Transcript Chapter 3

Chapter 3
Economic Activity in a
Changing World
Measuring Economic Activity
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Economic indicators are figures used to
measure economic performance.
Economic indicators measure things like how
much a country is producing, whether its
economy is growing, and how it compares to
other countries.
Gross Domestic Product (GDP)
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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.
An important measure of a country’s
economic health is its level or productivity
The total value of the goods and services
produced in a country in a given year is called
its gross domestic product (GDP).
Gross Domestic Product (GDP)
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To calculate the GDP, economists compute
the sum of goods and services.
Economists include four main areas in
calculating the GDP:
1.Consumer goods and services
2.Business goods and services
3.Government goods and services
4.Goods and services sold to other countries
Gross Domestic Product (GDP)
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The GDP doesn’t include the goods and
services that aren’t reported to the
government.
The United States produces so much more
than other countries that it has a higher
standard of living
The standard of living is the amount of
goods and services the average citizen can
buy.
Gross Domestic Product (GDP)
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The gross domestic product (GDP) is the output
of goods and services produced in a country.
Unemployment Rate
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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.
There are different reasons for being
unemployed, including:
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1. Frictional (Temporary)
2. Seasonal
3. Structural (Changes in industry)
4. Cyclical (Economic slowdown)
Unemployment Rate
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Frictional (Temporary)
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This is where if you just quit your job or
graduated from school and looking for work.
This type of unemployment has little effect on the
economy
Seasonal
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If you harvest crops or work in a retail during the
holiday season, you may only work a certain part
of the time
Unemployment Rate
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Structural (Changes in Industry)
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This is where new technology replaces workers or
required new skills
Cyclical (Economic slowdown)
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This is the worst type of unemployment and
occurs when the entire economy slows down
This type lasts until the economy recovers, which
can take years.
Unemployment Rate
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Changes in the unemployment rate show
whether an economy is picking up or slowing
down.
In 2003 rate was 5.2%
During Great depression
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Went from 3.7% to 8.7%
Currently 7.2%
Unemployment Rate
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How do you calculate the Rate
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Unemployment rate = (# of Unemployed/labor
force) x 100
Labor force = (# of employed) + (# of
unemployed)
Unemployed = 8 million
Employed = 125 million
Rate of Inflation
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Another important measure of economic
strength is the 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.
The more people are employed, the more
people spend.
Rate of Inflation
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As the demand for goods goes up, producers
raise their prices.
To pay the higher prices, workers demand
higher wages.
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.
Rate of Inflation
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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.
As a result, people have less money to buy
goods so the demand continues to go down.
Rate of Inflation
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This is what happened to some of the Asian
countries like Japan and Taiwan in the 90’s.
The United States tries to maintain a slow but steady
rate of economic growth to avoid both inflation and
deflation.
This is done by controlling productivity and keeping
a certain number of people unemployed.
That way there is less risk of producers making too
many goods or workers demanding higher wages
National Debt
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Countries can run up large debts
The main source or income for any
government is taxes
It uses taxes to pay for programs like defense,
education, and social services.
When the government spends more on
programs than it collects in taxes, the
difference in the amount is called the budget
deficit.
National Debt
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In the 1980’s the government ran up a huge
deficit when it cut taxes while increasing
spending on programs
To pay for the difference the government
borrows money from the public, banks, and
even other countries
National Debt
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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.
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.
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The National Debt on January 1st 1791 was
just $75 million dollars. Today, it rises by that
amount every hour or so. The following graph
shows how the National Debt has grown year
by year since 1940 in actual dollar amounts,
uncorrected for inflation:
The Business Cycles
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Once you enter into the workforce you’ll experience
many ups and downs
Economies go through ups and downs as a result of
wars, foreign competition, and changes in
technology.
Over long periods of time economic changes seem to
form patterns.
For example the U.S economy went though slumps
in the 30’s, 50’s, and the 70’s
The Business Cycles
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The rise and fall of economic activity over
time is called the business cycle.
Four cycles of the business cycle can be
identified
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1. Prosperity
2. Recession
3. Depression
4. Recovery
The Business Cycles
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Every phase indicates changes to an economy, to
industries, and to working people.
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.
Exp: if the US economy is in a period of economic
expansion, the U.S. will purchase goods and services
from other countries promoting expansion
Prosperity
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Prosperity is a peak of economic activity.
Unemployment is low, production of goods
and services is high, and new businesses
open.
Wages are usually higher so there is a greater
demand for goods to be purchased.
Prosperity
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The 1990’s was a record of prosperity, which
was due to the low rate of inflation and the
internet creating new opportunities for
business opportunities
Prosperity, however, does not last. Any
number of things can change
Companies produce too much, people stop
buying, or inflation rises dramatically.
Recession
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During a recession, economic activity slows
down.
Spending decreases and so does the demand
for products
Businesses produce less so they need fewer
workers
The unemployment rate then increases so
people have less to spend
Recession
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There is a general drop in the total production
declines. of goods and services, so the GDP
A recession can affect only one industry,
related industries, or spread to the entire
economy.
The ripple effect is when a recession in one
industry leads to a recession in other
industries.
Recession
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Exp: if there is a recession in the auto making
industry, it leads to a recession in industries that
make parts for the cars
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Like steel, and rubber
In 1970 an oil shortage in the U.S. caused gas prices
to increase
Gas is used for every kind of activity, from driving
to work, to transporting goods to market
As a result the price of everything went up and led to
a major recession
Depression
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A deep recession that affects the entire
economy and lasts for several years is called a
depression.
During a depression there is high
unemployment, low production of goods and
services, and excess capacity in
manufacturing plants.
A depression can be limited to one country
but usually spreads to related countries.
Depression
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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.
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A decline of 50%
During the Great Depression, the number of
people out of work rose nearly 800 percent.
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From 1.6 to 12.8 million
Depression
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During the worst years of the depression 1 out of
every 4 workers where jobless
The average manufacturing wage was a .55 cents an
hour but fell to .05 cents an hour
Many banks failed and FDIC did not exist, so
depositors where not protected.
The money supply fell by 1/3
Currency was in such a short supply that towns and
counties, resorted to printing their own money
Recovery
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A rise in business activity after a recession or
depression is called a recovery.
During a recovery:
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Production starts to increase
People start going back to work and have money
to spend again
The new demand for goods and services
stimulates more production
The GDP grows
New businesses open
Recovery
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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.
During a recovery businesses might start to
innovate a new product or a new way of
performing a task
Recovery
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When a business innovates, it often gains and
edge on its competition b/c its costs goes
down or its sales go up
Profit increases, business grows, and
economic activity soars.
Homework
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Page 44-45
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