Essential Standard 1.00
Understand the role of business in
the global economy.
1
Objective 1.02
Understand economic conditions
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Topics
• Measuring economic activities
• Classifying economic conditions
3
Measuring Economic Activities
4
Measuring Economic Activities
Gross Domestic Product (GDP)
• GDP: a country’s total dollar value of all final goods
and services produced in one year.
– Most commonly used measure to determine a country’s
overall economic growth Growth in GDP
• Major categories included in GDP
– Consumer spending: for food, clothing, housing, other
consumer items
– Business spending: for buildings, equipment, inventory
– Government spending: for employee pay, and to purchase
supplies and other goods and services
– Exports & imports:
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– Exports out of the country (minus) Imports into the country
GDP per capita
GDP per capita = output per person
=_________GDP__________
Total Population of the Country
6
Measuring Economic Activities
Labor Activities
• Unemployment rate: includes the people
of the labor force that are not working, but
are willing to work, are looking for work,
but can’t find a job.
• Productivity means …The production
output in relation to a unit of input (by a
worker.) Gains in Productivity Result in Record Output
– What can contribute to employees increasing
their production?
• Equipment, technology, training, management
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Measuring Economic Activities
Labor Activities
– U.S. 12/10 rate=9.4%
• represents over 14,500,000 people
– North Carolina’s 12/10 rate=9.8%
• North Carolina’s 07/10 rate=9.8%
– U.S. lowest: North Dakota 3.8%
• Lowest area unemployment: Lincoln, Nebraska 3.5%
– U.S. highest: Nevada 14.5%
• Highest area unemployment: El Centro, CA 28.3%
– Raleigh/Cary rate=7.8%
• 07/10=8.4%
• Current highest NC is Rocky Mt.=12.6%
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Measuring Economic Activities
Consumer Spending
Measurements of consumer
spending:
• Personal Income: includes the
total wages and salaries plus
investment income and
government payments to
individuals.
• Retail Sales: sales of durable
and non durable goods and
services purchased by consumers
(autos, building materials,
furniture, gas, $ spent at
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restaurants, etc)
Measuring Economic Activities
Investment (for the future)
• The money used for capital projects (land, buildings,
equipment, research) comes from three main sources:
• Personal savings:
– People and businesses deposit money in bank savings
accounts. Banks then lend this money to businesses
which use the borrowed money to buy equipment or
products for their businesses.
– Savers, in turn, earn interest on money used by
companies and other individuals.
– What happens if people don’t save??
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Measuring Economic Activities
Investment (for the future)
• The money used for capital projects (land, buildings,
equipment, research) comes from three main sources:
• The stock market:
– Stock represents ownership in a company. If a company
wants to expand, it can sell stock to raise money.
– Higher earnings for businesses increases their value, which
causes a demand for people wanting to buy the businesses
stock.
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Measuring Economic Activities
Investment (for the future)
• The money used for capital projects (land, buildings,
equipment, research) comes from three main sources:
• The bond market:
– Bonds represent debt for a company. If a company wants
to expand, it can sell bonds to raise money.
• Bondholders purchase the bonds, and earn interest on the money
they have loaned to businesses and the government.
• Eventually, the company pays the bondholders back their money,
with interest.
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Borrowing Activities …
By Governments: If governments want to
spend more than they brings in through taxes
and fees, they may have to borrow money.
This overspending is known as a budget
deficit. U.S. National Debt
Companies may borrow money to start up or
expand. Using borrowed funds efficiently can
result in an increase in sales and profits.
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Measuring Economic
Activities
GDP Per
capita
Consumer
Spending
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Classification of
Economic Conditions
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Situation
PROSPERITY
RECESSION
DEPRESSION
RECOVERY
Employment
trend
Labor: People who want
to work are working;
unemployment low
Wages: Good
Unemployment increases as
workers are laid off.
Supply and
demand of
goods and
services
trend/GDP
GDP: Increasing
Consumer Demand:
Increasing
Demand decreases as people Demand for products and
lose jobs;
services is very weak; GDP
GDP: growth slows for 2 or
falls rapidly
more quarters
Demand increases; GDP begins
to rise
Possible
actions of
businesses
Profits strong as is
production
Companies hiring &
expanding (Macy’s may
open more stores)
Businesses decrease
production as demand decre
ases; profits suffer
Businesses may strategize on
ways to stimulate demand for
goods & services
Businesses begin rehiring and
increasing production; companies
may again begin recruiting efforts
at colleges
Prolonged period of high
unemployment
Business failures and
closings increase;
companies make changes
(such as moving employees
from full time to part time to
decrease hours and reduce
benefits) just to stay open
PROSPERITY
DEPRESSION
Unemployment decreases
companies begin to rehire
workers
Year
Income
Income
percent
change
from year 1
Gallon of
milk cost
Gallon of
milk cost
percent
change
from year 1
1
2
3
$36,000 $38,000 $21,000
n/a
5.6%
-42%
$2.49
$2.99
$3.19
n/a
20%
28%
Over a
three-year
period, how
has the
income
been
impacted by
the
cost of a
gallon of
milk?
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Consumer Prices
•
•
•
•
•
Inflation
Causes of inflation
Consumer Price Index (CPI)
Deflation
Causes of deflation
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Measuring Economic Activity
• Inflation.
