1. Chapter 2 Economic Activities Provide an understanding of measurements commonly used to gauge economic activity and business conditions in our society.

2. Section 2-1 Measuring Economic Activity  Define gross domestic product  Describe economic measures of labor  Identify economic indicators for consumer spending

3. Gross Domestic Product (GDP)  Economic growth – a steady increase in the production of goods and services in an economic system  Different ways to measure growth  One way is to comparing an economy’s output from year to year  Most widely used measurement – gross domestic product (GDP) GDP – the total dollar value of all final goods and services produced in a country during one year

4. Look at Figure 2-1  Why do the countries have different GDP?

5. Discussion Question  What items do you think would be included in the GDP of a country?

6. Gross Domestic Product (GDP) con’t…  Components of GDP GDP includes 4 major categories  Consumer spending – food, clothing, housing, and other spending  Business spending – buildings, equipment, and inventory items  Government spending – pay for employees, buying supplies and other goods and services  Exports and Imports – exports less imports

7. Gross Domestic Product (GDP) con’t…  Components of GDP Some goods and services are not included in GDP  The value of the work you do for yourself Examples – mowing the lawn or building a picnic table If you buy these things they are included ONLY FINAL GOODS

8. Gross Domestic Product (GDP) con’t…  Comparing GDP U.S. annual GDP = $11 million Healthy economy – more goods and services produced Can’t just use dollar value of GDP to measure economic growth – wouldn’t tell the whole story Growth can also be measured with GDP per capita or output per person  GDP per capita – output per person, divide GDP by total population

9. Gross Domestic Product (GDP) con’t…  Comparing GDP con’t… If no change in GDP in the last two years, but population increases  We now have the same output to divide between more people An increase in GDP per capita means that the economy is growing If it is decreasing, the economy is in trouble

10. Activity  Use library references and the Internet to obtain the GDP and population statistics for three countries.  Use this data to calculate the GDP per capita.  Explain the differences among these countries

11. Labor Activities  Workers contribute to a countries economy in several ways Their labor activities create the goods and services needed The wages the workers receive are spent and create demand

12. Labor Activities con’t…  Employment 130 million worker in the U.S. Labor force consists of all people above the age of 16 who are actively working or seeking work Unemployment rate another economic statistic of concern  Unemployment rate – the portion of people in the labor force who are NOT working Considered unemployed when you are looking for work and willing to work, but unable to find a job Main cause of unemployment  When demand for goods and services decrease

13. Labor Activities con’t…  Productivity Vital source of economic growth is an increase in output per worker  Productivity – the production output in relation to a unit of input, such as a worker Improvements can result in more output per worker  Examples – improvements in equipment and technology, worker training and management techniques Productivity will always have ups and downs

14. Labor Activities con’t…  Productivity con’t… If wages increase faster than gains in productivity, cost of producing increases and so do prices Although, workers are earning more, their standard of living is not improving because of rising prices Producing more goods and services allows for fewer work hours per week  1890’s – averaged 60 hours per week  Today – average less than 40 hours per week

15. Discussion Question  What motivates you to work harder and faster?

16. Consumer Spending Most important factor of economic growth is the money we earn and spend  Personal Income People receive money for their participation in production  Personal income – salaries and wages, as well as, investment income and government payments to individuals These funds provide the foundation for buying goods and services you need

17. Consumer Spending con’t…  Retail Sales Monthly the U.S. Department of Commerce measures retail sales  Retail sales – sales of durable and nondurable goods bought by consumers Retail sales indicate general consumer spending Increasing retail sales indicates economic growth Items measured in retail sales  Automobiles, building materials, furniture, gasoline, clothing, purchases from restaurants, department stores, food stores, and drug stores

18. Section 2-2 Economic Conditions Change  Describe the four phases of the business cycle  Explain causes of inflation and deflation  Identify the importance of interest rates

