© 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. SLIDE 2 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 3 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 How Does One Measure Growth? ●What is economic growth? ●The steady increase in production of goods and services in an economic system ●Measurements ●Compare output from year to year ●Most widely used measure is the Gross domestic product or GDP ●Total value of all final goods and services produced in a country during one year SLIDE 4

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Components of the GDP ●Consumer spending for food, clothing, housing, and other aspects ●Business spending for buildings, equipment, and inventory items ●Government spending to pay employees and to buy supplies and other goods and services ●The exports of a country less the imports into the country SLIDE 5

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 GDP continued ●What’s not included? ●Work you do yourself such as cutting the lawn or working in the garden ●Only final products are included. ●Cars, but not the materials to make the cars such as steel or fabric ●If the GDP increases, the economy is growing and healthy SLIDE 6

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 7 Comparing GDP ●Just measuring totally monetary GDP doesn’t tell the whole story ●GDP per capita ●Output per person ●GDP /total population ●No change in GDP but an increase in population?

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 8 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 9 COMPARING GROSS DOMESTIC PRODUCT

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 10 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 Labor Activities ●Workers of a country contribute to the economy ●Their labor activities create needed goods and services ●Their wages are spent to create demand for various items ●Henry Ford’s payment of his workers. SLIDE 11

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 12 Employment ●155 million people are in the US labor force ●Labor force consists of all people above the age 16 who are actively working or seeking work.

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Unemployment ●Portion of people in the labor force who are not working ●Are looking for work and willing to work, but unable to find a job ●The main cause of unemployment is reduced demand for the goods and services being provided by various workers ●If fewer people ride the bus, bus companies will need fewer workers SLIDE 13

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Productivity ●A vital source of economic growth is an increase in output per worker ●Defined as the production output in relation to a unit of input (worker) ●Improvements in the following increase worker output ●Capital Resources (equipment and technology ●Worker training ●Management techniques SLIDE 14

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 Productivity cont. ●Over time the rate of growth in labor productivity has its ups and downs ●The rate of increase always gets small and often decreases ●The internet ●If wages increase faster than gains in productivity, the cost of producing goods increases and prices rise. ●Even though workers earn more, they can’t improve their standard of living ●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 was 60 hours a week and now it is 40. SLIDE 15

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 16 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 17 CONSUMER SPENDING ●The money you earn and spend is one of the most important factors for economic growth ●Personal income ●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 Consumer Spending ●Retail Sales ●Sales of durable and nondurable goods bought by consumers ●Increasing sales are an indicator of economic growth ●Normal items measured ●Automobiles, Building materials, Furniture, Gasoline, andClothing, ●Restaurants, departments stores, food stores, drug stores SLIDE 18

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 19 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 21 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 22 THE BUSINESS CYCLE ●The movement of the economy from one condition to another and back again ●Economics and business activity tends to move in cycles. ●All nations experience good and bad times ●Four phases

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 THE BUSINESS CYCLE ●Prosperity ●A period in which most people who want to work are working ●Businesses produce goods and services in record numbers ●Wages are good ●The GDP increases ●The demand for goods and services is high ●The high point of the business cycle SLIDE 23

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 THE BUSINESS CYCLE ●Recession ●A period in which demand begins to decrease ●Businesses lower production ●Unemployment begins to rise ●The GDP growth slows for two or more quarters ●Not too serious ●Hits specific industries harder than others ●The ripple effect—Auto industry ●Production weakens and output decreases SLIDE 24

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 THE BUSINESS CYCLE ●Depression ●When a recessions deepens and spreads throughout the entire economy ●A phase marked by prolonged period of high unemployment, weak consumer sales, and business failures ●GDP falls rapidly ●The Great Depression was the last one from ●25% of the labor force was unemployed ●Rare SLIDE 25

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 THE BUSINESS CYCLE ●Recovery ●The phase in which unemployment begins to decrease ●Demand for goods and services increases ●The GDP begins to rise again ●If recovery continues, the economy moves back into prosperity SLIDE 26

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 27 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 28 CONSUMER PRICES ●Changes in the buying power of your money ●Inflation ●Causes of inflation ●Measuring inflation ●Deflation

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Inflation ●An increase in the general level of prices ●Buying power decreases ●5% inflation would mean something that cost $100 one year would cost $105 dollars the next year. ●Inflation is most harmful to people living on fixed incomes SLIDE 29

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Causes of Inflation ●When demand for goods and services is greater than the supply ●Gas in the 70s and 80s ●Even though wages increase they can’t keep pace ●Most people don’t like inflation SLIDE 30

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Measuring Inflation ●1950s and 60s inflation was 1%-3% ●1970s and 80s inflation was 10%-12% ●Mild inflation can stimulate economic growth ●Wages increase more slowly than price of goods ●The price of products is more than the labor to make the goods ●Profits increase ●Expanded productions and hiring ●New workers spend money and demand increases SLIDE 31

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Consumer Price Index (CPI) ●Compares prices in one year with prices in some earlier base year SLIDE 32

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 CONSUMER PRICES ●Deflation ●A decrease in the general level of prices ●Usually occurs in periods of recession and depression ●Prices are lower but people have less money to spend ●Prices during the Great Depression declined 25% ●Computers and electronic products have decrease in price ●Due to improved technology SLIDE 33

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 34 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 35 INTEREST RATES ●They represent the cost of borrowing money ●Government, business, and consumers are affected by this ●Costs more to borrow money to buy goods and services when rates are high

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 36 INTEREST RATES ●Types of interest rates ●Prime rate ●What banks lend money to their best customers ●Discount rate ●What banks are charged to borrow from the Federal Reserve ●T-bill rate ●Yield on short-term (13 week) government debt ●Treasury bond rate ●Yield on long-term government debt (up to 30 years)

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 37 INTEREST RATES ●Types of interest rates ●Mortgage rate ●The amount individuals pay to borrow for the purchase of a new home ●Corporate bond rate ●Cost of borrowing for large corporations ●Certificate of deposit ●Savings account rate at the bank

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 38 INTEREST RATES ●Changing interest rates ●Supply and demand change the daily interest rates

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 39 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 41 KEY TERMS ●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 SLIDE 42 INVESTMENT ACTIVITIES ●Investing in the future—school, equipment ●Capital spending ●Money spent by a business for an item that will be used over a long period ●Buildings, equipment, or new products ●Paid for by: ●Personal Savings ●Stock Market ●Bond market

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 43 INVESTMENT ACTIVITIES ●Borrowing ●Government Debt ●Borrows money for capital projects ●Budget surplus ●Budget deficit ●National debt

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 44 INVESTMENT ACTIVITIES ●Borrowing cont. ●Business Debt ●Loans, bonds, and mortgages ●Consumer Debt ●Credit cards ●Auto loans ●Home mortgages

© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 2 SLIDE 45 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 46 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 47 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 SLIDE 48 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.