Introduction to Business© Thomson South-Western

ChapterChapterChapterChapter

Chapter 2

Measuring Economic Activity

Economic Conditions

Other Measures of Business Activity

Introduction to Business© Thomson South-Western

What is gross domestic product (GDP)? Currency value (such as U.S. dollar) of all

final goods and services produced within a country in a given period

Total income of a nation Measure of nation’s economic well-being Measure of a nation’s economic growth

from one period to the next Most commonly calculated via expenditures

Introduction to Business© Thomson South-Western

Investment

(I)

Personal Consumpti

on Expenditu

res

(C)

Government

(G)

Net Exports

(NX)

Fixed Investment

New Homes

Inventories

Exports Imports

GDP

What are the components of GDP?

GDP = C + I + G + NX

ClothesMoviesGrocerie

sCars

RoadsSchool

sParks

Introduction to Business© Thomson South-Western

What’s not included in GDP?

Intermediate goods Used goods Underground production (black market) Financial transactions Household production Transfer payments

Introduction to Business© Thomson South-Western

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

How much of GDP is each component?

Consumption (PCE) 70 %

Investment 16%

Government 19%

Net Exports -5%

Component % of GDP

GDP 100%

Average Percent of GDP since 2003

Source: Bureau of Economic Analysis

Introduction to Business© Thomson South-Western

Real and nominal GDP Nominal GDP: GDP that is not adjusted for

inflation. The value of goods and services in current prices.

Real GDP: The dollar price of GDP in a base year’s price, used to compare changes in GDP from one year to the next. An increase in real GDP is an increase in economic

growth.

Learn how to figure nominal v real

Introduction to Business© Thomson South-Western

What GDP does not tell us Does not measure income distribution Does not measure non-monetary output or

transactions (e.g., barter, household activities) Does not take into account desirable

externalities, such as leisure or environment Does not measure social well-being Correlates to standard of living but is not a

measure of standard of living

Introduction to Business© Thomson South-Western

Chapter 2

Slide 8

Comparing GDP

GDP per capitaOutput per person

Increase usually means economy is growing

Equation:

GDP/ Population

Introduction to Business© Thomson South-Western

Chapter 2

Slide 9

LABOR ACTIVITIES

Employment Productivity

Introduction to Business© Thomson South-Western

Chapter 2

Slide 10

What are ways to increase productivity?

Improvement in equipment

Technology

Training

Management

Introduction to Business© Thomson South-Western

Chapter 2

Slide 11

CONSUMER SPENDING

Personal income Salaries – wages – investment income

Retail sales Sales of durable/nondurable goods by

consumers

Introduction to Business© Thomson South-Western

Chapter 2

Slide 12

Comparison of GDP in Selected Countries

Introduction to Business© Thomson South-Western

Chapter 2

Slide 13

THE BUSINESS CYCLES Prosperity

Period in which most people who want to work are working, products produced in record numbers & GDP increases

Recession Period in which demands begins to decrease,

lower number of products produced, unemployment rises and GDP growth slows for two or more quarters.

Introduction to Business© Thomson South-Western

Chapter 2

Slide 14

THE BUSINESS CYCLES Depression

Phase marked by a prolonged period of high unemployment, weak sales, and business failures. GDP falls rapidly.

Recovery Phase where unemployment begins to

decrease, demand for goods increase, and GDP begins to rise. May be a slow process.

Introduction to Business© Thomson South-Western

Chapter 2

Slide 15

CONSUMER PRICES Inflation: increase in general level of prices. Causes of inflation

Demand > Supply Cost of goods rising faster than wages

Measuring inflation CPI: number comparing prices in one year v. with

another earlier base year.

Deflation: decrease in general level of prices.

Introduction to Business© Thomson South-Western

Chapter 2

Slide 16

INTEREST RATES Interest rates: Cost of Money Types of interest rates

Prime – banks give to best business customers Discount – rate financial institutions are charged

to borrow from the Federal Reserve Bank T-bill – yield on 13week US government debt

Introduction to Business© Thomson South-Western

Chapter 2

Slide 17

Types of interest rates (cont.) Treasury bond – yield on 20yr. US

government debt. Mortgage – what individuals pay to borrow

to purchase a home Corporate bond – cost of borrowing for

large US companies Certificate of Deposit (CD) – rate for six

month deposits

Changing interest rates Saving increases – interest rates decline Borrowing increases – interest rates rise

Introduction to Business© Thomson South-Western

Chapter 2

Slide 18

INVESTMENT ACTIVITIES Capital projects – money spent by business for an

item that will be used for a long period of time Personal savings – savings accounts, CDs,

Money market accounts The stock market – Ownership (equity) in a

business The bond market – Debt for an organization you

become a creditor – you are lending to the business or city

Introduction to Business© Thomson South-Western

Chapter 2

Slide 19

BORROWING Government debt

New schools, public buildings, government services, highways

Budget Surplus – spend less $ than make Budget Deficit – spend more $ than have National Debt – total amount owed by the

federal government

Introduction to Business© Thomson South-Western

Chapter 2

Slide 20

BORROWING Business debt

Loans, bonds, mortgages Efficient borrowing helpful

Consumer debt Credit cards Auto loans Home mortgages

Careful use of credit important for economic growth

Introduction to Business© Thomson South-Western

Chapter 2

Slide 21

FUTURE ECONOMIC CHALLENGES Limited access to health care Need for proper housing for many

people Traffic and crime Unemployment