19. Focus on Real Life  As you mature, your abilities increase  You depend less on your parents and begin to plan for your future  Various parts of your life change – there are ups and downs  Ups and downs also occur in business  When economic conditions improve, quality of life is enhanced  When there is a downward economic trend, there are greater hardships for workers and consumers

20. The Business Cycle  Economic activity moves in cycles  Economic changes in the U.S. have gone from good to bad and back to good  Business cycles are the ups and downs of GDP Business cycles – the movement of the economy from one condition to another and back again

21. The Business Cycle  The phases of the business cycle Prosperity Recession Depression Recovery

22. Discussion Question  In what ways are spending habits changed during a dramatic economic shift?  How does this affect small business owners?

23. The Business Cycle con’t…  Prosperity The peak of 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, and the rate of GDP growth increases Demand for goods and services is high Does not go on forever

24. The Business Cycle con’t…  Recession Economy slows down Recession – a period in which demand begins to decrease, businesses lower production, unemployment begins to rise, and GDP growth slows for two or more quarters of the calendar year May not be too serious or last long May signal trouble for some workers in related businesses The ripple effect is a drop in related businesses Some last for long periods as fewer factors of production are used and the total demand falls

25. The Business Cycle con’t…  Depression If and when a recession deepens and spreads through the entire economy, we move into a depression Depression – a phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures GDP falls rapidly Great Depression – 1930-1940  Approx. 25% of the work force was unemployed  Couldn’t even afford basic needs Difference between a recession and a depression is the severity of economic difficulties

26. Discussion Question  Does anyone know what happened to cause the Great Depression?  Also what helped to bring us out of it?

27. A Question of Ethics  Ethical Analysis Guidelines Most business decisions are viewed in different ways The situations these decisions make create ethical problems Ethics are principles of right and wrong that guide personal and business decisions

28. A Question of Ethics con’t…  There are three guidelines for business ethic situations Is the action legal?  Laws vary among states and in different countries  Managers consider other factors, such as professional standards and the effect of the action on society Does the action violate professional or company standards?  Professional and company standards will frequently exceed the law  Ensures decisions will be made in the best interest of the company and the society it operates in Who is affected by the action and how?  Decision makers should consider possible effects on employees, consumers, competitors, and the environment

29. A Question of Ethics con’t…  What are some examples of situations faced by workers and consumers that require ethical decisions?  Describe the effect on business activities if no ethical guidelines existed.  How have recent ethical situation affected workers, investors, and others?

30. The Business Cycle con’t…  Recovery Downturns in the economy do not last forever Recovery – the phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again People gain employment, consumers regain confidence about their futures and they begin to buy again Recovery may be slow or fast As it continues, the nation will move into prosperity

31. Discussion Question  When were these prices different?  Is there something you buy regularly that has increased in price while decreasing in size?  How does this affect your decision to purchase the item?

32. Consumer Prices  Our money has what we call buying power, but our buying power changes  Examples When we buy something that has gotten smaller in size, but the price has stayed the same When we buy technology products that are now less expensive than before

33. Consumer Prices con’t…  Inflation Inflation is a problem most nations have to cope with Inflation – increase in the general level of prices The buying power of the dollar decreases  It takes more money to buy the same amount of goods and services Inflation is most harmful to people on a fixed income

34. Consumer Prices con’t…  Causes of Inflation Inflation can occur when the demand for goods and service is greater than the supply  Demand > Supply Even though wages increase they do not increase as fast as the cost of goods and services Consumers pay higher prices, therefore they have to work harder to maintain the same standard of living Producers receive higher prices, but if wages go up faster than prices, businesses hire fewer workers and unemployment gets worse

35. Consumer Prices con’t…  Measuring Inflation Inflation rates vary Mild inflation can actually stimulate economic growth Wages rise more slowly than the prices of products The producer makes higher profits and tends to expand production and hire more people New employees increase spending and the total demand of the economy increases Most watched measure of inflation is the Consumer Price Index (CPI)  Price index – a number that compares prices in one year with some earlier base year  Can be deceptive because CPI is based on a select group of items

