Back to Table of Contents pp Chapter 3 Economic Activity in a Changing World

Introduction to Business, Economic Activity in a Changing World Slide 2 of 54 Gross Domestic Product (GDP) One way of telling how well an economy is performing is to determine how many goods and services it produces during a certain period of time.

Introduction to Business, Economic Activity in a Changing World Slide 3 of 54 Gross Domestic Product (GDP) The total value of the goods and services produced in a country in a given year is called its gross domestic product (GDP).

Introduction to Business, Economic Activity in a Changing World Slide 4 of 54 Gross Domestic Product (GDP) To calculate the GDP, economists compute the sum of goods and services. continued

Introduction to Business, Economic Activity in a Changing World Slide 5 of 54 Gross Domestic Product (GDP) Consumer goods and services Business goods and services Government goods and services Goods and services sold to other countries Economists include four main areas in calculating the GDP:

Introduction to Business, Economic Activity in a Changing World Slide 6 of 54 Gross Domestic Product (GDP) The GDP doesn’t include the goods and services that aren’t reported to the government.

Introduction to Business, Economic Activity in a Changing World Slide 7 of 54 Gross Domestic Product (GDP) The standard of living is the amount of goods and services the average citizen can buy.

Introduction to Business, Economic Activity in a Changing World Slide 8 of 54 Figure 3.1 GROSS DOMESTIC PRODUCT The gross domestic product (GDP) is the output of goods and services produced in a country. What percentage did the GDP increase from the end of Year 2 to the beginning of Year 3?

Introduction to Business, Economic Activity in a Changing World Slide 9 of 54 Graphic Organizer Gross Domestic Product Graphic Organizer Consumergoodsandservices Businessgoodsandservices Governmentgoodsandservices Goodsandservices sold to othercountries +=++ GrossDomesticProduct

Introduction to Business, Economic Activity in a Changing World Slide 10 of 54 Unemployment Rate The unemployment rate measures the number of people who are able to work but don’t have a job during a given period of time.

Introduction to Business, Economic Activity in a Changing World Slide 11 of 54 Unemployment Rate There are different reasons for being unemployed, including: Temporary Seasonal Changes in industry Economic slowdown

Introduction to Business, Economic Activity in a Changing World Slide 12 of 54 Unemployment Rate Changes in the unemployment rate show whether an economy is picking up or slowing down.

Introduction to Business, Economic Activity in a Changing World Slide 13 of 54 Rate of Inflation Inflation is a general increase in the cost of goods and services. Inflation can happen when an economy actually becomes too productive.

Introduction to Business, Economic Activity in a Changing World Slide 14 of 54 Rate of Inflation As the demand for goods goes up, producers raise their prices. To pay the higher prices, workers demand higher wages.

Introduction to Business, Economic Activity in a Changing World Slide 15 of 54 Rate of Inflation When wages go up, producers raise prices again to pay for the higher wages, and so on. This situation can spiral out of control and lead to hyperinflation.

Introduction to Business, Economic Activity in a Changing World Slide 16 of 54 Rate of Inflation Deflation is a general decrease in the cost of goods and services. When an economy produces more goods than people want, it has to lower prices and cut production.

Introduction to Business, Economic Activity in a Changing World Slide 17 of 54 Rate of Inflation The United States tries to maintain a slow but steady rate of economic growth to avoid both inflation and deflation.

Introduction to Business, Economic Activity in a Changing World Slide 18 of 54 National Debt When the government spends more on programs than it collects in taxes, the difference in the amount is called the budget deficit.

Introduction to Business, Economic Activity in a Changing World Slide 19 of 54 National Debt The total amount of money a government owes is its national debt. If the debt gets too large, a nation can become dependent on other nations or unable to borrow any more money.

Introduction to Business, Economic Activity in a Changing World Slide 20 of 54 National Debt If a nation spends less than its income, it has a budget surplus. The government will probably use a surplus to cut taxes, reduce the national debt, or increase spending for certain programs.

Introduction to Business, Economic Activity in a Changing World Slide 21 of 54 The Business Cycle Over long periods of time economic changes seem to form patterns. The rise and fall of economic activity over time is called the business cycle.

Introduction to Business, Economic Activity in a Changing World Slide 22 of 54 The Business Cycle The four phases of the business cycle are: Prosperity Recession Depression Recovery

Introduction to Business, Economic Activity in a Changing World Slide 23 of 54 Figure 3.2 BUSINESS CYCLE MODEL The repeated rise and fall of economic activity over time is called a business cycle. What are the four phases of the cycle?

Introduction to Business, Economic Activity in a Changing World Slide 24 of 54 The Business Cycle In a global economy, in which several countries are trading goods and services with one another, one country’s economy can affect its trading partners’ economies.

Introduction to Business, Economic Activity in a Changing World Slide 25 of 54 Prosperity Prosperity is a peak of economic activity. Unemployment is low, production of goods and services is high, and new businesses open.

Introduction to Business, Economic Activity in a Changing World Slide 26 of 54 Prosperity Prosperity, however, does not last. Any number of things can change. Companies produce too much, people stop buying, or inflation rises dramatically.

Introduction to Business, Economic Activity in a Changing World Slide 27 of 54 Recession During a recession, economic activity slows down. There is a general drop in the total production of goods and services, so the GDP declines.

Introduction to Business, Economic Activity in a Changing World Slide 28 of 54 Recession A recession can affect only one industry, related industries, or spread to the entire economy.

Introduction to Business, Economic Activity in a Changing World Slide 29 of 54 Recession The ripple effect is when a recession in one industry leads to a recession in other industries.

Introduction to Business, Economic Activity in a Changing World Slide 30 of 54 Depression A deep recession that affects the entire economy and lasts for several years is called a depression.

Introduction to Business, Economic Activity in a Changing World Slide 31 of 54 Depression During a depression there is high unemployment, low production of goods and services, and excess capacity in manufacturing plants.

Introduction to Business, Economic Activity in a Changing World Slide 32 of 54 Depression A depression can be limited to one country but usually spreads to related countries.

Introduction to Business, Economic Activity in a Changing World Slide 33 of 54 Depression The stock market crash on October 29, 1929, or “Black Tuesday,” marked the beginning of the Great Depression. Between 1929 and 1933, GDP fell from approximately $103 billion to $55 billion.

Introduction to Business, Economic Activity in a Changing World Slide 34 of 54 Depression During the Great Depression, the number of people out of work rose nearly 800 percent.

Introduction to Business, Economic Activity in a Changing World Slide 35 of 54 Depression During the Great Depression, many banks failed. The money supply fell by one-third.

Introduction to Business, Economic Activity in a Changing World Slide 36 of 54 Recovery A rise in business activity after a recession or depression is called a recovery.

Introduction to Business, Economic Activity in a Changing World Slide 37 of 54 Recovery During a recovery: Production starts to increase People start going back to work and have money to spend again continued

Introduction to Business, Economic Activity in a Changing World Slide 38 of 54 Recovery The new demand for goods and services stimulates more production The GDP grows New businesses open During a recovery:

Introduction to Business, Economic Activity in a Changing World Slide 39 of 54 Recovery A recovery can take a long time or it can happen quickly. During World War II, the United States recovered from the Great Depression much faster because of the demand for war production.