SLID E Measuring Economic Activity Economic Conditions Other Measures of Business Activity Economic Activity

Measuring Economic Activity Goals 1. Define Gross Domestic Product 2. Describe economic measures of labor 3. Identify economic indicators for consumer spending

Gross Domestic Product (GDP)  The total value of all final goods and services produced in a country during one year.  Other ways to determine how well an economy is doing:  Compare output from year to year  Govt collects information from producers and estimate national output.

Comparison of GDP of Selected Countries CountryTotal GDP ($) GDP Per Capita ($) CountryTotal GDP ($) GDP Per Capita ($) United States 14.3 Trillion 46,400Mexico1.5 Trillion13,500 China8.8 Trillion6,600Canada1.3 Trillion38,400 Japan4.1 Trillion32,600Poland690.1 Billion17,900 Germany2.8 Trillion34,100Saudi Arabia585.5 Billion20,400 India3.6 Trillion3,100South Africa495.1 Billion10,100 Brazil2.0 Trillion10,200Nigeria357.2 Billion2,400

Components of GDP GDP includes four major categories of economic activity: 1. Consumer Spending for food, clothing, housing, and other aspects. 2. Business spending for buildings, equipment, and inventory items. 3. Government spending to pay employees and to buy supplies and other goods and services 4. The exports of a country less the imports into the country.

Components of GDP  Some goods and services are not included in GDP like:  Value of work you do yourself  Only Final goods such as cars are counted when you measure GDP.  If a GDP increases year to year, this usually signals that an economy is growing and is healthy.

Comparing GDP  The more goods and services that are produced, the healthier the economy is.  GDP Per Capita aka Output per person.  GDP / The total population.

Checkpoint #1  What types of economic activities are not included in GDP?  GDP only applies to reported final goods and services  Money earned for goods and services that are not reported would not be included.  Goods and services used in the manufacture of other products are only counted once – in the final product

Labor Activities The workers of a country contribute to the economy in several ways: 1. Labor activities create needed goods 2. The wages they receive are spent to create demand for various items

Employment  Today more then 155 million people work in the United State  These members of the Labor Force are employed in thousands of different jobs.  The Labor Force includes all people above the age of 16 who are actively working or seeking work.  Unemployment Rate  The portion of people in the labor force who are not working.  Main cause for unemployment is reduced demand for goods and services being provided by various of workers.

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, such as a worker.  Improvements in: 1. Capital Resources 2. Worker Training 3. Management Techniques

Checkpoint #2 How can productivity be increased?  By improvements in capital resources, worker training, and management techniques

Consumer Spending  The money you earn and spend is one of the most important factors for economic growth  Personal Income  Refers to salaries and wages as well as investment income and government payments to individuals.  Retail Sales  Sales of durable and non-durable goods bought by consumers.  An indictor of general consumer spending patterns in the economy

Checkpoint #3 What are the main sources of personal income? 1. Wages 2. Salaries 3. Investment Income 4. Government Payments

Economic Conditions Change  Goals: 1. Describe the four phases of the business cycle 2. Explain causes of inflation and deflation 3. Identify the importance of interest rates

The Business Cycle  Economic and business activity tends to move in cycles.  Business Cycle refers to the movement of the economy from one condition to another and back again  Business cycles are the recurring ups and downs of GDP and have 4 phases: 1. Prosperity 2. Recession 3. Depression 4. Recovery

Prosperity  A period in which most people who want to work are working, businesses produce goods and services in record numbers, wages are good, and the rate of GDP growth increases.  The peak of the business cycle.  Does not go on forever

Recession  A period in which demand begins to decrease, businesses lower production, unemployment begins to rise, and GDP growth slows for two or more quarters of a calendar year.  May not be too serious or last very long.  Often signals trouble for workers in related businesses  Ripple Effect

Depression  A phase marked by a prolonged period of high unemployment, weaker consumer sales, and business failures.  Recession deepens and spreads throughout the entire economy  GDP falls rapidly during a depression

Recovery  The phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again.  People gain employment  Consumers regain confidence about their futures and begin buying again.

