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Economic Activity

2-1 Measuring Economic Activity2-2 Economic Conditions Change2-3 Other Measures of Business Activity

CHAPTER 2

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Measuring Economic Activity

Goals11. Define gross domestic product.12. Describe economic measures of labor.13. Identify economic indicators for consumer spending.

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Chapter 2 3

Key Terms

Gross Domestic Product (GDP) GDP per capita unemployment rate productivity personal income retail sales

Chapter 2 4

GROSS DOMESTIC PRODUCT (GDP) Obj. 11

Components of GDP Consumer spending Business spending Government spending Exports minus imports of a country▪ Only FINAL GOODS count

Comparing GDP Output per person GDP divided by the total population

Chapter 2 5

Comparison of GDP in Selected Countries

Source: CIA World Factbook

Chapter 2 6

What types of economic activities are not included in GDP?

Answer GDP only applies to reported final goods and services. Money earned for goods or services that are not reported

would not be included. Goods and services used in the manufacture of other

products are only counted once—in the final product.

Checkpoint >>

Chapter 2 7

LABOR ACTIVITIES Obj. 12

Employment – Labor force consists of all people above age

16 who are actively working or seeking work Unemployment rate- portion of people in

the labor force who are not working Productivity – production output in

relation to a unit of input OR

Output ÷ Input = PRODUCTIVITY What can influence a country’s

PRODUCTIVITY?

Chapter 2 8

What influences a country’s productivity?

AnswerCapital resources (equipment and technology) Worker training and Management techniquesSafety/securityEducation levelPolitical stability

Productivity >>

Chapter 2 9

CONSUMER SPENDING Obj. 13

Personal income – Salary or Wages Investment income Government payments

Retail sales – Sales of durable and nondurable goods bought by

consumers Retail sales are an indicator of general consumer

spending patterns in the economy Main Items:▪ Automobiles, building materials, furniture, gasoline,

clothing, restaurant sales, department stores, food stores and drug stores.

Chapter 2 10

What are the main sources of personal income?

AnswerSources of personal income include wages,

salaries, investment income, and government payments.

Checkpoint >>

Chapter 2 11

Reinforcement Activity

Chapter 2-1 Page 37▪ 1-3 and 4 or 5

12

Economic Conditions Change

Goals14. Describe the four phases of the business cycle.15. Explain causes of inflation and deflation.16. Identify the importance of interest rates.

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Chapter 2 13

Key Terms

business cycle prosperity recession depression

recovery inflation price index deflation

Chapter 2 14

THE BUSINESS CYCLE Obj. 14

Prosperity Recession Depression Recovery

Chapter 2 15

Prosperity~ high point in the cycle

People who want to work are working.

Production of G&S hit record highs. Wages are up. Rate of GDP growth increases. Demand for G&S is high. Cannot last forever… why?

Chapter 2 16

Recession~economy slows down

Demand begins to decrease. Businesses lower production. Unemployment begins to rise. GDP growth slows to 2 or more

quarters of the year. Severity varies.

Chapter 2 17

Depression~low point in the cycle

When recession grows and spread throughout the nation.

Prolonged unemployment Weak sales due to low demand Business failures GDP falls rapidly

Chapter 2 18

Recovery~upturn in the business cycle

Unemployment begins to decrease. Demand begins to increase. GDP begins to rise again. Consumers regain confidence in their

futures and begin spending again.

Chapter 2 19

What are the four phases of the business cycle?

AnswerThe four phases of the business cycle are

prosperity, recession, depression, and recovery.

http://www.wgal.com/money/29191773/detail.html

Checkpoint >>

Chapter 2 20

CONSUMER PRICES Obj. 15INFLATION/DEFLATION

Inflation- 1950’s last 70 yrs Sustained increase in the general level of prices

for G&S Buying power of the dollar decreases

Causes of inflation- When demand is greater than supply Wages may increase but at a much slower rate If wages would go up faster than prices,

businesses would need to hire fewer workers, which would worsen unemployment

Chapter 2 21

CONSUMER PRICES (INFLATION/DEFLATION)

Measuring Inflation- Rate of increase fluctuates and has

throughout our nation’s history. CPI (Consumer Price Index) ▪ Compares prices in one year with prices in

some earlier base year▪ Can be deceiving because it’s based on a

group of selected items and may not reflect necessities such as food, gas, and health care.

Chapter 2 22

CONSUMER PRICES (INFLATION/DEFLATION)

Deflation- Opposite of inflation~ A sustained decrease in

the general level of prices for G&S Usually occurs during recessions and

depressions Prices are lower but consumers have less

money to buy them. Doesn’t include items such as computers

whose prices have decrease drastically over the years…Why?

Chapter 2 23

CONSUMER PRICES Obj. 16INTEREST RATES

Interest Rates- Cost of money Individuals, companies, and governments who

borrow money are affected by interest rates People with poor credit ratings pay more (higher

interest rates) than people with good credit ratings… Why?

