introduction to business

1. Principles of Business, 8e
C H A P T E R 2
SLIDE
2-1 Measuring Economic Activity
2-2 Economic Conditions
Change
2-3 Other Measures of Business
Activity
2
C H A P T E R
Economic
Activity

3. 2-1 Measuring
Economic Activity
Goal 1 Define gross domestic product.
Goal 2 Describe economic measures of
labor.
Goal 3 Identify economic indicators for
consumer spending.

4. Principles of Business, 8e
C H A P T E R 2
KEY TERMS
● Gross Domestic Product (GDP)
● GDP per capita
● unemployment rate
● productivity
● personal income
● retail sales

5. Principles of Business, 8e
C H A P T E R 2
GROSS DOMESTIC PRODUCT
(GDP)

6. Principles of Business, 8e
C H A P T E R 2
GROSS DOMESTIC
PRODUCT (GDP)
● There are several ways to measure your
own growth
● so how do we measure business and
economic growth and activity?

7. Principles of Business, 8e
C H A P T E R 2
GROSS DOMESTIC
PRODUCT (GDP)
● Economic growth refers to a
steady increase in the production
of goods and services in an
economic system

8. Principles of Business, 8e
C H A P T E R 2
GROSS DOMESTIC
PRODUCT (GDP)
● Governments collect information from
producers and estimate national
output
● The most widely-used measure is
gross domestic product

9. Principles of Business, 8e
C H A P T E R 2
GROSS DOMESTIC
PRODUCT (GDP)
● Gross domestic product (GDP)
is the TOTAL VALUE OF ALL
FINAL GOODS & SERVICES
produced in a country during one
year

10. Principles of Business, 8e
C H A P T E R 2
COMPONENTS OF GDP
1. Consumer spending – spending by
households for food, clothing,
housing, and other aspects

11. Principles of Business, 8e
C H A P T E R 2
COMPONENTS OF GDP
2. Investment spending – spending
by businesses for buildings,
equipment, and inventory

12. Principles of Business, 8e
C H A P T E R 2
COMPONENTS OF GDP
3. Government spending – to pay
employees and to buy supplies and
other goods and services

13. Principles of Business, 8e
C H A P T E R 2
COMPONENTS OF GDP
4. Net exports – exports (sales to
foreign countries) minus imports
(purchases from foreign countries)

14. Principles of Business, 8e
C H A P T E R 2
COMPONENTS OF GDP
GDP = C + I + G + (X-M)

15. Principles of Business, 8e
C H A P T E R 2
NOT GDP
Some goods and services are NOT included:
● Services you do for yourself
● Resale of used goods
● Illegal goods and services

16. Principles of Business, 8e
C H A P T E R 2
NOT GDP
Some goods and services are NOT included:
● Intermediate goods
● Input goods (goods used in the making of other
goods) would be counted twice if intermediate
goods were included
● The value of the intermediate goods are included
in the value of the final good

17. Principles of Business, 8e
C H A P T E R 2
NOT GDP
Some goods and services are NOT included:
● Intermediate goods
● Input goods (goods used in the making of other
goods) would be counted twice if intermediate
goods were included
● The value of the intermediate goods are included
in the value of the final good

18. Principles of Business, 8e
C H A P T E R 2
COMPARING GDP
● Another way to measure economic
growth is GDP per capita
● GDP per capita is OUTPUT PER
PERSON
● Calculated by dividing GDP by total
population

19. Principles of Business, 8e
C H A P T E R 2
COMPARISON OF GDP IN
SELECTED COUNTRIES

20. Principles of Business, 8e
C H A P T E R 2
COMPARING GROSS
DOMESTIC PRODUCT

21. Principles of Business, 8e
C H A P T E R 2
Checkpoint ✓
● What types of economic activities are
included in GDP?
● Consumer spending (household)
● Investment spending (business)
● Government spending
● Net exports (exports – imports)

22. Principles of Business, 8e
C H A P T E R 2
LABOR ACTIVITIES

23. Principles of Business, 8e
C H A P T E R 2
LABOR ACTIVITIES
● Workers contribute to the
economy in several ways

24. Principles of Business, 8e
C H A P T E R 2
EMPLOYMENT
● More than 155 million people work in the US
● The US labor force is made up of
everyone 16 and older who are working
or actively seeking work
● Must be WILLING AND ABLE to
work

