Transcript Objective 1.02

Objective 1.02
Understand economic conditions
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Topics
• Measuring economic activities
• Classifying economic conditions
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Measuring Economic Activities
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Gross Domestic Product (GDP)
• GDP -is the highly used measurement to determine a
country’s overall economic output.
• GDP is a country’s total dollar value of all final goods
and services produced in one year.
• Major categories of GDP
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Individual spending
Business spending
Government spending
Exports & imports
• Name some products or services you have purchased or
from which you have received benefits.
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GDP per capita
GDP per capita = output per person
GDP per capita is calculated by using the
following formula:
GDP per capita=_______GDP________
Total Population
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Labor Activities
• Unemployment rate includes the people of the
labor force that are unemployed.
• People are considered to be “unemployed” if
they are looking for work and willing to work but
unable to find a job.
Productivity means production output per worker.
– What can contribute to employees increasing their
production?
• One example would be that a company could make an
improvement in their equipment.
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Consumer Spending
Measurement of consumer
spending:
• Personal income includes the
total wages and salaries plus
investment income and
government payments to
individuals
• Retail Sales include the sales of
goods and services purchased
by consumers. The sales are an
indicator of general consumer
spending patterns.
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Investment Activities
• Capital projects involve spending by
businesses for items such as land,
equipment, buildings, etc.
• The money used for capital projects
comes from three main sources:
• Personal savings
• The stock market
• The bond market
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How does each investment activity
impact economic growth?
• Personal Savings: Businesses use money deposited in
personal saving accounts to buy equipment or products
for their businesses. Savers earn interest on money
used by companies and other individuals.
• Stock Market: Higher earnings for businesses increases
their value, which causes a demand for people wanting
to buy the businesses stock.
• Bond Market: The bond market make available for
businesses and government to borrow money.
Bondholders earn interest on money loaned to
businesses and government.
Borrowing Activities by Government
and Businesses …
• Governments borrow money to finance projects like
schools, public highways, and parks.
• Businesses/Companies may borrow money to start up or
expand.
• How can government borrowing lead to a budget deficit?
– If the government spend more money than it collects,
then a budget deficit is resulted.
• How can using borrowed money wisely impact
businesses?
– Using borrowed fund efficiently can result in an
increase in sales and profits.
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Project
• Your team is to obtain data on the total
United States unemployment rate for the
last 5 years. Prepare a graph to illustrate
the changes in the unemployment rate.
• Remember to email me your team roles!
• Team leaders should be prepared to meet
with me to discuss your completion goal.
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1.02b
Understanding Economic
Conditions
The Business Cycle
• The business cycle is movement from 1
economic condition to another.
• Business cycles are the recurring ups and
downs of GDP.
• The business cycle contains 4 phases:
– Prosperity
– Recession
– Depression
– Recovery
Prosperity
• Occurs at the peak of the business cycle
• A period where most people who want to
work are working
• Businesses are producing goods and
services in record numbers
• Wages are good and the rate of GDP
growth increases
Recession
• When the economy slows down.
• Demand begins to decrease, businesses
lower production, unemployment begins to
rise, and GDP growth slows for 2 or more
quarters of the calendar year.
• This phase may not be too serious or last
very long, but it often signals trouble for some
groups of workers in related businesses.
• Some recessions last for long periods as
fewer factors of production are used and
demand falls.
Depression
• A phase marked by a prolonged period of
high unemployment, weak consumer
sales, and business failures.
• GDP falls rapidly during a depression.
• A nation doesn’t have to go through the
depression phase.
• Fortunately, our economy hasn’t had a
depression for more than 60 years. Great
Depression 1930 – 1940.
Recovery
• Economic downturns don’t last forever. A
welcome phase of the business cycle,
known as recovery, begins to appear.
• Unemployment begins to decrease
• Demand for goods and services increases
• GDP begins to rise again.
• As recovery continues, the nation moves
back into prosperity.
Individual Project
• You are to create a business cycle.
Include each phase, characteristics of
each phase, examples how it relates to
you (your family, community, etc.).
• You will be evaluated on the following
criteria:
– Depth of information
– Correctness of information
– Creativity
1.02c
Understanding Economic
Conditions Continuted
Think about this….
• Have you ever noticed that packages of
some items get smaller while the price
stays the same? This affects your buying
power.
Items that affect your buying
power…
• Inflation
• Deflation
• Interest Rates
Inflation
• An increase in the general level of prices.
• In times of inflation, the buying power of
the dollar decreases. Example: if prices
increase 5% during the last year, items
that cost $100 would now cost $105.
• It now takes more money to buy the SAME
amount of goods and services.
• Inflation is most harmful to people living on
fixed incomes. Example: Retired people
Causes of Inflation
• When the demand for goods and services is
greater than the supply. Money, earned or
borrowed, is spent for goods/services that are
in short supply, prices increase.
• Wages typically will increase during inflation;
however, the prices of goods/services rise
faster than the wage increase.
• Business tend to hire fewer workers because
they can’t keep up with paying higher wages
and paying higher prices for their supplies.
Measuring Inflation
• Inflation rates vary.
• Mild inflation (2%-3%) can actually help
stimulate the economic growth. Business
are able to hire employees. These
employees will be able to spend money.
• In the US, one of the most watched
measures of inflation is called the
Consumer Price Index (CPI).
CPI
• The Consumer Price Index (CPI) is a
number that compares prices in one year
with some earlier base year.
• Example of prices compared: food, gas,
healthcare
Deflation
• Decrease in the general level of prices
• Usually occurs during periods of recession
and depression
• Prices of products are lower, but people
have less money to buy them.
Interest Rates
• In simple terms, interest rates represent the
cost of money.
• Like everything else, money has a price.
• Companies and Governments that borrow
money are affected by interest rates. Higher
interest rates mean higher business costs.
• People with poor credit ratings pay a higher
interest rate than people with good credit
ratings.
Types of Interest Rates
• The prime rate is the rate
banks make available to
their best business
customers.
• The discount rate is the rate
financial institutions are
charged to borrow funds
from Federal Reserve
banks.
• The T-Bill rate is the yield
on short term (13-week) US
government debt
obligations
• The treasury bond rate is
the yield on long-term (20year) US government debt
obligation.
• The mortgage rate is the
amount individuals pay to
borrow for the purchase of a
new home.
• The corporate bond rate is
the cost of borrowing for
large US corporations.
• The certificate of deposit
(CD) rate is the rate for 6
month time deposits at
savings institutions.
Project
• Complete the review sheet located on my
desk. Use all notes, PowerPoints, online
review to assist you in answering the
questions.