Chapter 3

4 Types of Economy in USA1. Agricultural – during Colonial era,

people lived off the land and were primarily farmers

2. Service – also in Colonial Eras, colonists working together and often bartered for necessary services

3. Industrial - rooted in mid-1800’s during Industrial Revolution when society relied more on machinery to produce goods

4. Information - Boomed around mid-1900s as the Internet became integral part of doing business

Measuring Economic ActivityJust like baseball stats

measure a players performance …….. figures are used to measure economic performance.

GDPUnemployment RateRate of InflationNational Debt

Gross Domestic Product (GDP)The production of goods and services is the

result of all the economic activity in the country.Measure the final output of an economy… Measure productivity - how many goods/services country produces during a certain period of time

Measure the value of the goods/services, to calculate the GDP, Economists compute the sum of G/S in 4 areas: Consumer goods and services Business goods and services Government goods and services Goods and services sold to other countries

Gross Domestic Product (GDP)GDP does not include G/S not

reported ….babysitting, mowing lawns, daycare… or US owned plants made in other countries

The USA has a very high GDP compared to other countriesHigher Standard of Living – is the

amount of G/S the average citizen can buy

1990’s –GDP grew from $5.5 Trillion to $9 Trillion

Unemployment RateMeasures the number of people who are able to work but don’t have a job during a given period of time.Not as serious: Seasonal unemploymentSerious unemployment: changes in industry

New technology replaces workers, requires new skills

Companies merge or restructure and downsizeWorst type: entire economy slows down.

Millions of people in every industry lose their jobs, unemployment may last until economy recovers

Rate of InflationThe increase in the cost of goods/services

Rate of InflationWHY??? Different reasons….

Economy too productive, more people working with money …the more they spend…as demand goes up…producers raise their prices….workers demand higher wages….wages go up …producers raise prices if this spirals out of control it may lead to hyperinflation

Government allows too much money to circulate in the economy

Deflation – when supply of goods is greater than the demand

Rate of InflationThe USA tries to maintain a

slow but steady rate of economic growth to avoid inflation and deflation.By controlling productivity and

keeping a certain number of people unemployed

Less risk of producers making too many goods or workers demanding higher wages.

National DebtSource of income are taxeshttp://www.usdebtclock.org/index.html Government spends more for programs like defense,

education, and social programs than it collects in taxes…the difference is a Budget Deficit.

The gov’t borrows money from public, banks and foreign countries….the total amount of money the gov’t owes is the National Debt.

Budget Surplus – gov’t’s revenue exceeds the expenditures…but it will probably use the surplus to decrease National Debt, decrease taxes, or increase social programs

The Business CycleThe rise and fall of economic activity over

time

The Business CycleProsperity – peak economic activity

Unemployment is low, production high, new businesses open, people are spending, demand high

Recession – Economic activity slows downSpending decreases, demand decreases,

businesses produce less…workers get laid off..GDP declines

Ripple Effect – one industry’s recession can effect others….car industry slow down hurts car part manufacturers, loan officers….

The Business CycleDepression – A deep recession that affects the

entire economy and lasts for several yearsHigh unemployment, low production…..can spread

to other countriesStock Market Crash 10/20/29 “Black Tuesday”

…GDP fell 50%, unemployment rose 800%, 1 out of 4 were unemployed, wages drastically dropped, money supply fell by 1/3rd.

No FDIC- depositors were not protected, people panic withdrawals…”bank holiday” March 1933 gov’t closed banks for several days many never reopened.

The Business Cycle

Recovery – A rise in business activity after recession or depression

Production starts to increase, employment increase opportunities

New demand for goods/services stimulates GDP

Companies may spend to innovate new products, new way of performing a task.

Business innovation helps gain an edge on competition. Costs go down, sales increase, costs go down, profits increase, business grows, economic activity soars