Objective 1.02 Understand economic conditions 1 Understand the role of business in the global economy.

Measuring economic activities Classifying economic conditions Topics 2

Gross Domestic Product (GDP) Measurement to determine a country’s overall economic output. GDP is a country’s total dollar value of all final goods and services produced in one year. Major categories of GDP –Individual spending –Business spending –Government spending –Imports & exports US has very high GDP (over $14 trillion) 3

GDP per Capita GDP per capita = output per person =_________GDP__________ Total Population 4

Measuring Economic Activity Unemployment –Number of people able to work, but don’t have jobs during a given period of time 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)

Measuring Economic Activity Inflation –General increase in the cost of goods and services when demand exceeds supply –Causes: Economy too productive Printing too much money –Lowers consumer purchasing power –Avoided by slow but steady economic growth; controlling production and maintaining unemployment levels

Measuring Economic Activity Deflation –Decrease in the general price level of goods and services –Negative inflation rate 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

Year 123 Income Income percent change from year 1 $36,000 n/a $38, % $39, % Gallon of milk cost Gallon of milk cost percent change from year 1 $2.49 n/a $ % $ % Over a three-year period, how has the income been impacted by the cost of a gallon of milk? 8

Labor Activities Productivity means … –Number of items produced per worker –What can contribute to employees increasing their production? equipment, technology, training, and management. 9

Consumer Spending Measurements of consumer spending Personal Income –includes the total wages and salaries plus investment income and government payments to individuals. Retail Sales –include the sales of goods and services purchased to indicate the spending patterns 10

Investment Activities The money used for capital projects comes from three main sources: Personal savings Businesses use money deposited in personal saving accounts to buy equipment or products for their businesses. Savers earn interest on money used by companies and other individuals. 11

12 Investment Activities Stock market Higher earnings for businesses increases their value, which causes a demand for people wanting to buy the businesses stock. Bond market The bond market make available for businesses and government to borrow money. Bondholders earn interest on money loaned to businesses and government.

Borrowing Activities … by –Government –Businesses How can government borrowing lead to a budget deficit? How can using borrowed money wisely impact businesses? 13

14 Borrowing Activities … A: Governments borrow money to finance projects like schools, public highways, and parks. If the government spend more money than it collects, then a budget deficit is resulted. A: Companies may borrow money to start up or expand. Using borrowed fund efficiently can result in an increase in sales and profits.

15 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.

16 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).

Classification of Economic Conditions 17

Prosperity Employment rate and demand for products and services are high. Recession Unemployment rate is increasing and demand for products and services are lowering. Depression Unemployment rate is high and demand for products and services is lowering. Recovery Unemployment rate is lowering and demand for products and services is increasing. 18 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

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)

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

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