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

Introduction to Business © Thomson South-Western What is gross domestic product (GDP)? Currency value (such as U.S. dollar) of all final goods and services produced within a country in a given period Total income of a nation Measure of nation’s economic well-being Measure of a nation’s economic growth from one period to the next Most commonly calculated via expenditures

Introduction to Business © Thomson South-Western Investment (I) Personal Consumption Expenditures (C) Government (G) Net Exports (NX) Fixed Investment New Homes Inventories ExportsImports GDP What are the components of GDP? GDP = C + I + G + NX Clothes Movies Groceries Cars Roads Schools Parks

Introduction to Business © Thomson South-Western What’s not included in GDP? Intermediate goods Used goods Underground production (black market) Financial transactions Household production Transfer payments

Introduction to Business © Thomson South-Western How much of GDP is each component? Consumption (PCE) 70 % Investment 16% Government 19% Net Exports -5% Component % of GDP GDP 100% Average Percent of GDP since 2003 Source: Bureau of Economic Analysis

Introduction to Business © Thomson South-Western Real and nominal GDP Nominal GDP: GDP that is not adjusted for inflation. The value of goods and services in current prices. Real GDP: The dollar price of GDP in a base year’s price, used to compare changes in GDP from one year to the next. An increase in real GDP is an increase in economic growth. Learn how to figure nominal v real

Introduction to Business © Thomson South-Western What GDP does not tell us Does not measure income distribution Does not measure non-monetary output or transactions (e.g., barter, household activities) Does not take into account desirable externalities, such as leisure or environment Does not measure social well-being Correlates to standard of living but is not a measure of standard of living

Introduction to Business © Thomson South-Western Chapter 2 Slide 8 Comparing GDP GDP per capita Output per person Increase usually means economy is growing Equation: GDP/ Population

Introduction to Business © Thomson South-Western Chapter 2 Slide 9 LABOR ACTIVITIES Employment Productivity

Introduction to Business © Thomson South-Western Chapter 2 Slide 10 What are ways to increase productivity? Improvement in equipment Technology Training Management

Introduction to Business © Thomson South-Western Chapter 2 Slide 11 CONSUMER SPENDING Personal income Salaries – wages – investment income Retail sales Sales of durable/nondurable goods by consumers

Introduction to Business © Thomson South-Western Chapter 2 Slide 12 Comparison of GDP in Selected Countries

Introduction to Business © Thomson South-Western Chapter 2 Slide 13 THE BUSINESS CYCLES Prosperity Period in which most people who want to work are working, products produced in record numbers & GDP increases Recession Period in which demands begins to decrease, lower number of products produced, unemployment rises and GDP growth slows for two or more quarters.

Introduction to Business © Thomson South-Western Chapter 2 Slide 14 THE BUSINESS CYCLES Depression Phase marked by a prolonged period of high unemployment, weak sales, and business failures. GDP falls rapidly. Recovery Phase where unemployment begins to decrease, demand for goods increase, and GDP begins to rise. May be a slow process.

Introduction to Business © Thomson South-Western Chapter 2 Slide 15 CONSUMER PRICES Inflation: increase in general level of prices. Causes of inflation Demand > Supply Cost of goods rising faster than wages Measuring inflation CPI: number comparing prices in one year v. with another earlier base year. Deflation: decrease in general level of prices.

Introduction to Business © Thomson South-Western Chapter 2 Slide 16 INTEREST RATES Interest rates: Cost of Money Types of interest rates Prime – banks give to best business customers Discount – rate financial institutions are charged to borrow from the Federal Reserve Bank T-bill – yield on 13week US government debt

Introduction to Business © Thomson South-Western Chapter 2 Slide 17 Types of interest rates (cont.) Treasury bond – yield on 20yr. US government debt. Mortgage – what individuals pay to borrow to purchase a home Corporate bond – cost of borrowing for large US companies Certificate of Deposit (CD) – rate for six month deposits Changing interest rates Saving increases – interest rates decline Borrowing increases – interest rates rise

Introduction to Business © Thomson South-Western Chapter 2 Slide 18 INVESTMENT ACTIVITIES Capital projects – money spent by business for an item that will be used for a long period of time Personal savings – savings accounts, CDs, Money market accounts The stock market – Ownership (equity) in a business The bond market – Debt for an organization you become a creditor – you are lending to the business or city

Introduction to Business © Thomson South-Western Chapter 2 Slide 19 BORROWING Government debt New schools, public buildings, government services, highways Budget Surplus – spend less $ than make Budget Deficit – spend more $ than have National Debt – total amount owed by the federal government

Introduction to Business © Thomson South-Western Chapter 2 Slide 20 BORROWING Business debt Loans, bonds, mortgages Efficient borrowing helpful Consumer debt Credit cards Auto loans Home mortgages Careful use of credit important for economic growth

Introduction to Business © Thomson South-Western Chapter 2 Slide 21 FUTURE ECONOMIC CHALLENGES Limited access to health care Need for proper housing for many people Traffic and crime Unemployment