Chapter
3
Economic Activity in a
Changing World
pp. 34-47
Chapter
3
Learning Objectives
After completing this chapter, you’ll be
able to:
1. Identify how economic activity is
measured.
2. Explain how inflation and deflation work.
continued
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Chapter
3
Learning Objectives
After completing this chapter, you’ll be
able to:
3. Discuss the four phases of the business
cycle.
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Chapter
3
Why It’s Important
Economic activity affects
everyday life. The history of the
economy affects the industries
and of today and tomorrow.
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Chapter
3
Key Words
gross domestic product
standard of living
inflation
deflation
budget deficit
national debt
budget surplus
Introduction to Business, Economic Activity in a Changing World
continued
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Chapter
3
Key Words
business cycle
prosperity
recession
depression
recovery
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Chapter
3
Measuring Economic Activity
Economic indicators are figures used
to measure economic performance.
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Chapter
3
Measuring Economic Activity
Economic indicators measure things
like how much a country is producing,
whether its economy is growing, and
how it compares to other countries.
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Chapter
3
Gross Domestic Product (GDP)
One way of telling how well an
economy is performing is to determine
how many goods and services it
produces during a certain period of
time.
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Chapter
3
Gross Domestic Product (GDP)
The total value of the goods and
services produced in a country in a
given year is called its gross
domestic product (GDP).
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Chapter
3
Gross Domestic Product (GDP)
To calculate the GDP, economists
compute the sum of goods and
services.
continued
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Chapter
3
Gross Domestic Product (GDP)
Economists include four main areas in
calculating the GDP:
• Consumer goods and services
• Business goods and services
• Government goods and services
• Goods and services sold to other
countries
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Chapter
3
Gross Domestic Product (GDP)
The GDP doesn’t include the goods
and services that aren’t reported to the
government.
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Chapter
3
Gross Domestic Product (GDP)
The standard of living is the amount
of goods and services the average
citizen can buy.
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Chapter
Figure
3.1
3
GROSS DOMESTIC PRODUCT
The gross domestic
product (GDP) is the
output of goods and
services produced in
a country.
What percentage did
the GDP increase
from the end of Year
2 to the beginning of
Year 3?
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3
Graphic Organizer
Chapter
Graphic
Organizer
Gross
Domestic
Product
Consumer
goods
and
services
+
Business
goods
and
services
Government
+
goods
and
services
+
Goods
and
services
sold to
other
countries
Introduction to Business, Economic Activity in a Changing World
=
Gross
Domestic
Product
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Chapter
3
Unemployment Rate
The unemployment rate measures the
number of people who are able to
work but don’t have a job during a
given period of time.
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Chapter
3
Unemployment Rate
There are different reasons for being
unemployed, including:
• Temporary
• Seasonal
• Changes in industry
• Economic slow down
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Chapter
3
Unemployment Rate
The worst type of unemployment
occurs when the entire economy slows
down.
This type of unemployment lasts until
the economy recovers, which can take
years.
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Chapter
3
Unemployment Rate
Changes in the unemployment rate
show whether an economy is picking
up or slowing down.
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Chapter
3
Rate of Inflation
Inflation is a general increase in the
cost of goods and services.
Inflation can happen when an
economy actually becomes too
productive.
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Chapter
3
Rate of Inflation
As the demand for goods goes up,
producers raise their prices.
To pay the higher prices, workers
demand higher wages.
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Chapter
3
Rate of Inflation
When wages go up, producers raise
prices again to pay for the higher
wages, and so on.
This situation can spiral out of control
and lead to hyperinflation.
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Chapter
3
Rate of Inflation
Deflation is a general decrease in the
cost of goods and services.
When an economy produces more
goods than people want, it has to
lower prices and cut production.
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Chapter
3
Rate of Inflation
The United States tries to maintain a
slow but steady rate of economic
growth to avoid both inflation and
deflation.
