Chapter 2 Economic Activity Economic Growth Refers to a steady increase in production of goods &...

Chapter 2

Economic Activity

Economic Growth

• Refers to a steady increase in production of goods & services (G&S) in an economic system.

• Several methods available to check economic growth

America’s Workforce

• Over 130 million Americans work to help produce G&S

• The total of all the G&S Americans produce is the Output or Production of our nation

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Ways to Measure Economic Growth

• Gross Domestic Product (GDP)--measures output from year to year

• GDP Per Capita--measures output per person

• Labor Productivity--measures output per worker

GDP

GROSS DOMESTIC PRODUCT(GDP)

• One way to find out how well our economy is doing is to compare output from year to year. The Fed Gov’t collects information from producers and estimates our national output.

• GDP: The total dollar value of all final G&S produced in our country during one year.





GDP Includes 4 Major Categories of Expenditures

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4. Exports less imports of the country

3. Government spending to pay employees and to buy supplies.

1. Consumer spending for food, clothing, transportation, entertainment & housing.

2. Business spending for buildings, equipment, and supplies.

GDP Does Not Include:

• The value of work we do for ourselves

• Only final goods are counted: cars would be counted, but not the intermediate goods used in manufacturing, such as steel and fabrics

Difficulties in Comparing GDP• PRICES: Prices

generally do not stay the same--they fluctuate, generally going up.

• Because of this, it is not fair to say that we produced more this year than last when maybe the price actually increased.

GDP Per Capita• Output Per Person

• To calculate GDP Per Capita, take the GDP divided by the population of the country.

• Suppose that population increases. You can see that the same output would have to be divided among more people.

• An increase in GDP Per Capita means that economy is growing. A decrease may mean that the economy is having trouble.

Labor Productivity• Productivity: The number of items produced per

worker.

• Quality capital resources, worker training, & management techniques have increased worker output.

• Standard of Living increases w/ worker productivity and hours worked per week will decrease-leaving more leisure time.

• Unemployment Rate: The portion of people in the labor force who are not working--a high rate of unemployment could affect productivity.

Economic Indicators of Consumer Spending

• Personal Income provides the foundation for buying goods & services.

• Retail Sales: the sales of durable and nondurable goods bought by consumers.





The Business Cycle• The movement of the

economy from one condition to another and back again is called a business cycle.

• There are 4 phases in the business cycle.

The Business Cycle

• Prosperity: The peak of the business cycle.

• Low unemployment

• Wages are good

• Businesses produce record G & S

• GDP increases

Recession: When the economy slows down.

Demand begins to decrease

Businesses lower production

Unemployment begins to rise

GDP slows down

Depression: When a recession deepens & spreads throughout the entire economy.

• Very high unemployment

• Weak consumer sales

• Business fails

Recovery: When the economy begins to increase--may be fast or slow; can occur after either a recession or depression.

• Demand for G&S start to rise

• GDP begins to rise

• Unemployment begins to decrease

• People gain confidence and begin buying again

Inflation/Deflation

• Inflation: A sustained increase in the general level of prices. Big problem during the 70’s and early 80’s (Farm Crisis); a 2-3% increase is considered mild

• Deflation: A decrease in the general level of prices. It usually occurs in periods of recession and depression.

Causes of Inflation

• When demand for a product is greater than the supply of a product.

• Basically when the government increases the money supply faster than the quantity of goods increases we have inflation. Interestingly as the supply of goods increase the money supply has to increase or else prices actually go down.

• When costs of making a product increase and this causes supply to decrease.

Interest Rates

• Interest Rate: the cost of using someone else’s money.

• You earn interest on your savings & you pay interest on what you borrow.

• Interest rates change--generally on a daily basis.






Other Measures of Business Activity

• Investment Activities: Capital Projects by businesses, Personal Savings, Investing in the Stock Market or Buying Bonds

• Borrowing: Page 45-46

Gov’t Debt:

Business Debt:

Consumer Debt:

Future Economic Challenges

• Technology: Expands our opportunity to market G & S worldwide.