– The rapid rise in prices caused by an
inadequate supply of goods and services.
– Total demand exceeds total supply.
– Dollars are plentiful, so their value declines
and prices increase
– The result is a decline in purchasing
power; A dollar does not buy as much as it
did before inflation.
– Retirees and individuals on a fixed income
are financially hurt the most because their
income buys less.
Inflation Reduces
Consumers’ Ability to Buy
Goods and Services
As prices go up
Money does not buy as much
Consumers cut back on their
spending
Benefits of Inflation
• Economists suggest that an inflation rate
of 2-3% is healthy for the economy.
– Wages rise more slowly than prices.
– Producers make more profit and can hire
more workers.
– Unemployment is lower.
– Newly employed workers spend more money
and stimulate the economy.
– The United States usually has mild to
moderate inflation.
Disadvantages of Inflation
• If you do not keep up with inflation,
consumers will have a lower standard of
living.
– Inflation most affects people on a fixed
income, retirees and the unemployed.
– Most workers are affected when inflation is at
a moderate level.
Disadvantages of Inflation
• Increasing inflation reduces the
consumers' ability to buy goods and
services.
– Money does not buy as much (the value of
the dollar goes down).
– Consumers will purchase only necessary
goods.
– Consumers will have to cut back on their
spending
Disadvantages of Inflation
– Inflation occurs when there is too much
money in the economy.
– The government raises interest rates to
take money out of the economy.
– Rising interest rates discourage consumers
and businesses from borrowing money.
• Sales of durable goods fall.
• Consumers "make do" with current homes,
cars, etc.
• Business owners do not borrow to expand.
Disadvantages of Inflation
• Workers ask for higher wages; businesses raise
prices to pay for the increases.
• As consumers stop spending, business sales fall
and owners must cut back.
– Some businesses have to layoff workers
– People who lose their jobs will be able to buy fewer
goods and services
• Careful financial management is crucial in dealing with
inflation.
Disadvantages of Inflation
• Careful budgeting helps consumers cope
with limited economic resources.
– Wise decision-making is also necessary to
combat the effects of inflation.
– Comparison shopping, not impulse buying.
– Change lifestyle as needed.
– Savings and investments must keep up with
or ahead of inflation so that the money saved
does not lose value.
Measuring Economic Activity
• Consumer Price Index (CPI).
– A measure of the average change over
time in the prices paid by urban
consumers for a market basket of 400
consumer goods and services:
• Food and beverage.
• Housing.
• Apparel.
• Transportation.
• Medical Care.
• Education.
Measuring Economic Activity
• Deflation:
– A decrease in the volume, or amount, of
currency so that there is less currency
available for goods and services within a
free market; this tends to force market
prices lower.
– Deflation occurs when too few dollars are
chasing too many goods. Scarce dollars
are worth more, so prices go down.
Interest Rates
• Types:
–
–
–
–
–
–
–
Prime rate
Discount rate
T-bill rate
Treasury bond rate
Mortgage rate
Corporate bond rate
Certificate of deposit rate
What is the primary
purpose of each?
• How do interest rates impact businesses?
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Prime Rate
• The interest rate charged by banks to their most
creditworthy customers (usually the most
prominent and stable business customers).
• The rate is almost always the same amongst
major banks.
• Adjustments to the prime rate are made by
banks at the same time
• The prime rate does not adjust on any regular
basis.
• The Prime Rate is usually adjusted at the same
time and in correlation to the adjustments of the
Fed Funds Rate.
Discount Rate
• The interest rate charged to commercial
banks and other depository institutions
• On loans they receive from their regional
Federal Reserve Bank's lending facility
• Under the primary credit program, loans
are extended for a very short term (usually
overnight)
T-bill Rate
• A short-term debt obligation backed by the
U.S. government
• Maturity of less than one year
• Sold in denominations of $1,000
• Maximum purchase of $5 million
• Commonly have maturities of one month
(four weeks), three months (13 weeks)
or six months (26 weeks).
Treasury Bond (T-Bond) Rate
• A marketable, fixed-interest U.S. government
debt security
• Maturity of more than 10 years
• Make interest payments semi-annually
• The income that holders receive is only taxed
at the federal level
Treasury Bond (T-Bond) Rate
• Issued with a minimum denomination of
$1,000
• Sold through auction
Mortgage rate
• Interest rate on a loan secured by a
mortgage on a property
• A Mortgage is a debt instrument that
is secured by the collateral of specified
real estate property
• Borrower is obliged to pay back with
a predetermined set of payments
Corporate Bond Rate
• A debt security issued by a corporation
and sold to investors
• The backing for the bond is usually the
payment ability of the company
– typically money to be earned from future
operations
• Considered higher risk than government
bonds
Corporate Bond Rate
• Interest rates are almost always higher,
even for top-flight credit quality
companies.
• Issued in blocks of $1,000 in par value
• A major source of capital for many
businesses
Certificate of Deposit Rate
• A savings certificate entitling the bearer to
receive interest.
• Bears a maturity date
• A specified fixed interest rate
– Can be issued in any denomination
• Generally issued by commercial banks
– Insured by the FDIC
• Ranges from one month to five years.
Certificate of Deposit Rate
• It is a time deposit that restricts holders
from withdrawing funds on demand.
• It is still possible to withdraw the money,
this action will often incur a penalty.