© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE Measuring Economic Activity Economic Conditions Change Other Measures of Business Activity 2 C H A P T E R Economic Activity

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 2 Environment is a critical variable for Businesses You are standing in front of the door that leads to your destination What do you need for the trip? Discuss options

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 3 Is this person prepared for the environment? What will happen to him over time? 1 hour? 1 day? 1 week?

© 2012 Cengage Learning. All Rights Reserved. SLIDE 4 2-1Measuring Economic Activity Goal 1Define gross domestic product. Goal 2Describe economic measures of labor. Goal 3Identify economic indicators for consumer spending.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 5 KEY TERMS ●Gross Domestic Product (GDP) ●GDP per capita ●unemployment rate ●productivity ●personal income ●retail sales

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 6 GROSS DOMESTIC PRODUCT (GDP) ●GDP is the total value of all final goods and services produced in a country during one year. ●Economic growth refers to a steady increase in the production of goods and services in an economic system. ●The more goods and services that are produced, the healthier an economy is considered to be

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Components of GDP ●1. Consumer spending for food, clothing, housing, and other goods and services ●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 minus the imports into the country SLIDE 7

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Comparing GDP ●Another way to measure economic growth is GDP per capita or output per person. GDP per capita is calculated by dividing GDP by the total population. ●GDP is compared to previous measures to determine the direction of the economy. SLIDE 8

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 9 GROSS DOMESTIC PRODUCT (GDP) ●Components of GDP ●Consumer Spending 60-65% ●Business Spending 18-20% ●Government Spending 18-20% ●Net Exports (5%)

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 10 COMPARISON OF GDP IN SELECTED COUNTRIES

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 11 COMPARING GROSS DOMESTIC PRODUCT

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 12 Checkpoint ●What types of economic activities are not included in GDP? ●GDP only applies to reported final goods and services. ●Money earned for goods or 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.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 13 LABOR ACTIVITIES ●Employment ●Productivity

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Employment ●The labor force consists of all people above age 16 who are actively working or seeking work. ●Students, retired people, and others who cannot or do not wish to work are not part of the labor force. SLIDE 14

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 15 LABOR ACTIVITIES ●Employment ●Unemployment Measurement Criteria ●Not all unemployed people are counted ●Are you unemployed if you are looking for work but cant find a job?

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Productivity ●is the production output in relation to a unit of input, such as a worker. ●Improvements in capital resources(equipment and technology), worker training, and management techniques can result in more output per worker. SLIDE 16

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Productivity cont. ●An ability to produce more goods and services makes it possible to reduce the number of hours in a workweek. ●In the 1890s, the average worker in the United States put in about 60 hours a week. ●Today, the average workweek for many factory and union-contracted jobs has decreased to less than 40 hours SLIDE 17

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Productivity cont. ●If wages increase faster than gains in productivity, the cost of producing goods increases and prices rise. ●Even though workers earn more money, they are not able to improve their standard of living because of rising prices. SLIDE 18

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 19 Checkpoint ●How can productivity be increased? ●Productivity can be increased by improvements in capital resources (equipment and technology), worker training, and management techniques.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 20 CONSUMER SPENDING ●Personal income refers to salaries and wages as well as investment income and government payments to individuals.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 RETAIL SALES ●Retail sales are the sales of durable and nondurable goods bought by consumers. ●Retail sales are an indicator of general consumer spending patterns in the economy. ●Increasing retail sales usually points toward economic growth. SLIDE 21

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 22 Checkpoint ●What are the main sources of personal income? ●Sources of personal income include wages, salaries, investment income, and government payments.

© 2012 Cengage Learning. All Rights Reserved. SLIDE Economic Conditions Change Goal 1Describe the four phases of the business cycle. Goal 2Explain causes of inflation and deflation. Goal 3Identify the importance of interest rates.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 24 KEY TERMS ●business cycle ●prosperity ●recession ●depression ●recovery ●inflation ●price index ●deflation

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 25 THE BUSINESS CYCLE ●Business cycles are the recurring ups and downs of GDP in a country. There are four stages in the business cycle ●Prosperity ●Recession ●Depression ●Recovery

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Prosperity ●is a period in which most people who want to work are working, ●businesses produce goods and services in record numbers, wages are good ●rate of GDP growth increases. SLIDE 26

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Recession ●is a period in which demand begins to decrease, businesses lower production, unemployment begins to rise ●Recession is defines as: GDP growth slows for two consecutive quarters of the calendar year. SLIDE 27

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Recession ripple effect ●This phase may not be too serious or last very long, but it often signals trouble for workers in related businesses. ●For example, if people buy fewer cars, a number of workers who make batteries, tires, and other parts may lose their jobs. ● This drop in related businesses is called the ripple effect. SLIDE 28

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Depression ●is a phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures. ●Many business failures ●GDP falls rapidly SLIDE 29

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Recovery ●is the phase in which unemployment begins to decrease, demand for goods and services increases. ●GDP begins to rise again. SLIDE 30

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 31 Checkpoint ●What are the four phases of the business cycle? ●Prosperity ●Recession ●Depression ●Recovery

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 32 CONSUMER PRICES ●Inflation ● is an increase in the general level of prices. ●Measuring inflation ●Most people think inflation is harmful. Consumers have to pay higher prices for the things they buy. Therefore, as workers, they have to earn more money to maintain the same standard of living.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Inflation cont. ●Causes of inflation - One type of inflation occurs when the demand for goods and services is greater than the supply ●Even though wages (the price paid for labor) tend to increase during inflation, prices of goods and services usually rise so fast that the wage earner never seems to catch up. SLIDE 33