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Chapter
3
National Debt
When the government spends more
on programs than it collects in taxes,
the difference in the amount is called
the budget deficit.
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Chapter
3
National Debt
The total amount of money a
government owes is its national debt.
If the debt gets too large, a nation can
become dependent on other nations or
unable to borrow any more money.
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Chapter
3
National Debt
If a nation spends less than its income,
it has a budget surplus.
The government will probably use a
surplus to cut taxes, reduce the
national debt, or increase spending for
certain programs.
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Chapter
3
Fast Review
1. What are some of the types of
unemployment?
2. What is the difference between
inflation and deflation?
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Chapter
3
The Business Cycle
Over long periods of time economic
changes seem to form patterns.
The rise and fall of economic activity
over time is called the business
cycle.
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Chapter
3
The Business Cycle
The four phases of the business cycle
are:
• Prosperity
• Recession
• Depression
• Recovery
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Chapter
Figure
3.2
3
BUSINESS CYCLE MODEL
The repeated rise
and fall of
economic activity
over time is called
a business cycle.
What are the four
phases of the
cycle?
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Chapter
3
The Business Cycle
In a global economy, in which several
countries are trading goods and
services with one another, one
country’s economy can affect its
trading partners’ economies.
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Chapter
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Prosperity
Prosperity is a peak of economic
activity.
Unemployment is low, production of
goods and services is high, and new
businesses open.
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Chapter
3
Prosperity
Prosperity, however, does not last. Any
number of things can change.
Companies produce too much, people
stop buying, or inflation starts to rise.
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Chapter
3
Recession
During a recession, economic activity
slows down.
There is a general drop in productivity
and the GDP declines.
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Chapter
3
Recession
A recession can affect only one
industry, related industries, or spread
to the entire economy.
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Chapter
3
Recession
The ripple effect is when a recession
in one industry leads to a recession in
other industries.
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Chapter
3
Depression
A deep recession that affects the entire
economy and lasts for several years is
called a depression.
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Chapter
3
Depression
During a depression there is high
unemployment, low productivity, and
excess capacity in manufacturing
plants.
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Chapter
3
Depression
A depression can be limited to one
country but usually spreads to related
countries.
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Chapter
3
Depression
The stock market crash on October 29,
1929, or “Black Tuesday,” marked the
beginning of the Great Depression.
Between 1929 and 1933, GDP fell from
approximately $103 billion to $55
billion.
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Chapter
3
Depression
During the Great Depression, the
number of people out of work rose
nearly 800 percent.
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Chapter
3
Depression
During the Great Depression, many
banks failed.
The money supply fell by one-third.
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Chapter
3
Recovery
A rise in business activity after a
recession or depression is called a
recovery.
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Chapter
3
Recovery
During a recovery:
• Production starts to increase
• People start going back to work and
have money to spend again
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Chapter
3
Recovery
During a recovery (continued):
• The new demand for goods and
•
•
services stimulates more production
The GDP grows
New businesses open
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Chapter
3
Recovery
A recovery can take a long time or it
can happen quickly.
During World War II, the United States
recovered from the Great Depression
much faster because of the demand
for war production.
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Chapter
3
Fast Review
1. What are the four phases of the
business cycle?
2. How does the ripple effect impact the
economy?
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Chapter
3
Did colonists develop their own
industries?
How do factories influence the
workplace?
continued
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Chapter
3
How did the assembly line change
American society?
How has the Internet changed
the way people do business?
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Chapter
3
Making an Ethical
Decision
1. Should you encourage other company
executives to sell your product to countries
that have an economic system you
disapprove of?
continued
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Chapter
3
Making an Ethical
Decision
2. Does it matter if your product is
desperately needed by the country to
save lives?
continued
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Chapter
3
Making an Ethical
Decision
3. If the United States bans trade with that
country, would you still discuss the topic
with other executives? If the executives
want to help the banned country, how else
could your company get a product to those
who need it?
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End of Chapter
3
Economic Activity in a Changing World