25. Principles of Business, 8e
C H A P T E R 2
EMPLOYMENT
● One economic statistic of concern
is the unemployment rate
● The unemployment rate is the %
of people in the labor force who
are NOT WORKING

26. Principles of Business, 8e
C H A P T E R 2
PRODUCTIVITY
● Another statistic of importance is
worker productivity, or OUTPUT PER
WORKER
● Productivity is
the production
output in relation
to a unit of input

27. Principles of Business, 8e
C H A P T E R 2
PRODUCTIVITY
● Increases in productivity may be due to:
● Improvements in capital resources
(equipment, technology, etc)
● More worker training
● Better management

28. Principles of Business, 8e
C H A P T E R 2
Checkpoint ✓
● How can productivity be increased?
● Productivity can be increased by improvements
in:
● capital resources (equipment and technology)
● worker training
● management techniques.

29. Principles of Business, 8e
C H A P T E R 2
CONSUMER SPENDING

30. Principles of Business, 8e
C H A P T E R 2
CONSUMER SPENDING
● The money you earn and
spend is one of the most
important factors for economic
growth

31. Principles of Business, 8e
C H A P T E R 2
CONSUMER SPENDING
● Personal income refers to the
MONEY THAT INDIVIDUALS
EARN, including wages,
salaries, investment income
and government payments

32. Principles of Business, 8e
C H A P T E R 2
CONSUMER SPENDING
● Retail sales are an indicator of
general consumer spending
patterns in the economy
● Retail sales is the SALE OF
DURABLE AND NONDURABLE
GOODS bought by consumers

33. Principles of Business, 8e
C H A P T E R 2
CONSUMER SPENDING
● The main items whose sales are measured for
estimating retail sales include:
● automobiles
● building materials
● furniture
● gasoline
and
● clothing
as well as purchases from:
● restaurants
● department stores
● food stores
and
● drug stores

34. Principles of Business, 8e
C H A P T E R 2
Checkpoint ✓
● What are the main sources of personal
income?
● Sources of personal income include:
● Wages
● Salaries
● Investment income
● Government payments

35. Principles of Business, 8e
C H A P T E R 2

36. 2-2 Economic
Conditions Change
Goal 1 Describe the four phases of the
business cycle.
Goal 2 Explain causes of inflation and
deflation.
Goal 3 Identify the importance of interest
rates.

37. Principles of Business, 8e
C H A P T E R 2
KEY TERMS
● business cycle
● peak
● recession
● depression
● expansion
● inflation
● price index
● deflation

38. Principles of Business, 8e
C H A P T E R 2
THE BUSINESS CYCLE
● Economic activity tends to move in waves, or cycles
● The movement of the economy from one
condition to another and back again is called
a business cycle
● Business cycle – fluctuations in
economic activity

39. Principles of Business, 8e
C H A P T E R 2
THE BUSINESS CYCLE
● 4 phases:
● Peak – the phase in which GDP reaches its
maximum
● Recession – a downturn in which GDP
declines and unemployment rises
● Trough – the phase in which GDP reaches its
minimum
● Expansion – an upturn in activity in which
GDP rises and unemployment falls

40. Principles of Business, 8e
C H A P T E R 2
THE BUSINESS CYCLE
Recession

41. Principles of Business, 8e
C H A P T E R 2
● additional points/phases:
● Recovery – the portion of expansion starting at
the trough and growing to the previous peak
● Boom – expansion beyond the previous peak
● Depression – phase marked by a prolonged
period of high unemployment. A severe recession
Recession
THE BUSINESS CYCLE

42. Principles of Business, 8e
C H A P T E R 2
Checkpoint ✓
● What are the four phases of the business
cycle?
● Peak
● Recession
● Trough
● Expansion

43. Principles of Business, 8e
C H A P T E R 2
CONSUMER PRICES

44. Principles of Business, 8e
C H A P T E R 2
INFLATION
● Inflation is an INCREASE IN
THE GENERAL LEVEL OF
PRICES

45. Principles of Business, 8e
C H A P T E R 2
INFLATION
● In times of inflation, the buying
power decreases
● For example, if prices rise 5%, items
that had cost $100 would now cost $105
● It takes more to buy the same amount
● Inflation is most harmful to people of fixed
incomes

