1.02 ~ economic activities and conditions measuring economic activity

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1.02 ~ ECONOMIC ACTIVITIES AND CONDITIONS MEASURING ECONOMIC ACTIVITY

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Page 1: 1.02 ~ ECONOMIC ACTIVITIES AND CONDITIONS MEASURING ECONOMIC ACTIVITY

1 . 0 2 ~ E C O N O M I C A C T I V I T I E S A N D C O N D I T I O N S

MEASURING ECONOMIC ACTIVITY

Page 2: 1.02 ~ ECONOMIC ACTIVITIES AND CONDITIONS MEASURING ECONOMIC ACTIVITY

GROSS DOMESTIC PRODUCT (GDP)

• The total dollar value of all final goods and services produced in a country during one year.• US has very high GDP (over $15 trillion)

Chapter 2 Slide 2

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COMPONENTS OF GDP

Consumer spending for food, clothing, housing, and other

spending

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 a

country.

Chapter 2 Slide 3

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NOT INCLUDED IN GDP

Value of the work you do for yourself

Intermediate goods used in

manufacturing, such as steel and fabrics.

Chapter 2 Slide 4

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GDP PER CAPITA

GDP per capita

output per person = GDP ÷ Total PopulationIncrease in GDP per capita

means economy is

growing

Decrease in GDP per capita

may mean economy is

having trouble

5

Page 6: 1.02 ~ ECONOMIC ACTIVITIES AND CONDITIONS MEASURING ECONOMIC ACTIVITY

LABOR ACTIVITIES

The workers of a country contribute to an

economy in several ways:

Create needed goods and services

Wages received are spent to create demand

for various itemsChapter 2 Slide 6

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LABOR ACTIVITIES ~ EMPLOYMENT

Labor force

consists of all people above age 16 who are actively

working or seeking employment.

Students, retired people, and others who cannot or do

not wish to work are not part of the labor force.

Unemployment rate

Portion of people in the labor force who are not

working (must be looking for work and able and willing to

work)

Main cause: reduced demand for goods and

services

As of July 2011, US Unemployment Rate = 9.1% (Bureau of Labor Statistics)• http://www.bls.gov/news.releas

e/empsit.nr0.htm

Chapter 2 Slide 7

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LABOR ACTIVITIES ~ EMPLOYMENT

• Unemployment• Temporary• Just quit job or just graduated from school

• Seasonal• Harvest crops or work retail during the

holidays• Industry Changes• New technology• Mergers or restructuring and “downsizing”

• US ~ 4.5% (typical)

Page 9: 1.02 ~ ECONOMIC ACTIVITIES AND CONDITIONS MEASURING ECONOMIC ACTIVITY

LABOR ACTIVITIES ~ 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.

Can be increased

by:

Improvements in capital resources (equipment and

technology)

Worker training

Management techniques

Chapter 2 Slide 9

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CONSUMER SPENDING

The money you earn and spend is one of the most important factors for economic growth.

Personal income• The salaries and wages as well

as investment income and government payments to individuals.

Chapter 2 Slide 10

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CONSUMER SPENDING

Retail sales

The sales of durable and nondurable goods bought

by consumers.

Main items measured include:• Automobiles, Building Materials,

Furniture, Gasoline, Clothing• Purchases from Restaurants,

Department Stores, Food Stores, Drug Stores

Chapter 2 Slide 11

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ECONOMIC CONDITIONS CHANGE

Goals• Describe the four phases of the business cycle.• Explain causes of inflation and deflation.• Identify the importance of interest rates.

Chapter 2 Slide 12

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THE BUSINESS CYCLE

• Our economy has its ups and downs; seems to run in cycles• Good times Bad times Good

times• This movement of the economy from one

condition to another and then back again is called a Business Cycle.• Four phases

Chapter 2 Slide 13

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Prosperity

• Employment rate and demand for products and services are high.

• Businesses continue making profits.

Recession

• Unemployment rate is increasing and demand for products and services are lowering.

• Businesses must strategize to stimulate demand for products & services.

Depression

• Unemployment rate is high and demand for products and services is lowering.

• Businesses try to maintain profits or break even to avoid going out of business.

Recovery

• Unemployment rate is lowering and demand for products and services is increasing.