When borrowing increases, interest rates rise Types of interest rates (continued on next slide)

Chapter 2 24

CONSUMER PRICES (INTEREST RATES)

Types of Interest Rates Prime rate- given to banks’ best customers Discount rate- charges to banks by the FED T-bill rate- yield on short- term US gov. obligations (ex. 5 year)

Treasury bond rate- yield on long-term US gov obligation (ex. 30 year)

Mortgage rate- interest on a home loan Corporate bond rate- large US corporations’ cost to

borrow Certificate of deposit rate- rate for long-term deposits at

savings institutions

Chapter 2 25

Supplemental Information

▪ Discount Rate ▪ http://money.cnn.com/2010/02/18/news/economy/discount.rate.fortu

ne/index.htm

▪ Car Loan Rates▪ Auto Rates▪ http://www.bankrate.com/finance/auto/auto-loan-rates.aspx

▪ Mortgage Rates (Adjustable Rate Mortgages vs. Fixed Rate Mortgages)▪ http://mortgage-x.com/trends.htm

▪ Savings Account Interest Rate▪ CD Rates ▪ http://www.bankrate.com/cd.aspx▪ http://www.ratestracker.com/historical-cd-rates/

▪ Credit Card Rates▪ http://www.indexcreditcards.com/credit-card-rates-monitor/

Chapter 2 26

What are the main causes of inflation?

Answer Inflation is an increase in the general level of

prices that occurs when the demand for goods and services is greater than supply.

Checkpoint >>

Chapter 2 27

How do interest rates affect business activities in our economy?

Answer Interest rates can encourage or discourage

borrowing and spending. Lower interest rates allow consumers greater

spending power, which increases demand, productivity, and employment.

Businesses often pass on the cost of higher interest rates to consumers.

Checkpoint >>

Chapter 2 28

Reinforcement Activity

Chapter 2-2 Page 42▪ 1-3, and choose 4 or 5

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Other Measures of Business Activity

Goals17. Discuss investment activities that promote economic growth.18. Explain borrowing activities by government, business, and consumers.19. Describe future concerns of economic growth.

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Chapter 2 30

Growth and Investments Obj. 17

Capital projects- spending by businesses for items such as land, buildings, equipment, and new products. This $ comes from three main sources:

Personal savings http://www.bankrate.com/compare-rates.aspx

Stock investments http://www.youtube.com/watch?v=sjyWxERgGJs

Bonds http://www.bloomberg.com/markets/rates/index.html

http://www.investinginbonds.com/learnmore.asp?catid=9

Chapter 2 31

INVESTMENT ACTIVITIES

Savings- Low risk / low yield option

Stock- High risk / potentially high yield ownership in a corporation

Bond- Low risk / mid yield represents debt for an organization

and YOU are the creditor

Chapter 2 32

GOVERNMENT DEBT Obj. 18

Government budget surplus▪ Gov’t spent less than it took in▪ Gov’t may reduce taxes or increase

spending on various programs

Government budget deficit▪ Gov’t spent more than it took in▪ Over time this amount builds up…

cummulative

National debt▪ Total amount owed by the Federal

Government

Chapter 2 33

Government Income- TAXES

Personal income tax ▪ 20-30% of earned income (latest figures state a rate of 38%)▪ Collected on a pay-as-you-earn basis▪ Federal, state, and local

Property tax▪ Based on appraisals of land and property▪ Local tax

Sales tax▪ Taken at time of purchase▪ State tax▪ PA sales tax is 6%▪ Sin tax- A tax on certain items, such as cigarettes and alcohol, that are regarded as

neither necessities nor luxuries.

▪ Excise taxes- taxes paid when purchases are made on a specific good- Often included in the price of the product. Also placed on some activities, such as on wagering or on highway usage by trucks.

Chapter 2 34

BUSINESS DEBT

Most common forms: Loans Bonds Mortgages

Poor debt management results in company failure

Chapter 2 35

CONSUMER DEBT

Most common: Credit cards Auto loans Mortgages

Pros: Convenient Great for emergencies

Cons: Overuse Overspending

Chapter 2 36

Name some examples of capital projects.

AnswerCapital projects include the purchase of any

item a business will use over an extended period of time such as land, buildings, and equipment.

Checkpoint >>

Chapter 2 37

What is the cause of a budget deficit?

AnswerA budget deficit occurs when a government or

organization spends more than it takes in.

Checkpoint >>

Chapter 2 38

FUTURE ECONOMIC CHALLENGES Obj. 19

Limited access to health care Need for proper housing for many

people Traffic and crime Unemployment Housing market

Chapter 2 39

Checkpoint >>

What economic challenges do countries face in the future?AnswerFuture economic concerns for any country

include the ability to increase its output and provide a means for its citizens to meet the basic needs of food and shelter, adequate health care, education, transportation, employment, and safety.

Chapter 2 40

Chapter 2 Assessment Review To be done by Wednesday:

Page 47▪ 1 , 2 and 3 or 4

To be done by date of Test (Friday 9/21): Pages 48-51▪ 1-30 ▪ Extra Credit: Choose up to two (2) from 31-44