1. Economic Activity in a
Changing World
Chapter 3 pp

2. Learning Objectives After completing this chapter, you’ll be able to:
Identify how economic activity is measured.
Explain how inflation and deflation work.
continued

3. Learning Objectives After completing this chapter, you’ll be able to:
Discuss the four phases of the business cycle.

4. Why It’s Important
Economic activity affects everyday life. The history of the economy affects the industries and of today and tomorrow.

5. Key Words gross domestic product standard of living inflation
deflation
budget deficit
national debt
budget surplus
continued

6. Key Words
business cycle
prosperity
recession
depression
recovery

7. Measuring Economic Activity
Economic indicators are figures used to measure economic performance.

8. Measuring Economic Activity
Economic indicators measure things like how much a country is producing, whether its economy is growing, and how it compares to other countries.

9. 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.

10. 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).

11. Gross Domestic Product (GDP)
To calculate the GDP, economists compute the sum of goods and services.
continued

12. Gross Domestic Product (GDP)
Economists include four main areas in calculating the GDP:
Consumer goods and services
Business goods and services
Government goods and services
Goods and services sold to other countries

13. Gross Domestic Product (GDP)
The GDP doesn’t include the goods and services that aren’t reported to the government.

14. Gross Domestic Product (GDP)
The standard of living is the amount of goods and services the average citizen can buy.

15. 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?

16. Gross Domestic Product
Graphic Organizer
Graphic Organizer
Gross Domestic Product
Goods
and
services
sold to
other
countries
Consumer
goods
and
services
Business
goods
and
services
Government
goods
and
services
Gross
Domestic
Product + + + =

17. 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.

18. Unemployment Rate
There are different reasons for being unemployed, including:
Temporary
Seasonal
Changes in industry
Economic slow down

19. Unemployment Rate
The worst type of unemployment occurs when the entire economy slows down.
This type of unemployment lasts until the economy recovers, which can take years.

20. Unemployment Rate
Changes in the unemployment rate show whether an economy is picking up or slowing down.

21. 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.

22. Rate of Inflation
As the demand for goods goes up, producers raise their prices.
To pay the higher prices, workers demand higher wages.

23. 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.

24. 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.

25. Rate of Inflation
The United States tries to maintain a slow but steady rate of economic growth to avoid both inflation and deflation.

26. National Debt
When the government spends more on programs than it collects in taxes, the difference in the amount is called the budget deficit.

27. 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.

28. 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.

29. What are some of the types of unemployment?
Fast Review
What are some of the types of unemployment?
What is the difference between inflation and deflation?

30. 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.

31. The Business Cycle The four phases of the business cycle are:
Prosperity
Recession
Depression
Recovery

32. What are the four phases of the cycle?
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?

33. 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.

34. Prosperity Prosperity is a peak of economic activity.
Unemployment is low, production of goods and services is high, and new businesses open.

35. Prosperity
Prosperity, however, does not last. Any number of things can change.
Companies produce too much, people stop buying, or inflation starts to rise.

36. Recession During a recession, economic activity slows down.
There is a general drop in productivity and the GDP declines.

37. Recession
A recession can affect only one industry, related industries, or spread to the entire economy.

38. Recession
The ripple effect is when a recession in one industry leads to a recession in other industries.

39. Depression
A deep recession that affects the entire economy and lasts for several years is called a depression.

40. Depression
During a depression there is high unemployment, low productivity, and excess capacity in manufacturing plants.

41. Depression
A depression can be limited to one country but usually spreads to related countries.

42. 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.

43. Depression
During the Great Depression, the number of people out of work rose nearly 800 percent.

44. Depression During the Great Depression, many banks failed.
The money supply fell by one-third.

45. Recovery
A rise in business activity after a recession or depression is called a recovery.

46. Recovery During a recovery: Production starts to increase
People start going back to work and have money to spend again

47. Recovery During a recovery (continued):
The new demand for goods and services stimulates more production
The GDP grows
New businesses open

48. 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.

49. What are the four phases of the business cycle?
Fast Review
What are the four phases of the business cycle?
How does the ripple effect impact the economy?

50. Did colonists develop their own industries?
How do factories influence the workplace?
continued

51. How did the assembly line change American society?
How has the Internet changed the way people do business?

52. Making an Ethical Decision
Should you encourage other company executives to sell your product to countries that have an economic system you disapprove of?
continued

53. Making an Ethical Decision
Does it matter if your product is desperately needed by the country to save lives?
continued

54. Making an Ethical Decision
If the United States bans trade with that country, would you still discuss the topic with other executives? If the executives want to help the banned country, how else could your company get a product to those who need it?

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End of Chapter
Economic Activity in a Changing World