• Business may increase human capital. 14

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THE BUSINESS CYCLE

• Prosperity• Peak of economic activity• Low unemployment and inflation• Production is high• Higher wages = greater demand for goods and services• New business open (Internet companies)• 1990’s

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THE BUSINESS CYCLE

• Recession• Economic activity slows down• Spending and demand for goods decreases• Unemployment and inflation rise• Productivity and GDP decline• Ripple Effect• Recession in one industry affects related industries

• 1970s (oil shortage)

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THE BUSINESS CYCLE

• Depression• Deep recession affecting the entire economy and lasting

several years• High unemployment and inflation• Low productivity• Shortages of goods• Great Depression 1929-1933

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THE BUSINESS CYCLE

• Recovery• Rise in business activity after recession or depression• Production increases• Unemployment declines• Demand for goods and services increases• GDP rises• New businesses open• Innovation and expansion

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CONSUMER PRICES

Chapter 2 Slide 19

Inflation

An increase in the general

level of prices.

Demand for goods and services is

greater than supply

causing prices to rise faster than wages

Buying power of the dollar decreases

It now takes more money to buy the

same amount of goods and

services

Most harmful to people

living on fixed incomes –

retirees and disabled persons

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CONSUMER PRICES

• Inflation• Causes:• Economy too productive• Printing too much money

• Avoided by slow but steady economic growth; controlling production and maintaining unemployment levels

• Consumer Price Index (CPI)• Tracks the prices of a specified basket of consumer goods

and services• Provides measure of inflation• Also considered a cost of living index

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Deflation

A decrease

in the general level of prices

Usually occurs during

periods of recession

and depressio

n

Prices of products are lower, but people have less money to buy them

Significant deflation occurred

in the U.S. during the

Great Depression of the 1930s, when prices

declined about 25%.

Chapter 2 Slide 21

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OTHER MEASURES OF BUSINESS ACTIVITY

Chapter 2 Slide 1

Goals• Discuss investment activities that promote

economic growth.• Explain borrowing activities by government,

business, and consumers.• Describe future concerns of economic growth.

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INVESTMENT ACTIVITIES

Chapter 2 Slide 23

•Your time in school is an investment in your future•Companies buying buildings and equipment•Capital spending – money spent by a business for an item that will be used over a long period

Investing for the

future can happen in

several ways.

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INVESTMENT ACTIVITIES, CONT’D.

Chapter 2 Slide 24

Capital projects involve spending by businesses for

items such as land, buildings, equipment, and new products.

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PERSONAL SAVINGS

Chapter 2 Slide 25

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THE STOCK MARKET

Chapter 2 Slide 26

Many people invest by

becoming part owners of a corporation.

Investors are issued stock to represent this

ownership.

Supply and demand are major influencers in stock prices• If a company has

higher earnings, more people will want to buy its stock, which causes the value to increase

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THE BOND MARKET

Chapter 2 Slide 27

Another investment activity involves the sale of bonds.

• In return, you are paid interest for the use of your money.

A bond represents debt for an organization.

When you purchase a corporate or government bond, you have become a creditor.

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GOVERNMENT DEBT

Chapter 2 Slide 28

Credit is often referred to as “Buy now, pay later”

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GOVERNMENT DEBT, CONT’D.

Chapter 2 Slide 29

A government may spend less than it takes in – a budget surplus is the

result.

May cause a reduction in taxes

or increased spending

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30

Interest Rates

•Prime rate is usually made available to banks’ best customers.

•Discount rate is offered by the federal reserve to financial institutions for loans.

•T-bill rate is the yield for short-term (13 weeks) government debt.

•Treasury bond rate is the yield for long-term government debt.

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31

Interest Rates

•Mortgage rate is the amount borrowers pay for home loans.

•Corporate bond rate is the cost of loans for large US corporations.

•Certificate of deposit (CD) rate paid for deposits for a period of time ( 6, 12, or 18 months).

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DECISION-MAKING

Chapter 2 Slide 32

Economic decision-making plays a major

role in how well companies (both

large and small) will manage their debt.

Borrowing can be helpful when

funds are used to expand sales and

profits.

Poor decision-making can lead to debt problems

and business failure.

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>> C H E C K P O I N T

Chapter 2 Slide 33

What is the cause of a budget deficit?

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FUTURE ECONOMIC CHALLENGES

Chapter 2 Slide 34

Limited access to health care Traffic and crime

Page 35: 1.02 ~ ECONOMIC ACTIVITIES AND CONDITIONS MEASURING ECONOMIC ACTIVITY

>> C H E C K P O I N T

Chapter 2 Slide 35

What are future economic concerns for a country’s economy?