Objective 1.02

Understand economic conditions

1

• Measuring economic activities

• Classifying economic conditions

Topics

2

Measuring Economic Activities

3

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– Individual spending– Business spending– Government spending– Exports & imports

• Name some products or services you have purchased or from which you have received benefits.

4

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.10

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 (20-year) 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.

Each day, the cost of

money (interest) changes

because of various factors.

Project

• Complete the review sheet located on my desk. Use all notes, PowerPoints, online review to assist you in answering the questions.