36. Consumer Prices con’t…  Deflation Deflation – is a decrease in the general level of prices Deflation usually happens during recessions and depressions Prices of products are lower, but we have less money Prices decline 25%

37. Consumer Prices con’t…  Interest Rates Interest rates represent the cost of using money Interest rates have a strong influence on business activities Anyone who borrows money is affected by interest rates  Higher interest rates means higher business costs

38. Discussion Question  What advantages are there to using a loan to make a purchase?

39. Consumer Prices con’t…  Types of Interest Rates Many types of interest rates These rates represent the cost of money for different groups in different settings  Prime rate – rate banks make available to their best business customers  Discount rate – rate financial institutions are charged to borrow funds from Federal Reserve banks  T-bill rate – yield on short-term U.S. government debt obligations

40. Consumer Prices con’t…  Types of Interest Rates con’t… Treasury bond rate – the yield on long-term U.S. government debt obligations Mortgage rate – the amount individuals pay to borrow for the purchase of a new house Corporate bond rate – the cost of borrowing for large U.S. corporations Certificate of deposit rate – the rate for six-month time deposits at savings institutions

41. Consumer Prices con’t…  Changing Interests Rates The cost of money or interest changes because of various factors Supply and demand for money is a major influence on the level of interest rate As amounts saved increase, interest rates decline, this is because there is more funds available When borrowing increases, interest rates are to follow

42. Section 2-3 Other Measures of Business Activity  Discuss investment activities that promote economic growth  Explain borrowing activities by government, business, and consumers  Describe future concern of economic growth

43. Investment Activities  Investing happens in many ways Time in school, buying buildings, and equipment  Capital spending is the money spent by a business for an item that will be used over a long period Capital projects – spending by businesses for items such as, buildings, equipment, and new products Money for capital projects comes from three sources  Personal savings  Stock investments  bonds

44. Investment Activities con’t…  Personal savings Major source of investment funds Companies use money you deposit in a bank or other financial institution  Used for buying expensive equipment or creating new products  In return you are paid interest The U.S. personal savings rate is less than one percent This low rate can cause economic concerns for the future

45. Investment Activities con’t…  The stock market Invest by becoming part owner of corporations  Stock – represents ownership in a corporation Stock ownership is commonly called equity or ownership Many factors affect the value of shares of stock  Demand and supply  When a company has high earnings, people want to buy its stock  The value of the stock, therefore goes up

46. Investment Activities con’t…  The bond market The sale of bonds is an investment  Bond – represents debt for an organization If you buy a corporate or government bond, you become a creditor Means you have lent money to the organization, so then in return bondholders are paid interest for the use of your money

47. Borrowing  “Buy now, pay later”  Borrowing by the government, businesses, and consumers can have economic influence

48. Borrowing con’t…  Government debt Expect services from federal, state, and local governments Borrows to finance these projects Examples: new schools, public buildings, highways, and parks May spend less than they take in, causing a budget surplus  Budget surplus – when government spends less than they bring in

49. Borrowing con’t…  If surplus occurs, may cut taxes or increase spending  Spending more than it takes in, causes a budget deficit Budget deficit – when government spends more than they bring in  Deficits build up National debt – total amount owed by the federal government

50. Borrowing con’t…  Business debt Loans, bonds, and mortgages are ways for businesses to borrow money Borrowing can be helpful  Can help expand sales and profits Poor debt management can result in companies going out of business

51. Borrowing con’t…  People often use credit cards, auto loans, and home mortgages to finance purchases  Credit can be convenient, but overuse leads to financial problems  Careful use of credit can be good for economic growth

52. Future Economic Challenges  The ability to produce output determines its growth  Various economic problems exist and need to be solved Examples: adequate health care, traffic, crime, and unemployment  Don’t know what the future economic situation will be  Economic growth is needed to maintain or increase the standard of living and prevent unemployment