1. CHAPTER 2 Economic Activity

2. MEASURING ECONOMIC ACTIVITY  Economic growth is the steady increase in the production of goods and services in an economic system.  One way to measure this is through Gross Domestic Product (GDP) Gross Domestic Product- the total dollar value of all final goods and services produced in a country during one year.

3. COMPONENTS OF GDP  4 major categories of economic activity Consumer spending on food, clothing, housing, and other spending 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  Work you do for yourself is not included in GDP  Only the final product is included in GDP

4. COMPARING GDP  GDP per Capita– output by person Calculated by dividing GDP by the total population  An increase in GDP per capita means the economy is going and a decrease means it could be in trouble

5. LABOR ACTIVITIES  People’s labor creates the needed goods and services  The wages they receive are spent to create demand  The labor force is made up of all people above the age of 16 who are actively working or seeking work.  Unemployment rate– the portion of people in the labor force who are not working

6. PRODUCTIVITY  Productivity– the production output in relation to a unit of input  If wages increase faster than gains in productivity, the cost of producing goods increases and prices rise.  The ability to produce more goods and services makes it possible to reduce the number of hours in a work week

7. CONSUMER SPENDING  Personal income– salaries and wages as well as investment income and government payments to individuals  Retail Sales– the sales of durable and nondurable goods bought by consumers Retail sales are an indicator of general consumer spending patterns in the economy  The main items measured for retail sales are:  Automobiles, building materials, furniture, gasoline, and clothing

8. THE BUSINESS CYCLE  Business Cycle– the movement of the economy from one condition to another and back again  The four phases of the business cycle are: Prosperity Recession Depression Recovery

9. PROSPERITY  Prosperity– a period in which most people who want to work are working, businesses produce goods and services in record numbers, wages are good, and the rate of GDP growth increases  Demands for goods and services is high.

10. RECESSION  Recession– a period in which demand begins to decrease, businesses lower production, unemployment begins to rise, and GDP growth slows for two or more quarters of the calendar year  Recession usually doesn’t last too long but it may signal trouble for some groups of workers

11. DEPRESSION  Depression– a phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures  GDP falls rapidly during a depression

12. RECOVERY  Recovery– the phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again  Consumers regain confidence about their futures and begin buying again  Recovery may be slow or fast

13. CONSUMER PRICES  Inflation– an increase in the general level of prices  During times of inflation, the buying power of the dollar decreases.  Inflation is most harmful to people living on fixed incomes Example: Retired People

14. CAUSES OF INFLATION  When the demand for goods and services is greater than the supply.  During inflation, prices of goods and services usually rise so fast that the wage earner never seems to catch up  Consumers have to pay higher prices for the things they buy.

15. MEASURING INFLATION  Mild inflation can actually stimulate the economy  In the U.S. one of the most watched measures of inflation is called the Consumer Price Index (CPI)  Price index– a number that compares prices in one year with some earlier base year.

16. DEFLATION  Deflation– a decrease in the general level of prices.  Usually occurs in periods of recession and depression  Prices of products tend to be lower, buy people have less money to buy them.

17. TYPE OF INTEREST RATES  Prime Rate– the rate banks make available to their best business customers such as large corporations  Discount Rate– the rate financial institutions are charged to borrow funds from Federal Reserve banks.  T-Bill Rate– the yield on short-term U.S. government debt obligations

18. TYPES OF INTEREST RATES  Treasury Bond Rate– the yield on long-term U.S. government debt obligations  Mortgage Rate-- the amount individuals pay to borrow money to purchase a new home  Corporate Bond Rate– the cost of borrowing for large U.S. corporations  Certificate of Deposit Rate– the rate for sic-month time deposits at savings institutions

19. INVESTMENT ACTIVITIES  Capital spending– money spent by a business for an item that will be used over a long period of time  Capital projects— spending by businesses for items such as land, buildings, equipment, and new products  A major source of investment fund is personal savings

20. INVESTMENT ACTIVITIES  Corporations are a major type of business organization  Many people invest by becoming part owners of a corporation  Stock– ownership in a corporation  Stock ownership is called equity  Supply and demand are the major influences of buying stock in a corporation

21. THE BOND MARKET  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  Bondholders are then paid interest for the use of their money

22. GOVERNMENT DEBT  Often times, the government uses borrowing to finance various projects New schools Public buildings Highways Parks

23. GOVERNMENT DEBT  Budget surplus– when the government spends less than it takes in If this occurs, the government may reduce taxes or increase spending on different programs  Budget deficit– when the government spends more than they take in  National debt– the total amount owed by the federal government

24. BUSINESS AND CONSUMER DEBT  Loans, bonds, and mortgages are common borrowing methods used by businesses.  Efficient use of borrowing can be helpful to companies because they can use the funds to expand sales and profits  Consumes commonly use credit cards, auto loans and home mortgages to finance their purchases