Transcript Introduction to Business

Chapter 2
Economic Activity
2-1 Measuring Economic Activity
2-2 Economic Conditions Change
2-3 Other Measures of Business
Activity
Introduction to Business
© Thomson South-Western
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The gross domestic product (GDP) is one the primary indicators used to gauge the
health of a country's economy. It represents the total dollar value of all goods and
services produced over a specific time period - you can think of it as the size of the
economy. Usually, GDP is expressed as a comparison to the previous quarter or
year. For example, if the year-to-year GDP is up 3%, this is thought to mean that
the economy has grown by 3% over the last year.
Measuring GDP is complicated (which is why we leave it to the economists), but at
its most basic, the calculation can be done in one of two ways: either by adding up
what everyone earned in a year (income approach), or by adding up what everyone
spent (expenditure method). Logically, both measures should arrive at roughly the
same total.
The income approach, which is sometimes referred to as GDP(I), is calculated by
adding up total compensation to employees, gross profits for incorporated and non
incorporated firms, and taxes less any subsidies. The expenditure method is the
more common approach and is calculated by adding total consumption, investment,
government spending and net exports.
As one can imagine, economic production and growth, what GDP represents, has a
large impact on nearly everyone within that economy. For example, when the
economy is healthy, you will typically see low unemployment and wage increases
as businesses demand labor to meet the growing economy. A significant change in
GDP, whether up or down, usually has a significant effect on the stock market. It's
not hard to understand why: a bad economy usually means lower profits for
companies, which in turn means lower stock prices. Investors really worry about
negative GDP growth, which is one of the factors economists use to
determine whether an economy is in a recession.
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LESSON 2-1
Measuring Economic Activity
Goals
 Define gross domestic product.
 Describe economic measures of labor.
 Identify economic indicators for
consumer spending.
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Gross Domestic Product (GDP)
 The total $ value of all final goods & services
produced in a country during one year.
 Why final, what does that mean?
 Don’t want to count things twice.
 The stuff used to make the final product
 The costs are in it.
 What doesn’t it include?
 The value of what you do for yourself
 Cut lawn, build swing set
 Yearly increases are signs of a healthy, growing economy
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Gross Domestic Product (GDP)
 Components of GDP
 4 categories of economic activity
1. Consumer spending for food, clothing, housing
and other spending
2. Business spending for buildings, equipment &
inventory
3. Govt. spending to pay employees and buy
supplies and other G & S.
4. The exports of a country less the imports in.
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Comparing GDP
 GDP isn’t always the whole story
 GDP PER CAPITA
 What’s this?
 Output Per Person
 GDP / total Population
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Comparison of GDP in
Selected Countries
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LABOR ACTIVITIES
 Employment
 Those older than 16 who are actively
working or seeking work.
 Students, retired people and those who can’t or
don’t wish to are excluded
 Unemployment rate
 The portion of people in the labor force
who are not working
 Those who wish to work.
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LABOR ACTIVITIES
 Productivity
 Output per worker
 How to increase this?
 Technology – capital resources
 Training – capital & human resources together
 Can decrease after a while
 We’ve got to get the most out of the new
technology
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LABOR ACTIVITIES
 Problems
 Wages increase faster than gains in
productivity
 Then what?
 Price must go up
 Why?
 It costs more to produce the goods
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LABOR ACTIVITIES
 Technology increase productivity
since the turn of the last century
 60 hour work week then
 Now?
 40
 How?
 Technology and efficiency
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Consumer Spending
 What items are measured?
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Autos
Building materials
Furniture
Gasoline
clothing
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Restaurants
Department stores
Food stores
Drug stores
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Retail Sales
 Personal Income
 Salaries, wages, investment income and
govt. payments to individuals
 How we buy the G & S
 Retail Sales
 The sales of durable and nondurable
goods bought by consumers
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LESSON 2-2
Economic Conditions Change
Goals
 Describe the four phases of the
business cycle.
 Explain causes of inflation and
deflation.
 Identify the importance of interest rates.
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THE BUSINESS CYCLE
 Prosperity
 People who want to work, are
 Goods & services are being produced in
record numbers
 Wages are good
 GDP increases
 Demand for G & S is high
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THE BUSINESS CYCLE
 Recession
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Economy slows
Demand begins to decrease
Production lowers
Unemployment begins to rise
GDP slows for 2 or more quarters
Signals trouble ahead
 Ripple effect
 One problem trigger another
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THE BUSINESS CYCLE
 Depression
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Recession deepens
High unemployment
Weak consumer spending
Businesses fail
GDP falls rapidly
 The Great depression
 When?
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THE BUSINESS CYCLE
 Recovery
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Unemployment begins to decrease
Demand for G & S increases again
GDP begins to rise
Confidence in the economy increases
 Back to prosperity!
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CONSUMER PRICES
 Inflation
 An increase in general level of prices
 Buying power decreases
 Who does it hurt the most?
 Fixed income
 Prices stay same and packages shrink?
 Examples
 Ice Cream
 Current Inflation rate???
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CONSUMER PRICES
WIN
 Causes of inflation
 Demand exceeds supply
 Measuring inflation
 Late 70’s – early 80’s
 It hit 10- 12 %
 MODERATE CAN BE GOOD
NIM
 2–3$
 Helps stimulate economy
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Consumer Price Index (CPI)
Compares prices in one year with a
base year
 A select group of items
 Some can go up while others go down
 Necessities going up can have a greater
impact
 Gas, heating oil prices
WHAT’S IT AT NOW
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Deflation
Price go down
 Occurs during recession or
depression
 Prices are lower but…
 People probably have less $$
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INTEREST RATES
 The cost to borrow money
 Markup on $$$
 Types of interest rates
 Prime
 Banks rate to best business customers
 Discount
 Rate financial institutions are charged by the
Federal Reserve
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INTEREST RATES
 T-Bill
 Short term (13-week) U.S. Govt. Debt. Obligations
 Treasury bond
 Long term (20-week) U.S. Govt. Debt. Obligations
 Mortgage
 Individuals pay for home purchase
 CD
 6-month time deposits at savings institutions.
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LESSON 2-3
Other Measures
of Business Activity
Goals
 Discuss investment activities that
promote economic growth.
 Explain borrowing activities by
government, business, and consumers.
 Describe future concerns of economic
growth.
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Capital Projects
 Capital spending
 Money spent for something that will benefit
the business for a long period of time
 Like?
 Land, buildings, equipment
 Sources of Capital
 Personal savings—you know this one
 Stock investments
 bonds
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Capital
 Stock
 Ownership in a company
 Equity
 Right or claim against something
 Shares of a business
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D
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Capital
 Bonds
 Like a loan
 It is debt to the business
 Those who buy them are your creditors
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Borrowing/ Debt
 budget surplus
 Spend less than it takes in
 budget deficit
 Spend more
 national debt
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>> C H E C K P O I N T
Name some examples of capital projects.
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>> C H E C K P O I N T
What is the cause of a budget deficit?
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FUTURE ECONOMIC
CHALLENGES
 Limited access to health care
 Need for proper housing for many
people
 Traffic and crime
 Unemployment
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