• Health Care• Homeless• Gangs• War

GROSS DOMESTIC PRODUCT(GDP)

• GDP: The total dollar value of all final G&S produced in our country during one year.

• One way to find out how well our economy is doing is to compare output from year to year using the GDP.





GDP Includes 4 Major Categories of Expenditures

1. Consumer spending for food, clothing, transportation, entertainment & housing.

2. Business spending for buildings, equipment, and supplies.

3. Government spending to pay employees and to buy supplies.

4. Exports less imports of the country






GDP Does Not Include:

• The value of work we do for ourselves

• Only final goods are counted: cars would be counted, but not the intermediate goods used in manufacturing, such as steel and fabrics

Difficulties in Comparing GDP• PRICES: Prices

generally do not stay the same--they fluctuate, generally going up.

• Because of this, it is not fair to say that we produced more this year than last when maybe the price actually increased.

GDP Per Capita• Output Per Person

• To calculate GDP Per Capita, take the GDP divided by the population of the country.

• Suppose that population increases. You can see that the same output would have to be divided among more people.

• An increase in GDP Per Capita means that economy is growing. A decrease may mean that the economy is having trouble.

Labor Productivity• Productivity: The number of items produced per

worker.

• Quality capital resources, worker training, & management techniques have increased worker output.

• Standard of Living increases w/ worker productivity and hours worked per week will decrease-leaving more leisure time.

• Unemployment Rate: The portion of people in the labor force who are not working--a high rate of unemployment could affect productivity.

Economic Indicators of Consumer Spending

• Personal Income provides the foundation for buying goods & services.

• Retail Sales: the sales of durable and nondurable goods bought by consumers.





The Business Cycle• The movement of the

economy from one condition to another and back again is called a business cycle.

• There are 4 phases in the business cycle.

The Business Cycle

• Prosperity: The peak of the business cycle.

• Low unemployment

• Wages are good

• Businesses produce record G & S

• GDP increases

Recession: When the economy slows down.

Demand begins to decrease

Businesses lower production

Unemployment begins to rise

GDP slows down

Depression: When a recession deepens & spreads throughout the entire economy.

• Very high unemployment

• Weak consumer sales

• Business fails

Recovery: When the economy begins to increase--may be fast or slow; can occur after either a recession or depression.

• Demand for G&S start to rise

• GDP begins to rise

• Unemployment begins to decrease

• People gain confidence and begin buying again

Inflation/Deflation

• Inflation: A sustained increase in the general level of prices. Big problem during the 70’s and early 80’s (Farm Crisis); a 2-3% increase is considered mild

• Deflation: A decrease in the general level of prices. It usually occurs in periods of recession and depression.

Causes of Inflation

• When demand for a product is greater than the supply of a product.

• Basically when the government increases the money supply faster than the quantity of goods increases we have inflation. Interestingly as the supply of goods increase the money supply has to increase or else prices actually go down.

• When costs of making a product increase and this causes supply to decrease.

Interest Rates

• Interest Rate: the cost of using someone else’s money.

• You earn interest on your savings & you pay interest on what you borrow.

• Interest rates change--generally on a daily basis.






Other Measures of Business Activity

• Investment Activities: capital projects by businesses, personal savings, investing in the Stock Market or buying bonds

• Careful use of credit can be important for economic growth--too much credit can cause problems!

• Borrowing: Page 45-46

Government Debt: gov’t borrows money to help finance projects…

Business Debt: most businesses will take out business loans or mortgages

Consumer Debt: credit cards, car loans, & mortgages

Future Economic Challenges

• Technology: Expands our opportunity to market G & S worldwide.

• Health Care• Homeless• Gangs• War

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Chapter 2 Economic Activity Economic Growth Refers to a steady increase in production of goods &...

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