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Inflation cont. ●Is most harmful to people living on fixed incomes (retired on SS). ●Some inflation, 2-3 %, is good for the economy ●The Consumer Price Index CPI is used to calculate inflation SLIDE 34

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Deflation ●Means a decrease in the general level of prices. The opposite of Inflation. ●Prices of products are lower, but people have less money to buy them so there is no benefit to consumers SLIDE 35

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 36 Checkpoint ●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 greater than supply.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 37 INTEREST RATES ●Interest rates represent the cost of money

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Types of interest rates ●The prime rate is the rate banks make available to their best business customers, such as large corporations. ●The discount rate is the rate financial institutions are charged to borrow funds from Federal Reserve banks. ●The T-bill rate is the yield on short term (13-week) U.S. government debt obligations. SLIDE 38

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Types of interest rates ●The treasury bond rate is the yield on long- term U.S. government debt obligations of up to 30 years. ●The mortgage rate is the amount individuals pay to borrow for the purchase of a new home. ●The corporate bond rate is the cost of borrowing for large U.S. corporations. ●The certificate of deposit rate is the rate for time deposits at savings institutions. SLIDE 39

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Changing interest rates ●Each day, the cost of money (interest) changes because of various factors. ●The supply and demand for money is the major influence on the level of interest rates. SLIDE 40

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 41 Checkpoint ●How do interest rates affect business activities in our economy? ●Interest rates can encourage or discourage borrowing and spending. ●Lower interest rates allow consumers greater spending power, which increases demand, productivity, and employment. ●Businesses often pass on the cost of higher interest rates to consumers.

© 2012 Cengage Learning. All Rights Reserved. SLIDE Other Measures of Business Activity Goal 1Discuss investment activities that promote economic growth. Goal 2Explain borrowing activities by government, business, and consumers. Goal 3Describe future concerns of economic growth.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 43 KEY TERMS ●capital spending ●capital project ●stock ●bond ●budget surplus ●budget deficit ●national debt

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Capital Spending ●Capital spending refers to money spent by a business for an item that will be used over a long period SLIDE 44

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Capital Project ●Capital projects involve spending by businesses for items such as land, buildings, equipment, and new products. ● The money for capital projects comes from three main sources: personal savings, stock investments, and bonds. SLIDE 45

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Capital Projects cont. ●A major source of investment funds is personal savings. Companies use money you deposit in a bank or other financial institution. These funds provide the money necessary for buying expensive equipment or creating new products. ●In return, savers are paid interest on the money they deposit. ●The savings rate of a country is an important factor for economic growth. SLIDE 46

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Stock ●Stock represents ownership in a corporation. ●Stock ownership is commonly called equity. This term means “ownership.” ●The value of your investment in a company increases if the stock price goes up in the Stock Market SLIDE 47

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Bond ●Another investment activity involves the sale of bonds. ●A bond represents debt for an organization. ●If you purchase a corporate or government bond, you are a creditor. This means you have lent money to the organization. ●In return, bondholders are paid interest for the use of their money. SLIDE 48

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 49 INVESTMENT ACTIVITIES ●Personal savings ●The stock market ●The bond market

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 50 Checkpoint ●Name some examples of capital projects. ●Capital projects include the purchase of any item a business will use over an extended period of time such as land, buildings, and equipment.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 51 BORROWING ●Government debt ●Business debt ●Consumer debt

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Government debt ●A government may spend less than it takes in. When this occurs, a budget surplus is the result. ●If a surplus exists, government may reduce taxes or increase spending on various programs. SLIDE 52

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Government debt cont. ●A government may spend more than it takes in. This situation is called a budget deficit. ●This can lead to higher taxes or increased borrowing by the government to fund its programs SLIDE 53

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 National Debt ●Over time, deficits build up. ●The total amount owed by the federal government is called the national debt. SLIDE 54

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Business Debt ●Loans, bonds, and mortgages are common borrowing methods used by businesses. Most companies, large and small, use debt at some time. ●Poor debt management can result in a company going out of business. SLIDE 55

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Consumer Debt ●People commonly use credit cards, auto loans, and home mortgages to finance their purchases. The use of credit can be convenient. ●Careful use of credit can be important for economic growth. In contrast, unwise borrowing can result in legal action and other trouble. SLIDE 56

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 57 Checkpoint ●What is the cause of a budget deficit? ●A budget deficit occurs when a government or organization spends more than it takes in.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 58 FUTURE ECONOMIC CHALLENGES ●Emerging markets ●Weak economies ●Consumer preferences and behavior

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Global Business Growth ●Expanded economic output results in more goods and services. ●Global business growth is occurring in emerging markets, places where consumer incomes and buying power are increasing because of economic expansion. ●With more jobs and more income for workers, quality of life improves. SLIDE 59

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Global Business Growth cont. ●Many countries lack the technology, education, and business systems needed for economic success. ●Today, businesses and other organizations exist to help improve the situations in weak economies. By providing training, technology, loans, and other assistance, innovative solutions for various economic problems. SLIDE 60

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 61 Checkpoint ●What economic challenges do countries face in the future? ●Future economic concerns for any country include the ability to increase its output and provide a means for its citizens to meet the basic needs of food and shelter, adequate health care, education, transportation, employment, and safety.