /total population ●No change in GDP but an increase in population?

8. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 8 COMPARISON OF GDP IN SELECTED COUNTRIES

9. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 9 COMPARING GROSS DOMESTIC PRODUCT

10. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 10 Checkpoint ●What types of economic activities are not included in GDP? ●GDP only applies to reported final goods and services. ●Money earned for goods or services that are not reported would not be included. ●Goods and services used in the manufacture of other products are only counted once—in the final product.

11. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Labor Activities ●Workers of a country contribute to the economy ●Their labor activities create needed goods and services ●Their wages are spent to create demand for various items ●Henry Ford’s payment of his workers. SLIDE 11

12. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 12 Employment ●155 million people are in the US labor force ●Labor force consists of all people above the age 16 who are actively working or seeking work.

13. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Unemployment ●Portion of people in the labor force who are not working ●Are looking for work and willing to work, but unable to find a job ●The main cause of unemployment is reduced demand for the goods and services being provided by various workers ●If fewer people ride the bus, bus companies will need fewer workers SLIDE 13

14. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Productivity ●A vital source of economic growth is an increase in output per worker ●Defined as the production output in relation to a unit of input (worker) ●Improvements in the following increase worker output ●Capital Resources (equipment and technology ●Worker training ●Management techniques SLIDE 14

15. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Productivity cont. ●Over time the rate of growth in labor productivity has its ups and downs ●The rate of increase always gets small and often decreases ●The internet ●If wages increase faster than gains in productivity, the cost of producing goods increases and prices rise. ●Even though workers earn more, they can’t improve their standard of living ●An ability to produce more goods and services makes it possible to reduce the number of hours in a workweek. ●In the 1890s the average was 60 hours a week and now it is 40. SLIDE 15

16. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 16 Checkpoint ●How can productivity be increased? ●Productivity can be increased by improvements in capital resources (equipment and technology), worker training, and management techniques.

17. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 17 CONSUMER SPENDING ●The money you earn and spend is one of the most important factors for economic growth ●Personal income ●Salaries and wages as well as investment income and government payments to individuals

18. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Consumer Spending ●Retail Sales ●Sales of durable and nondurable goods bought by consumers ●Increasing sales are an indicator of economic growth ●Normal items measured ●Automobiles, Building materials, Furniture, Gasoline, andClothing, ●Restaurants, departments stores, food stores, drug stores SLIDE 18

19. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 19 Checkpoint ●What are the main sources of personal income? ●Sources of personal income include wages, salaries, investment income, and government payments.

20. © 2012 Cengage Learning. All Rights Reserved. SLIDE 20 2-2Economic Conditions Change Goal 1Describe the four phases of the business cycle. Goal 2Explain causes of inflation and deflation. Goal 3Identify the importance of interest rates.

21. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 21 KEY TERMS ●business cycle ●prosperity ●recession ●depression ●recovery ●inflation ●price index ●deflation

22. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 22 THE BUSINESS CYCLE ●The movement of the economy from one condition to another and back again ●Economics and business activity tends to move in cycles. ●All nations experience good and bad times ●Four phases

23. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 THE BUSINESS CYCLE ●Prosperity ●A period in which most people who want to work are working ●Businesses produce goods and services in record numbers ●Wages are good ●The GDP increases ●The demand for goods and services is high ●The high point of the business cycle SLIDE 23

24. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 THE BUSINESS CYCLE ●Recession ●A period in which demand begins to decrease ●Businesses lower production ●Unemployment begins to rise ●The GDP growth slows for two or more quarters ●Not too serious ●Hits specific industries harder than others ●The ripple effect—Auto industry ●Production weakens and output decreases SLIDE 24

25. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 THE BUSINESS CYCLE ●Depression ●When a recessions deepens and spreads throughout the entire economy ●A phase marked by prolonged period of high unemployment, weak consumer sales, and business failures ●GDP falls rapidly ●The Great Depression was the last one from 1930-1940 ●25% of the labor force was unemployed ●Rare SLIDE 25

26. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 THE BUSINESS CYCLE ●Recovery ●The phase in which unemployment begins to decrease ●Demand for goods and services increases ●The GDP begins to rise again ●If recovery continues, the economy moves back into prosperity SLIDE 26

27. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 27 Checkpoint ●What are the four phases of the business cycle? ●Prosperity ●Recession ●Depression ●Recovery

28. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 28 CONSUMER PRICES ●Changes in the buying power of your money ●Inflation ●Causes of inflation ●Measuring inflation ●Deflation

29. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Inflation ●An increase in the general level of prices ●Buying power decreases ●5% inflation would mean something that cost $100 one year would cost $105 dollars the next year. ●Inflation is most harmful to people living on fixed incomes SLIDE 29

30. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Causes of Inflation ●When demand for goods and services is greater than the supply ●Gas in the 70s and 80s ●Even though wages increase they can’t keep pace ●Most people don’t like inflation SLIDE 30

31. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Measuring Inflation ●1950s and 60s inflation was 1%-3% ●1970s and 80s inflation was 10%-12% ●Mild inflation can stimulate economic growth ●Wages increase more slowly than price of goods ●The price of products is more than the labor to make the goods ●Profits increase ●Expanded productions and hiring ●New workers spend money and demand increases SLIDE 31

32. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Consumer Price Index (CPI) ●Compares prices in one year with prices in some earlier base year SLIDE 32

33. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Deflation ●A decrease in the general level of prices ●Usually occurs in periods of recession and depression ●Prices are lower but people have less money to spend ●Prices during the Great Depression declined 25% ●Computers and electronic products have decrease in price ●Due to improved technology SLIDE 33

34. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 34 Checkpoint ●What are the main causes of inflation? ●Inflation is an increase in the general level of prices that occurs when the demand for goods and services is greater than supply.

35. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 35 INTEREST RATES ●They represent the cost of borrowing money ●Government, business, and consumers are affected by this ●Costs more to borrow money to buy goods and services when rates are high

36. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 36 INTEREST RATES ●Types of interest rates ●Prime rate ●What banks lend money to their best customers ●Discount rate ●What banks are charged to borrow from the Federal Reserve ●T-bill rate ●Yield on short-term (13 week) government debt ●Treasury bond rate ●Yield on long-term government debt (up to 30 years)

37. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 37 INTEREST RATES ●Types of interest rates ●Mortgage rate ●The amount individuals pay to borrow for the purchase of a new home ●Corporate bond rate ●Cost of borrowing for large corporations ●Certificate of deposit ●Savings account rate at the bank

38. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 38 INTEREST RATES ●Changing interest rates ●Supply and demand change the daily interest rates

39. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 39 Checkpoint ●How do interest rates affect business activities in our economy? ●Interest rates can encourage or discourage borrowing and spending. ●Lower interest rates allow consumers greater spending power, which increases demand, productivity, and employment. ●Businesses often pass on the cost of higher interest rates to consumers.

40. © 2012 Cengage Learning. All Rights Reserved. SLIDE 40 2-3Other Measures of Business Activity Goal 1Discuss investment activities that promote economic growth. Goal 2Explain borrowing activities by government, business, and consumers. Goal 3Describe future concerns of economic growth.

41. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 41 KEY TERMS ●capital project ●stock ●bond ●budget surplus ●budget deficit ●national debt

42. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 42 INVESTMENT ACTIVITIES ●Investing in the future—school, equipment ●Capital spending ●Money spent by a business for an item that will be used over a long period ●Buildings, equipment, or new products ●Paid for by: ●Personal Savings ●Stock Market ●Bond market

43. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 43 INVESTMENT ACTIVITIES ●Borrowing ●Government Debt ●Borrows money for capital projects ●Budget surplus ●Budget deficit ●National debt

44. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 44 INVESTMENT ACTIVITIES ●Borrowing cont. ●Business Debt ●Loans, bonds, and mortgages ●Consumer Debt ●Credit cards ●Auto loans ●Home mortgages

45. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 45 Checkpoint ●Name some examples of capital projects. ●Capital projects include the purchase of any item a business will use over an extended period of time such as land, buildings, and equipment.

46. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 46 Checkpoint ●What is the cause of a budget deficit? ●A budget deficit occurs when a government or organization spends more than it takes in.

47. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 47 FUTURE ECONOMIC CHALLENGES ●Emerging markets ●Weak economies ●Consumer preferences and behavior

48. © 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 48 Checkpoint ●What economic challenges do countries face in the future? ●Future economic concerns for any country include the ability to increase its output and provide a means for its citizens to meet the basic needs of food and shelter, adequate health care, education, transportation, employment, and safety.