Essential Standard 1.00

Understand the role of business in the global economy.

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Objective 1.02

Understand economic conditions

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• Measuring economic activities• Classifying economic conditions

Topics

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Measuring Economic Activities

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Measuring Economic ActivitiesGross Domestic Product (GDP)

• GDP: a country’s total dollar value of all final goods and services produced in one year.

• The most commonly used measurement to determine a country’s overall economic growth

Consumer SpendingBusiness (Investment) SpendingGovernment Spending

+(Exports - Imports)-----------------------------------Gross Domestic Product

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GDP per capita

GDP per capita = output per person

= _________GDP__________Total Population of the Country

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Standard of Living

Standard of living refers to the level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area. The standard of living includes factors such as income, quality and availability of employment, class disparity, poverty rate, quality and affordability of housing, hours of work required to purchase necessities, gross domestic product, inflation rate, number of vacation days per year, affordable (or free) access to quality healthcare, quality and availability of education, life expectancy, incidence of disease, cost of goods and services, national economic growth, economic and political stability, political and religious freedom, environmental quality, climate and safety. The standard of living is closely related to quality of life.

Measuring Economic ActivitiesLabor Activities

• Unemployment rate: The percentage the total labor force that are not working, but actively seeking employment and willing to work.

• Productivity: A measure of output from a production process, per unit of input– Gains in Productivity Result in Record Output – What can contribute to employees increasing

their production?• Equipment, technology, training, management

Measuring Economic ActivitiesLabor Activities

– U.S. July 2011 rate => 9.1% • 13.9M people are unemployed in the US• http://www.bls.gov/web/laus/laumstrk.htm

– North Carolina’s July 2011 rate => 10.1%• Over 471,000 people are unemployed in

NC• http://

www.ncesc1.com/PMI/Rates/PressReleases/County/NR_July2011_CountyRates_M.pdf

– Robeson County July 2011 rate => 13.4%

US 10 Year Unemployment

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Measuring Economic ActivitiesConsumer Spending

Measurements of consumer spending:

• Personal Income: an individual’s total earnings from wages, investment interest, and other sources

• Retail Sales: sales of durable and non durable goods and services purchased by consumers (autos, building materials, furniture, gas, $ spent at restaurants, etc)

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Measuring Economic ActivitiesInvestment (for the future)

• The money used for capital projects (land, buildings, equipment, research) comes from three main sources:

– Personal Savings

– The Stock Market

– The Bond Market

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Personal Savings:• People and businesses deposit money in

bank savings accounts. Banks then lend this money to businesses which use the borrowed money to buy equipment or products for their businesses.

• Savers, in turn, earn interest on money used by companies and other individuals.

• What happens if people don’t save??

Measuring Economic ActivitiesInvestment (for the future)

Measuring Economic ActivitiesInvestment (for the future)

The stock market:• Stock represents ownership in a

company. If a company wants to expand, it can sell stock to raise money.

• Higher earnings for businesses increases their value, which causes a demand for people wanting to buy the businesses stock.

Measuring Economic ActivitiesInvestment (for the future)

The bond market:– Bonds represent debt for a company.

If a company wants to expand, it can sell bonds to raise money. • Bondholders purchase the bonds,

and earn interest on the money they have loaned to businesses and the government.

• Eventually, the company pays the bondholders back their money, with interest.

Borrowing Activities …Governments: If governments want to spend more

than they brings in through taxes and fees, they may have to borrow money. This overspending is known as a budget deficit. The amount by which a government’s spending exceeds its income over a particular period of time. Also called deficit or deficit spending.

U.S. National Debt: www.usdebtclock.org

Borrowing Activities …

When the Government borrows money, it doesn’t go to the bank and apply for a loan. It "issues debt." This means the Government sells Treasury marketable securities such as Treasury bills, notes, bonds and Treasury inflation-protected securities (TIPS) to other federal government agencies, individuals, businesses, state and local governments, as well as people, businesses and governments from other countries.

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Borrowing Activities …

Companies: • Companies may borrow money to start up or

expand.• Using borrowed funds efficiently can result in

an increase in sales and profits. • Companies may borrow from a bank or sell

bonds.

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Measuring Economic Activities

GDP GDP Per capita

Labor ActivitiesConsumer Spending

Investment Activities

Borrowing Activities

Classification of Economic Conditions

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PROSPERITY RECESSION

DEPRESSION

RECOVERY

Situation PROSPERITY RECESSION DEPRESSION RECOVERY

Employment trend

Labor: People who want to work are working; unemployment lowWages: Good

Unemployment increases as workers are laid off.

Prolonged period of high unemployment

Unemployment decreases companies begin to rehire workers

Supply and demand of goods and services trend/GDP

GDP: IncreasingConsumer Demand: Increasing

Demand decreases as people lose jobs;GDP: growth slows for 2 or more quarters

Demand for products and services is very weak; GDP falls rapidly

Demand increases; GDP begins to rise

Possible actions of businesses

Profits strong as is productionCompanies hiring & expanding (Macy’s may open more stores)

Businesses decrease production as demand decre ases; profits suffer Businesses may strategize on ways to stimulate demand for goods & services

Business failures and closings increase; companies make changes (such as moving employees from full time to part time to decrease hours and reduce benefits) just to stay open

Businesses begin rehiring and increasing production; companies may again begin recruiting efforts at colleges

4 Phases of the Economic Cycle

-Unemployment remains low -Strong consumer confidence about the future leads to record purchases-Businesses expand to take advantage of marketplace opportunties. -The decade-long run of economic prosperity in the U.S. from the early 1990s to 2001 was one of the longest in a century.

Prospersity:

Recession:

-A cyclical economic contraction that lasts for six months or longer-Consumers frequently postpone major purchases and shift buying patterns toward basic, functional products carrying low prices. -Businesses mirror these changes in the marketplace by slowing production, postponing expansion plans, reducing inventories, and often cutting the size of their workforce.

Depression:- When the economic slowdown continue in a

downward spiral over an extended period of time, the economy falls into depression.

- The Great Depression of the 1930’s

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Recovery:-The economy emerges from recession and consumer spending picks up steam.-Even through business often continue to rely on part time and other temporary workers during the early stages of a recovery, unemployment begins to decline, as business activity accelerates and firms seek additional workers to meet growing production demands. -Gradually, the concerns of recession begin to disappear, and consumers start purchasing more discretionary items such as vacations and new computer equipment.

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Consumer Prices

• Inflation • Causes of inflation• Consumer Price Index (CPI) • Deflation• Causes of deflation

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Inflation:-The rate at which the general level of prices for goods and services is rising-As inflation rises, every dollar will buy a smaller percentage of a good.

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Interest Rates

• Types:– Prime rate– Discount rate– T-bill rate– Treasury bond rate– Mortgage rate– Corporate bond rate– Certificate of deposit rate

What is the primary purpose of each?

• How do interest rates impact businesses?

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