CHAPTER
2
Economic Activity
2-1
Measuring Economic Activity
2-2
Economic Conditions
2-3
Other Measures of Business Activity
SLIDE 1
2-1 Measuring Economic Activity
Goals
1. Define
Gross Domestic Product
2. Describe
3. Identify
economic measures of labor
economic indicators for
consumer spending
Gross Domestic Product (GDP)

The total value of all final goods and services
produced in a country during one year.

Other ways to determine how well an economy is
doing:
 Compare
output from year to year
 Govt collects information from producers and
estimate national output.
Comparison of GDP of Selected Countries
Country
Total GDP
($)
GDP Per
Capita ($)
Country
Total GDP
($)
GDP Per
Capita ($)
United States
14.3
Trillion
46,400
Mexico
1.5 Trillion
13,500
China
8.8 Trillion
6,600
Canada
1.3 Trillion
38,400
Japan
4.1 Trillion
32,600
Poland
690.1 Billion
17,900
Germany
2.8 Trillion
34,100
Saudi Arabia
585.5 Billion
20,400
India
3.6 Trillion
3,100
South Africa
495.1 Billion
10,100
Brazil
2.0 Trillion
10,200
Nigeria
357.2 Billion
2,400
Components of GDP

GDP includes four major categories of economic
activity:
1.
2.
3.
4.
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 .
Components of GDP

Some goods and services are not included in GDP
like:
 Value
of work you do yourself

Only Final goods such as cars are counted when you
measure GDP.

If a GDP increases year to year, this usually signals
that an economy is growing and is healthy.
Comparing GDP
 The
more goods and services that are
produced, the healthier the economy is.
 GDP
Per Capita aka Output per person.
GDP
/ The total population.
Checkpoint #1
 What
types of economic activities are
not included in GDP?
 GDP only applies to reported final goods and services
 Money
earned for goods and 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
Labor Activities

The workers of a country contribute to the
economy in several ways:
1. Labor activities create needed goods
2.
The wages they receive are spent to create demand
for various items
Employment

Today more then 155 million people work in the
United State
 These
members of the Labor Force are employed in
thousands of different jobs.
 The Labor Force includes all people above the age of
16 who are actively working or seeking work.

Unemployment Rate
 The
portion of people in the labor force who are not
working.
 Main cause for unemployment is reduced demand for
goods and services being provided by various of
workers.
Productivity

A 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
in:
1.
Capital Resources
2.
Worker Training
3.
Management Techniques
Checkpoint #2
 How
can productivity be increased?
 By improvements in capital resources, worker
training, and management techniques
Consumer Spending


The money you earn and spend is one of the most
important factors for economic growth
Personal Income
 Refers
to salaries and wages as well as investment
income and government payments to individuals.

Retail Sales
 Sales
of durable and non-durable goods bought by
consumers.
 An indictor of general consumer spending patterns in
the economy
Checkpoint #3
 What
are the main sources of personal
income?
1.
Wages
2.
Salaries
3.
Investment Income
4.
Government Payments
2-2 Economic Conditions
Change
Goals:
1.
Describe the four phases of the business
cycle
2.
Explain causes of inflation and deflation
3.
Identify the importance of interest rates
The Business Cycle

Economic and business activity tends to move in
cycles.


Business Cycle refers to the movement of the economy from
one condition to another and back again
Business cycles are the recurring ups and downs of
GDP and have 4 phases:
1.
2.
3.
4.
Prosperity
Recession
Depression
Recovery
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.
 The
peak of the business cycle.
 Does
not go on forever
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 a calendar year.
 May
not be too serious or last very long.
 Often
signals trouble for workers in related
businesses
 Ripple
Effect
Depression

A phase marked by a prolonged period of high
unemployment, weaker consumer sales, and
business failures.
 Recession
deepens and spreads throughout the
entire economy
 GDP
falls rapidly during a depression
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
begin buying again.
Checkpoint #4
 What
are the 4 phases of the business
cycle?
1.
Prosperity
2.
Recession
3.
Depression
4.
Recovery
Consumer Prices

