Introduction to Business © Thomson South-Western ChapterChapter Economic Activity Measuring Economic Activity Economic Conditions Change Other Measures of Business Activity 2

Introduction to Business © Thomson South-Western Chapter 2 Slide 2 The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total. The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports. As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.gross domestic productindicatorseconomyemployeesthe stock marketrecession

Introduction to Business © Thomson South-Western Chapter 2 Slide 3 LESSON 2-1 LESSON 2-1 Measuring Economic Activity Goals Define gross domestic product. Describe economic measures of labor. Identify economic indicators for consumer spending.

Introduction to Business © Thomson South-Western Chapter 2 Slide 4 Gross Domestic Product (GDP) The total $ value of all final goods & services produced in a country during one year. Why final, what does that mean? Don’t want to count things twice. The stuff used to make the final product The costs are in it. What doesn’t it include? The value of what you do for yourself Cut lawn, build swing set Yearly increases are signs of a healthy, growing economy

Introduction to Business © Thomson South-Western Chapter 2 Slide 5 Gross Domestic Product (GDP) Components of GDP 4 categories of economic activity 1.Consumer spending for food, clothing, housing and other spending 2.Business spending for buildings, equipment & inventory 3.Govt. spending to pay employees and buy supplies and other G & S. 4.The exports of a country less the imports in.

Introduction to Business © Thomson South-Western Chapter 2 Slide 6 Comparing GDP GDP isn’t always the whole story GDP PER CAPITA What’s this? Output Per Person GDP / total Population

Introduction to Business © Thomson South-Western Chapter 2 Slide 7 Comparison of GDP in Selected Countries

Introduction to Business © Thomson South-Western Chapter 2 Slide 8 LABOR ACTIVITIES Employment Those older than 16 who are actively working or seeking work. Students, retired people and those who can’t or don’t wish to are excluded Unemployment rate The portion of people in the labor force who are not working Those who wish to work.

Introduction to Business © Thomson South-Western Chapter 2 Slide 9 LABOR ACTIVITIES Productivity Output per worker How to increase this? Technology – capital resources Training – capital & human resources together Can decrease after a while We’ve got to get the most out of the new technology

Introduction to Business © Thomson South-Western Chapter 2 Slide 10 LABOR ACTIVITIES Problems Wages increase faster than gains in productivity Then what? Price must go up Why? It costs more to produce the goods

Introduction to Business © Thomson South-Western Chapter 2 Slide 11 LABOR ACTIVITIES Technology increase productivity since the turn of the last century 60 hour work week then Now? 40 How? Technology and efficiency

Introduction to Business © Thomson South-Western Chapter 2 Slide 12 Consumer Spending What items are measured? Autos Building materials Furniture Gasoline clothing Restaurants Department stores Food stores Drug stores

Introduction to Business © Thomson South-Western Chapter 2 Slide 13 Retail Sales Personal Income Salaries, wages, investment income and govt. payments to individuals How we buy the G & S Retail Sales The sales of durable and nondurable goods bought by consumers

Introduction to Business © Thomson South-Western Chapter 2 Slide 14 LESSON 2-2 LESSON 2-2 Economic Conditions Change Goals Describe the four phases of the business cycle. Explain causes of inflation and deflation. Identify the importance of interest rates.

Introduction to Business © Thomson South-Western Chapter 2 Slide 15 THE BUSINESS CYCLE Prosperity People who want to work, are Goods & services are being produced in record numbers Wages are good GDP increases Demand for G & S is high

Introduction to Business © Thomson South-Western Chapter 2 Slide 16 THE BUSINESS CYCLE Recession Economy slows Demand begins to decrease Production lowers Unemployment begins to rise GDP slows for 2 or more quarters Signals trouble ahead Ripple effect One problem trigger another

Introduction to Business © Thomson South-Western Chapter 2 Slide 17 THE BUSINESS CYCLE Depression Recession deepens High unemployment Weak consumer spending Businesses fail GDP falls rapidly The Great depression When?

Introduction to Business © Thomson South-Western Chapter 2 Slide 18 THE BUSINESS CYCLE Recovery Unemployment begins to decrease Demand for G & S increases again GDP begins to rise Confidence in the economy increases Back to prosperity!

Introduction to Business © Thomson South-Western Chapter 2 Slide 19 CONSUMER PRICES Inflation An increase in general level of prices Buying power decreases Who does it hurt the most? Fixed income Prices stay same and packages shrink? Examples Ice Cream Current Inflation rate???

Introduction to Business © Thomson South-Western Chapter 2 Slide 20 CONSUMER PRICES Causes of inflation Demand exceeds supply Measuring inflation Late 70’s – early 80’s It hit % MODERATE CAN BE GOOD 2 – 3 $ Helps stimulate economy WIN NIM

Introduction to Business © Thomson South-Western Chapter 2 Slide 21 Compares prices in one year with a base year A select group of items Some can go up while others go down Necessities going up can have a greater impact Gas, heating oil prices WHAT’S IT AT NOW Consumer Price Index (CPI)

Introduction to Business © Thomson South-Western Chapter 2 Slide 22 Price go down Occurs during recession or depression Prices are lower but… People probably have less $$ Deflation

Introduction to Business © Thomson South-Western Chapter 2 Slide 23 INTEREST RATES The cost to borrow money Markup on $$$ Types of interest rates Prime Banks rate to best business customers Discount Rate financial institutions are charged by the Federal Reserve

Introduction to Business © Thomson South-Western Chapter 2 Slide 24 INTEREST RATES T-Bill Short term (13-week) U.S. Govt. Debt. Obligations Treasury bond Long term (20-week) U.S. Govt. Debt. Obligations Mortgage Individuals pay for home purchase CD 6-month time deposits at savings institutions.

Introduction to Business © Thomson South-Western Chapter 2 Slide 25

Introduction to Business © Thomson South-Western Chapter 2 Slide 26 LESSON 2-3 LESSON 2-3 Other Measures of Business Activity Goals Discuss investment activities that promote economic growth. Explain borrowing activities by government, business, and consumers. Describe future concerns of economic growth.

Introduction to Business © Thomson South-Western Chapter 2 Slide 27 Capital Projects Capital spending Money spent for something that will benefit the business for a long period of time Like? Land, buildings, equipment Sources of Capital Personal savings—you know this one Stock investments bonds

Introduction to Business © Thomson South-Western Chapter 2 Slide 28 Capital Stock Ownership in a company Equity Right or claim against something Shares of a business

Introduction to Business © Thomson South-Western Chapter 2 Slide 29 DisneyDisney

Introduction to Business © Thomson South-Western Chapter 2 Slide 30 Capital Bonds Like a loan It is debt to the business Those who buy them are your creditors

Introduction to Business © Thomson South-Western Chapter 2 Slide 31 Borrowing/ Debt budget surplus Spend less than it takes in budget deficit Spend more national debt

Introduction to Business © Thomson South-Western Chapter 2 Slide 32 >> C H E C K P O I N T Name some examples of capital projects.

Introduction to Business © Thomson South-Western Chapter 2 Slide 33 >> C H E C K P O I N T What is the cause of a budget deficit?

Introduction to Business © Thomson South-Western Chapter 2 Slide 34 FUTURE ECONOMIC CHALLENGES Limited access to health care Need for proper housing for many people Traffic and crime Unemployment