1. Chapter 2
Economic Activity

2. 2-1 Measuring Economic Activity
After finishing this section, you will know:
The definition of gross domestic product
Various economic measures of labor
Economic indicators for consumer spending

3. GROSS DOMESTIC PRODUCT
Gross Domestic Product (GDP)- the total dollar value of all final goods and services produced in a country during one year

4. Components of GDP
1. Consumer spending for food, clothing, housing, and other aspects
2. Business spending for buildings, equipment, and inventory systems
3. Government spending to pay employees and to buy supplies and other goods
4. The exports of a country less the imports into the country

5. Some goods and services are not included:
The value of the work you do for yourself
Cutting your own lawn
Building a picnic table for your yard

6. Only final goods are considered such as cars
Intermediate goods are not considered including: steel and fabrics
If we counted intermediate goods, the value of these goods would be counted twice
If the GDP increases from year to year, the economy is growing and healthy

7. Comparing GDP
The United States had an annual GDP of about $12.4 trillion in recent years
The more goods and services produced, the healthier an economy is considered to be
Just measuring the dollar value of GDP does not tell the whole story

8. GDP per capita- output per person
Calculated by dividing GDP by the total population
An increase in GDP per capita means that an economy is growing
A decrease may mean that an economy is facing difficulties
See Figure 2-1 page 34

9. Checkpoint>>
What types of economic activities are not included in GDP? Give at least 3 examples.

10. LABOR ACTIVITIES
The workers of an economy contribute to the economy in several ways.
Their labor activities create needed goods and services
The wages they receive are spent to create demand for various items

11. Employment
Today more than 145 million people work in the United States
These members of the workforce are employed in thousands of different jobs
Labor force- all people above the age of 16 who are actively working or seeking work

12. Unemployment rate- the portion of people in the labor force who are not working
People are considered to be unemployed if they are looking for work and willing to work but unable to find a job
Unemployment rates vary from year to year and in different areas of the country
The main cause of unemployment is decreased demand for goods and services being provided by workers
Example: If fewer people travel by bus, the bus company will need fewer workers.

13. Productivity
Productivity- the production output in relation to a unit of input, such as a worker
Improvements in capital resources (equipment and technology), worker training and management techniques can increase productivity

14. Ability to produce more goods and services makes it possible to reduce the number of hours in a workweek.
In the 1890s, the average worker worked 60 hours per week
Today, the average worker works 40 hours per week

15. Checkpoint>>
How can productivity be increased? Give at least 2 examples.

16. CONSUMER SPENDING
The money you earn and spend is one of the most important factors for economic growth.
Personal Income
Personal income- salaries and wages as well as investment income and government payments to individuals
These funds provide the foundation for buying needed goods and services

17. Retail Sales
Retail sales- sales of durable and nondurable goods bought by consumers
Retail sales are an indicator of general consumer spending patterns in the economy
Increasing retail sales usually points toward economic growth
The main items whose sales are measured for estimating retail sales include
Automobiles, building materials, furniture, gasoline, and clothing

18. Checkpoint>>
What are the main sources of personal income? Give at least 2 examples.

19. 2-1 ASSESSMENT Complete the 3 assessment questions individually.
When finished with the assessment questions begin working on the Visual Art project.

20. 2-2 Economic Conditions Change
After finishing this section, you will know:
The four phases of the business cycle
The causes of inflation and deflation
The importance of interest rates

21. 2-2 Economic Conditions Change
THE BUSINESS CYCLE
Business cycle- the recurring ups and downs of GDP which contains 4 phases

22. 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
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 a calendar year

23. Depression
Depression- a phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures
GDP falls rapidly during a depression
Recovery
Recovery- the phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again

24. Checkpoint>>
What are the four phases of the business cycle? Give at least one characteristic of each phase.
Prosperity – unemployment is low/demand is high/GDP is high or increasing
Recession – unemployment is going up/demand goes down/GDP slows down
Depression – Unemployment is high/Demand is low/ GDP is LOW
Recovery – unemployment goes down/demand goes up/GDP goes up

25. CONSUMER PRICES Inflation
Inflation- an increase in the general level of prices
In times of inflation, the buying power of the dollar decreases
Example: If an item cost $100 last year and prices increased 5%, that same item would cost $105 now.
People living on fixed incomes are most affected by inflation

26. Causes of Inflation
When the demand for goods and services is greater than the supply.
When is supply down and the demand is up the price will go up
Even though wages tend to increase during inflation, prices of goods and services usually rise so fast that the wage earner never seems to catch up.

