CHAPTER 2
2-1
2-2
2-3
Measuring Economic Activity
Economic Conditions Change
Other Measures of Business Activity
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2-1
Goals
11. Define gross domestic product.
12. Describe economic measures of labor.
13. Identify economic indicators for consumer spending.
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Gross Domestic Product (GDP)
GDP per capita
unemployment rate
productivity
personal income
retail sales
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Components of GDP
 Consumer spending
 Business spending
 Government spending
 Exports minus imports of a country
▪ Only FINAL GOODS count
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Comparing GDP
 Output per person
 GDP divided by the total population
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Source: CIA World Factbook
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Checkpoint >>
What types of economic activities are not included in GDP?
Answer
 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.
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Employment –
 Labor force consists of all people above age 16
who are actively working or seeking work
 Unemployment rate- portion of people in the
labor force who are not working
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Productivity – production output in relation
to a unit of input OR
 Output
÷ Input = PRODUCTIVITY
 What can influence a country’s PRODUCTIVITY?
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Productivity >>
What influences a country’s productivity?
Answer
 Capital resources (equipment and technology)
 Worker training and Management techniques
 Safety/security
 Education level
 Political stability
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Personal income –
 Salary or Wages
 Investment income
 Government payments
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Retail sales –
 Sales of durable and nondurable goods bought by
consumers
 Retail sales are an indicator of general consumer spending
patterns in the economy
 Main Items:
▪ Automobiles, building materials, furniture, gasoline, clothing,
restaurant sales, department stores, food stores and drug stores.
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Checkpoint >>
What are the main sources of personal income?
Answer
 Sources of personal income include wages, salaries,
investment income, and government payments.
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Chapter 2-1
 Page 37
▪ 1-3 and 4 or 5
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2-2
Goals
14. Describe the four phases of the business cycle.
15. Explain causes of inflation and deflation.
16. Identify the importance of interest rates.
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business cycle
prosperity
recession
depression
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recovery
inflation
price index
deflation
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Prosperity
Recession
Depression
Recovery
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People who want to work are working.
Production of G&S hit record highs.
Wages are up.
Rate of GDP growth increases.
Demand for G&S is high.
Cannot last forever… why?
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Demand begins to decrease.
Businesses lower production.
Unemployment begins to rise.
GDP growth slows to 2 or more quarters of
the year.
Severity varies.
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When recession grows and spread
throughout the nation.
Prolonged unemployment
Weak sales due to low demand
Business failures
GDP falls rapidly
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Unemployment begins to decrease.
Demand begins to increase.
GDP begins to rise again.
Consumers regain confidence in their futures
and begin spending again.
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Checkpoint >>
What are the four phases of the business cycle?
Answer
 The four phases of the business cycle are prosperity,
recession, depression, and recovery.
 http://www.wgal.com/money/29191773/detail.html
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Inflation- 1950’s last 70 yrs
 Sustained increase in the general level of prices for G&S
 Buying power of the dollar decreases
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Causes of inflation When demand is greater than supply
 Wages may increase but at a much slower rate
 If wages would go up faster than prices, businesses would
need to hire fewer workers, which would worsen
unemployment
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Measuring Inflation Rate of increase fluctuates and has throughout
our nation’s history.
 CPI (Consumer Price Index)
▪ Compares prices in one year with prices in some earlier
base year
▪ Can be deceiving because it’s based on a group of
selected items and may not reflect necessities such as
food, gas, and health care.
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Deflation Opposite of inflation~ A sustained decrease in the
general level of prices for G&S
 Usually occurs during recessions and depressions
 Prices are lower but consumers have less money to buy
them.
 Doesn’t include items such as computers whose prices
have decrease drastically over the years…Why?
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Interest Rates Cost of money
 Individuals, companies, and governments who borrow
money are affected by interest rates
 People with poor credit ratings pay more (higher interest
rates) than people with good credit ratings… Why?