Checkpoint #4  What are the 4 phases of the business cycle? 1. Prosperity 2. Recession 3. Depression 4. Recovery

Consumer Prices  A problem with which most nations have to cope is INFLATION.  An Increase in the general level of prices.  Buying power decreases  Inflation is the most harmful to people living on fixed incomes.  Income does not change

Causes of Inflation 1. When demand for goods and services is greater than the supply  When a large supple if money, earned or borrowed, is spent for goods that are in short supply, prices increase 2. Prices of goods and services usually rise so fast 3. Wages go up faster than prices, businesses tend to hire fewer workers

Measuring Inflation  Inflation rates vary  Mild inflation (2 or 3 percent a year) can stimulate economic growth.  Wages rise slowly than the prices of products  Consumer Price Index (CPI)  A number that compares prices in one year with prices in some earlier base year.

Deflation  A decrease in the general level of prices.  Occurs in periods of recession and depression.  Products of prices are lower, but people have less money to buy them.  The Great Depression of the 1930s  Cost of computers

Checkpoint #5  What are the main causes of inflation?  Inflation is an increase in the general level of prices that occurs when the demand for goods and services is great than supply.

Interest Rates  The cost of money  Have a strong influence on business activities  Companies and governments that borrow money and consumers are affected by interest rates.  People with poor credit rating pay a higher interest rate than people with good credit

Types of Interest Rates  Prime Rate – the rate the banks make available to their best business customers.  Discount Rate – the rate financial institutions are charged to borrow funds from Federal Reserve Banks  T-Bill Rate – the yield on short term (13 week) U.S. debt obligations  Treasury Bond Rate – the yield on long-term U.S. government debt obligations of up to 30 years.

Types of Interest Rates  Mortgage Rate– the amount individuals pay to borrow for the purchase of a new home.  Corporate Bond Rate – the cost of borrowing for large U.S. corporations  Certificate of Deposit Rate– the rate for time deposits at savings institutions.

Checkpoint #6  How do interest rates affect business activities in our economy?  Interest rates can encourage or discourage borrowing or spending.  Lower interest rates allow consumers greater spending power

2-3 Other Measures of Business Activity  Goals: 1. Discuss investment activities that promote economic growth 2. Explain borrowing activities by government, business, and consumers 3. Describe future concerns of economic growth

Investment Activities  Investing for the future can happen in several ways  Capital Spending  Refers to money spent by a business for an item that will be used over a long period of time.  Capital Projects  Involve spending by businesses for items such as land, buildings. Equipment, and new products.

Personal Savings  Major source of investment funds  Provide the money necessary for buying expensive equipment or creating new products  Interest is paid on the money they deposit  The savings rate of a country is an important factor for economic growth

The Stock Market  Many people invest by becoming part owners of a corporation.  Stock – represents ownership in a corporation  Stock ownership is also known as EQUITY  The value of shares of affected by many factors.  Supply and Demand  Company has higher earnings

The Bond Market  Sales of Bonds  Bond represents debt for an organization  Creditor  When you purchase corporate or government bond  You lent money to money to the organization  Bond holders are paid interest for the use of their money.

Checkpoint #7  Name some examples of capital projects?  The purchase of any item a business will use over an extended period of time such as land, buildings, and equipment.

Borrowing  “Buy now, pay later”  Borrowing occurs by: 1. Government 2. Businesses 3. Consumers

Government Debt  People expect services from federal, state, and local governments.  Government uses borrowing to finance various projects. (Schools, highways)  Budget Surplus  Government spends less than it takes in  Government may reduce taxes or increase spending in various programs

Government Debt  Budget Deficit  Government may spend more than it takes in.  The total amount owed by the government  National Debt

Business Debt  Loans, bonds, and mortgages are common borrowing methods used by businesses  Efficient use of borrowing can be helpful to companies  Using the funds of others can help expand sales and profits

Consumer Debt  People commonly use credit cards, auto loans, home mortgages to finance their purchases  Careful use of credit cards can be important for economic growth.

Checkpoint #8  What is the cause of a budget deficit ?  When the government or organization spends more than it takes in.

Economic Challenges and Adopting to Current Markets  Global business growth is occurring in emerging markets  Places where consumer incomes and buying power are increasing because of economic expansion  Quality of life improves  Countries lack the technology, education, and business systems