27. Measuring Inflation
During the late 1950s and early 1960s, the annual inflation rate in the United States was 1 to 3%.
During the late 1970s and early 1980s, the cost of living increased 10-12% annually.
Mild inflation 2-3% per year can stimulate an economy

28. Price index- number that compares the prices in one year with prices in some earlier base year
There are different types of price indexes, some that compare selected items and some that track the change in price of necessities; food, gas, health care
Deflation
Deflation- a decrease in the general level of prices usually during recession and depression
Prices of products are lower but people have less money to buy them

29. Checkpoint>>
What are the main causes of inflation?

30. INTEREST RATES Interest rates represent the cost of money
As a consumer you are affected by interest rates
The earnings you receive as a saver or investor reflect current interest rates
People with poor credit ratings pay a higher interest rate than people with good credit ratings.

31. Types of Interest Rates
Prime rate- rate banks make available to their best business customers such as large corporations
Discount rate- rate financial institutions are charged to borrow funds from Federal Reserve banks
T-bill rate- yield on short-term (13 week) U.S. government debt obligations

32. Types of Interest Rates
Treasury bond rate- yield on long-term (20 year) U.S. government debt obligations
Mortgage rate- amount individuals pay to borrow for the purchase of a home
Corporate bond rate- cost of borrowing for large U.S. corporations
Certificate of deposit rate- rate for time deposits at savings institutions

33. Changing Interest Rates
Each day, interest rates change because of various factors:
As amounts saved increase, interest rates decline
When borrowing by consumers , businesses, and government increases, interest rates are likely to rise

34. Checkpoint>>
How do interest rates affect business activities in our economy? Give at least 2 ways.

35. 2-2 ASSESSMENT
Complete the 3 assessment questions individually.

36. 2-3 Other Measures of Business Activity
After finishing this section, you will be able to:
Explain how investment activities promote economic growth
List and describe borrowing activities by government, businesses, and consumers
Describe future concerns of economic growth

37. 2-3 Other Measures of Business Activity
INVESTMENT ACTIVITIES
Capital spending- money spent by businesses 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

38. The money for capital projects comes from 3 main sources:
Personal savings
Investments
Bonds

39. Personal Savings
A major source of investment funds is personal savings.
Companies us money you deposit in a bank or other financial institution
In return, savers are paid interest on the money they deposit
The savings rate of a country is an important factor for economic growth

40. The Stock Market / The Bond Market
Stock- represents ownership in a corporation often called equity
Bond- represents debt for an organization
If you purchase a corporate or government bond, you are a creditor
This means that you have lent money to the organization or business
In return, bondholders are paid interest for the use of their money

41. Checkpoint>>
Name some examples of capital projects. Give at least 3 SPECIFIC examples.

42. BORROWING Government Debt
People expect services from local, state, and federal governments.
Those services cost money.
Often government uses borrowing to finance projects.
Examples of projects: new schools, public buildings, highways, and parks

43. Budget surplus- when a government spends less than it takes in
When this happens, governments may reduce taxes or increase spending on projects
Budget deficit- when a government spends more than it takes in
National debt- total amount owed by the federal government

44. Business Debt
Common debts include: loans, bonds, and mortgages
Consumer Debt
People commonly use credit cards, auto loans, and home mortgages to finance purchases

45. Checkpoint>>
What is the cause of a budget deficit?

46. FUTURE ECONOMIC CHALLENGES
New technologies help solve economic problems
Common economic problems include:
Health care coverage, proper housing especially in large cities, traffic, and crime

47. Checkpoint>>
What economic problems with countries face in the future?

48. 2-3 ASSESSMENT
Complete the 4 assessment questions individually.