 When borrowing increases, interest rates rise
 Types of interest rates (continued on next slide)
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Types of Interest Rates
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Prime rate- given to banks’ best customers
Discount rate- charges to banks by the FED
T-bill rate- yield on short- term US gov. obligations (ex. 5 year)
Treasury bond rate- yield on long-term US gov obligation (ex. 30 year)
Mortgage rate- interest on a home loan
Corporate bond rate- large US corporations’ cost to borrow
Certificate of deposit rate- rate for long-term deposits at savings
institutions
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▪ Discount Rate
▪ http://money.cnn.com/2010/02/18/news/economy/discount.rate.fortune/index.htm
▪ Car Loan Rates
▪ Auto Rates
▪ http://www.bankrate.com/finance/auto/auto-loan-rates.aspx
▪ Mortgage Rates (Adjustable Rate Mortgages vs. Fixed Rate Mortgages)
▪ http://mortgage-x.com/trends.htm
▪ Savings Account Interest Rate
▪ CD Rates
▪ http://www.bankrate.com/cd.aspx
▪ http://www.ratestracker.com/historical-cd-rates/
▪ Credit Card Rates
▪ http://www.indexcreditcards.com/credit-card-rates-monitor/
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Checkpoint >>
What are the main causes of inflation?
Answer
 Inflation is an increase in the general level of prices that
occurs when the demand for goods and services is
greater than supply.
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Checkpoint >>
How do interest rates affect business activities in our economy?
Answer
 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.
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Chapter 2-2
 Page 42
▪ 1-3, and choose 4 or 5
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2-3
Goals
17. Discuss investment activities that promote economic growth.
18. Explain borrowing activities by government, business, and consumers.
19. Describe future concerns of economic growth.
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Capital projects- spending by businesses for items
such as land, buildings, equipment, and new products. This $
comes from three main sources:
 Personal savings
http://www.bankrate.com/compare-rates.aspx
 Stock investments
 Bonds
http://www.youtube.com/watch?v=sjyWxERgGJs
http://www.bloomberg.com/markets/rates/index.html
 http://www.investinginbonds.com/learnmore.asp?catid=9
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 Savings Low risk / low yield option
 Stock High risk / potentially high yield
 ownership in a corporation
 Bond Low risk / mid yield
 represents debt for an organization and
YOU are the creditor
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 Government budget surplus
▪ Gov’t spent less than it took in
▪ Gov’t may reduce taxes or increase spending on
various programs
 Government budget deficit
▪ Gov’t spent more than it took in
▪ Over time this amount builds up… cummulative
 National debt
▪ Total amount owed by the Federal Government
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 Personal income tax
▪ 20-30% of earned income (latest figures state a rate of 38%)
▪ Collected on a pay-as-you-earn basis
▪ Federal, state, and local
 Property tax
▪ Based on appraisals of land and property
▪ Local tax
 Sales tax
▪ Taken at time of purchase
▪ State tax
▪ PA sales tax is 6%
▪ Sin tax- A tax on certain items, such as cigarettes and alcohol, that are regarded as neither
necessities nor luxuries.
▪ Excise taxes-
taxes paid when purchases are made on a specific good- Often included in the price of the
product. Also placed on some activities, such as on wagering or on highway usage by trucks.
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Most common forms:
 Loans
 Bonds
 Mortgages
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Poor debt management results in company
failure
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Most common:
 Credit cards
 Auto loans
 Mortgages
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Pros:
 Convenient
 Great for emergencies
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Cons:
 Overuse
 Overspending
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Checkpoint >>
Name some examples of capital projects.
Answer
 Capital projects include the purchase of any item a
business will use over an extended period of time
such as land, buildings, and equipment.
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Checkpoint >>
What is the cause of a budget deficit?
Answer
 A budget deficit occurs when a government or
organization spends more than it takes in.
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Limited access to health care
Need for proper housing for many people
Traffic and crime
Unemployment
Housing market
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What economic challenges do countries face in the future?
Answer
 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.
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To be done by Wednesday:
 Page 47
▪ 1 , 2 and 3 or 4
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To be done by date of Test (Friday 9/21):
 Pages 48-51
▪ 1-30
▪ Extra Credit: Choose up to two (2) from 31-44
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