Understanding the economy

Gross Domestic Product Otherwise known as GDP Since 1991, the US has been using the GDP as its primary measurement of productivity. The output of goods and services produced by labor and property located with a country. Made up of … Private investment- Spending by business for things like equipment, software, etc. as well as home construction. Govt Spending – Money spent by local, state, and federal governments.

GDP Personal Spending – All consumer expenditures for goods and services. Change in business inventories– Expanding inventories are an addition to the GDP (business are producing goods). Shrinking inventory decreases GDP. People are buying more than what was produced. Net exports of goods and services – Is your countries goods in demand elsewhere?

Standard of Living A measurement of the amount and quality of goods and services that a nation’s people have. It reflects their “quality of life” GDP/population = GDP per Capita. This number is high for most industrialized nations because they have a high level of production.

InflaTION Refers to rising prices Low inflation rates (1%-5%) per year is good because it shows an economy is stable. Double digit inflation is devastating. Money loses its original value because prices rise sharply. Govt raises interest rates to discourage the borrowing of money during inflationary times. The result is a slowdown in economic growth which helps to bring inflation down.

CPI and PPI Consumer Price Index and Producer Price index These two figures measure inflation. CPI – Measures the change in price of 400 specific retail goods and services used by the average urban household. Also called the Cost of Living Index.

CPI and PPI CPI goods – Medical care, transportation, food, housing, utilities, etc. (average necessity items needed to survive) PPI- Measures wholesale price levels. It is a trendsetter because producer prices generally get passed along to the customer.

Business Cycle Expansion –Economy is flourishing. Low unemployment, increase in output of goods/services, high consumer spending. Expansion Recession Trough Recovery

Business Cycle Recession – A period of economic slowdown that lasts for at least two quarters (6 months). Companies reduce their workforce so unemployment rises. Consumers spend less so producers produce less.

Business Cycle Trough – The economy stops slowing and signs appear that a recovery may be near. Economic activity begins to rise

Business Cycle Recovery – Jobs are created because spending increases. With greater demand, production begins to increase. GDP begins to increase.

Factors that Affect Business Cycles Businesses – Expand or curtail operations based on their perception of the cycle Invest in ne properties during good times Hire more employees in good times

Factors that Affect Business Cycles Consumers During rough times, consumer confidence goes down. Their biggest fear is a cut in wages or losing a job so they spend less. Lower demand for products means businesses lose money and cut employees, slash inventories, etc.

Factors that Affect Business Cycles Government Taxes When businesses are taxed at a high rate, they have less money to fuel the economy. They may have to fire some employees.

Factors that Affect Business Cycles When economy needs a boost, interest rates and taxes are cut and federally funded programs are used to spark a depressed economy. Federal Reserve – Raises interest rates during inflation to discourage borrowing of money.