A problem with which most nations have to cope
is INFLATION.
 An
Increase in the general level of prices.
 Buying

power decreases
Inflation is the most harmful to people living on fixed
incomes.
 Income
does not change
Causes of Inflation
1.
When demand for goods and services is greater
than the supply
 When
a large supple if money, earned or borrowed, is
spent for goods that are in short supply, prices increase
2.
Prices of goods and services usually rise so fast
3.
Wages go up faster than prices, businesses tend
to hire fewer workers
Measuring Inflation

Inflation rates vary

Mild inflation (2 or 3 percent a year) can
stimulate economic growth.
 Wages

rise slowly than the prices of products
Consumer Price Index (CPI)
A
number that compares prices in one year with prices
in some earlier base year.
Deflation

A decrease in the general level of prices.
 Occurs
in periods of recession and depression.
 Products
of prices are lower, but people have less
money to buy them.

The Great Depression of the 1930s

Cost of computers
Checkpoint #5
 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 great than supply.
Interest Rates

The cost of money

Have a strong influence on business activities

Companies and governments that borrow money
and consumers are affected by interest rates.
 People
with poor credit rating pay a higher interest
rate than people with good credit
Types of Interest Rates
Prime Rate – the rate the banks make available to
their best business customers.
 Discount Rate – the rate financial institutions are
charged to borrow funds from Federal Reserve
Banks
 T-Bill Rate – the yield on short term (13 week)
U.S. debt obligations
 Treasury Bond Rate – the yield on long-term U.S.
government debt obligations of up to 30 years.

Types of Interest Rates
 Mortgage
Rate– the amount individuals pay
to borrow for the purchase of a new home.
 Corporate
Bond Rate – the cost of
borrowing for large U.S. corporations
 Certificate
of Deposit Rate– the rate for
time deposits at savings institutions.
Checkpoint #6
 How
do interest rates affect business
activities in our economy?
 Interest
rates can encourage or discourage
borrowing or spending.
 Lower
interest rates allow consumers greater
spending power
2-3 Other Measures of
Business Activity
Goals:
1.
2.
3.
Discuss investment activities that promote
economic growth
Explain borrowing activities by
government, business, and consumers
Describe future concerns of economic
growth
Investment Activities

Investing for the future can happen in several
ways
 Capital
Spending
 Refers
to money spent by a business for an item that
will be used over a long period of time.
 Capital
Projects
 Involve
spending by businesses for items such as
land, buildings. Equipment, and new products.
Personal Savings

Major source of investment funds
 Provide
the money necessary for buying expensive
equipment or creating new products
 Interest

is paid on the money they deposit
The savings rate of a country is an important factor
for economic growth
The Stock Market

Many people invest by becoming part owners of a
corporation.
 Stock
– represents ownership in a corporation
 Stock

ownership is also known as EQUITY
The value of shares of affected by many factors.
 Supply
and Demand
 Company
has higher earnings
The Bond Market

Sales of Bonds
 Bond

Creditor
 When
 You

represents debt for an organization
you purchase corporate or government bond
lent money to money to the organization
Bond holders are paid interest for the use of their
money.
Checkpoint #7
 Name
some examples of capital
projects?
 The
purchase of any item a business will use
over an extended period of time such as land,
buildings, and equipment.
Borrowing
“Buy
now, pay later”
Borrowing occurs by:
Government
2. Businesses
3. Consumers
1.
Government Debt

People expect services from federal, state, and
local governments.

Government uses borrowing to finance various
projects. (Schools, highways)

Budget Surplus
 Government
 Government
spends less than it takes in
may reduce taxes or increase spending in
various programs
Government Debt

Budget Deficit
 Government
 The
may spend more than it takes in.
total amount owed by the government
 National
Debt
Business Debt
 Loans,
bonds, and mortgages are common
borrowing methods used by businesses
 Efficient
use of borrowing can be helpful to
companies
 Using
the funds of others can help expand sales
and profits
Consumer Debt

People commonly use credit cards, auto loans,
home mortgages to finance their purchases

Careful use of credit cards can be important for
economic growth.
Checkpoint #8
 What
is the cause of a budget deficit ?
 When
the government or organization spends
more than it takes in.
Economic Challenges and Adopting to
Current Markets

Global business growth is occurring in emerging
markets
 Places
where consumer incomes and buying power are
increasing because of economic expansion
 Quality

of life improves
Countries lack the technology, education, and
business systems