Chapter 3Economic Activity in a

Changing World

Measuring Economic Activity Economic indicators are figures used to

measure economic performance. Economic indicators measure things like how

much a country is producing, whether its economy is growing, and how it compares to other countries.

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.

• An important measure of a country’s economic health is its level or productivity

• The total value of the goods and services produced in a country in a given year is called its gross domestic product (GDP).

Gross Domestic Product (GDP)• To calculate the GDP, economists compute

the sum of goods and services.• Economists include four main areas in

calculating the GDP:1.Consumer goods and services2.Business goods and services3.Government goods and services4.Goods and services sold to other countries

Gross Domestic Product (GDP)• The GDP doesn’t include the goods and

services that aren’t reported to the government.• The United States produces so much more than

other countries that it has a higher standard of living

• The standard of living is the amount of goods and services the average citizen can buy.

Gross Domestic Product (GDP)• The gross domestic product (GDP) is the output

of goods and services produced in a country.

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.

• There are different reasons for being unemployed, including:• 1. Frictional (Temporary)• 2. Seasonal• 3. Structural (Changes in industry)• 4. Cyclical (Economic slowdown)

Unemployment Rate Frictional (Temporary)

This is where if you just quit your job or graduated from school and looking for work.

This type of unemployment has little effect on the economy

Seasonal If you harvest crops or work in a retail during the

holiday season, you may only work a certain part of the time

Unemployment Rate Structural (Changes in Industry)

This is where new technology replaces workers or required new skills

Cyclical (Economic slowdown) This is the worst type of unemployment and

occurs when the entire economy slows down This type lasts until the economy recovers, which

can take years.

Unemployment Rate• Changes in the unemployment rate show

whether an economy is picking up or slowing down.

In 2003 rate was 5.2% During Great depression

Went from 3.7% to 8.7% Currently 7.2%

Unemployment Rate How do you calculate the Rate

Unemployment rate = (# of Unemployed/labor force) x 100

Labor force = (# of employed) + (# of unemployed)

Unemployed = 8 million Employed = 125 million

Rate of Inflation Another important measure of economic

strength is the 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. The more people are employed, the more

people spend.

Rate of Inflation As the demand for goods goes up, producers

raise their prices.• To pay the higher prices, workers demand

higher wages. • 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.

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.

• As a result, people have less money to buy goods so the demand continues to go down.

Rate of Inflation This is what happened to some of the Asian

countries like Japan and Taiwan in the 90’s. The United States tries to maintain a slow but steady

rate of economic growth to avoid both inflation and deflation.

This is done by controlling productivity and keeping a certain number of people unemployed.

That way there is less risk of producers making too many goods or workers demanding higher wages

National Debt Countries can run up large debts The main source or income for any

government is taxes It uses taxes to pay for programs like defense,

education, and social services. When the government spends more on

programs than it collects in taxes, the difference in the amount is called the budget deficit.

National Debt In the 1980’s the government ran up a huge

deficit when it cut taxes while increasing spending on programs

To pay for the difference the government borrows money from the public, banks, and even other countries

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.

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.

The National Debt on January 1st 1791 was just $75 million dollars. Today, it rises by that amount every hour or so. The following graph shows how the National Debt has grown year by year since 1940 in actual dollar amounts, uncorrected for inflation:

The Business Cycles Once you enter into the workforce you’ll experience

many ups and downs Economies go through ups and downs as a result of

wars, foreign competition, and changes in technology.

• Over long periods of time economic changes seem to form patterns.

• For example the U.S economy went though slumps in the 30’s, 50’s, and the 70’s

The Business Cycles• The rise and fall of economic activity over

time is called the business cycle. • Four cycles of the business cycle can be

identified• 1. Prosperity • 2. Recession• 3. Depression• 4. Recovery

The Business Cycles Every phase indicates changes to an economy, to

industries, and to working people. 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.

Exp: if the US economy is in a period of economic expansion, the U.S. will purchase goods and services from other countries promoting expansion

Prosperity Prosperity is a peak of economic activity.• Unemployment is low, production of goods

and services is high, and new businesses open.

• Wages are usually higher so there is a greater demand for goods to be purchased.

Prosperity• The 1990’s was a record of prosperity, which

was due to the low rate of inflation and the internet creating new opportunities for business opportunities

Prosperity, however, does not last. Any number of things can change

• Companies produce too much, people stop buying, or inflation rises dramatically.

Recession• During a recession, economic activity slows

down. • Spending decreases and so does the demand

for products• Businesses produce less so they need fewer

workers• The unemployment rate then increases so

people have less to spend

Recession• There is a general drop in the total production

declines. of goods and services, so the GDP• A recession can affect only one industry,

related industries, or spread to the entire economy.

• The ripple effect is when a recession in one industry leads to a recession in other industries.

Recession Exp: if there is a recession in the auto making

industry, it leads to a recession in industries that make parts for the cars Like steel, and rubber

In 1970 an oil shortage in the U.S. caused gas prices to increase

Gas is used for every kind of activity, from driving to work, to transporting goods to market

As a result the price of everything went up and led to a major recession

Depression A deep recession that affects the entire

economy and lasts for several years is called a depression.

During a depression there is high unemployment, low production of goods and services, and excess capacity in manufacturing plants.

• A depression can be limited to one country but usually spreads to related countries.

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.• A decline of 50%

• During the Great Depression, the number of people out of work rose nearly 800 percent.• From 1.6 to 12.8 million

Depression During the worst years of the depression 1 out of

every 4 workers where jobless The average manufacturing wage was a .55 cents an

hour but fell to .05 cents an hour Many banks failed and FDIC did not exist, so

depositors where not protected. The money supply fell by 1/3 Currency was in such a short supply that towns and

counties, resorted to printing their own money

Recovery• A rise in business activity after a recession or

depression is called a recovery. • During a recovery:

• Production starts to increase• People start going back to work and have money

to spend again• The new demand for goods and services

stimulates more production• The GDP grows• New businesses open

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.

During a recovery businesses might start to innovate a new product or a new way of performing a task

Recovery When a business innovates, it often gains and

edge on its competition b/c its costs goes down or its sales go up

Profit increases, business grows, and economic activity soars.

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