46. Principles of Business, 8e
C H A P T E R 2
● When quantity demanded is
greater than quantity supplied,
prices tend to rise
CAUSES OF INFLATION

47. Principles of Business, 8e
C H A P T E R 2
CAUSES OF INFLATION
● When more money is printed/minted,
money becomes less scarce and more
plentiful
● As items become less scarce, their value tends to
fall
● Falling value of dollars means it takes more dollars
to buy the same items (meaning prices rose)

48. Principles of Business, 8e
C H A P T E R 2
MEASURING INFLATION
● One of the most common measures of
inflation is called the Consumer Price
Index (CPI)
● CPI compares prices in
one year to prices in an
earlier base year

49. Principles of Business, 8e
C H A P T E R 2
DEFLATION
● The opposite of inflation is called deflation
● Deflation is a DECREASE IN
THE GENERAL LEVEL OF
PRICES
● Usually occurs in periods of recession or
depression

50. Principles of Business, 8e
C H A P T E R 2
Checkpoint ✓
● What are the main causes of inflation?
● Inflation is an increase in the general level of
prices
● It occurs when the demand for goods and
services is greater than supply
● It occurs when more money is printed/minted

51. Principles of Business, 8e
C H A P T E R 2
INTEREST RATES
● Interest rates represent the
COST OF BORROWING
MONEY

52. Principles of Business, 8e
C H A P T E R 2
TYPES OF INTEREST RATES
● Prime rate – the rate banks charge their
best customers
● Discount rate – the rate financial
institutions are charged to borrow from the
Federal Reserve (The Fed)
● Federal funds rate – the rate banks
charge each other. Set by The Fed

53. Principles of Business, 8e
C H A P T E R 2
TYPES OF INTEREST RATES
● T-bill rate – the rate on short-term (13-
week) US debt
● Treasury bond rate – rate on long-term
(up to 30 years) US debt

54. Principles of Business, 8e
C H A P T E R 2
Checkpoint ✓
● How do interest rates affect business activities in
our economy?
● Interest rates can encourage or discourage borrowing
and spending.
● Lower interest rates allow consumers greater
spending power, which increases demand,
productivity, and employment.
● Businesses often pass on the cost of higher interest
rates to consumers.

56. 2-3 Other Measures
of Business Activity
Goal 1 Discuss investment activities that
promote economic growth.
Goal 2 Explain borrowing activities by
government, business, and consumers.
Goal 3 Describe future concerns of economic
growth.

57. Principles of Business, 8e
C H A P T E R 2
KEY TERMS
● capital project
● stock
● bond
● budget surplus
● budget deficit
● national debt

58. Principles of Business, 8e
C H A P T E R 2
INVESTMENT ACTIVITIES
● Remember that business expenses are
considered investment spending (also
called capital spending)
● Capital projects involve SPENDING
BY BUSINESSES for items such as
land, buildings, equipment, and new
projects

59. Principles of Business, 8e
C H A P T E R 2
INVESTMENT ACTIVITIES
● Personal savings
● Companies use money you deposit in a
financial institution to fund investment
projects
● In return, depositors are paid interest on
their deposits

60. Principles of Business, 8e
C H A P T E R 2
INVESTMENT ACTIVITIES
● Stock market investments
● Many people investing in stocks
● Stocks represent partial owner-
ship in a corporation
● Stock ownership is also called
equity

61. Principles of Business, 8e
C H A P T E R 2
INVESTMENT ACTIVITIES
● Another investment activity is the buying
and selling of bonds
● Bonds represents debt for an
organization
● The bond purchaser becomes a creditor
(a lender to the bond seller)
● The holder of the bond is paid interest

62. Principles of Business, 8e
C H A P T E R 2
Checkpoint ✓
● Name some examples of capital projects.
● Capital projects include the purchase of any
item a business will use over an extended
period of time such as land, buildings, and
equipment.

63. Principles of Business, 8e
C H A P T E R 2
BORROWING

64. Principles of Business, 8e
C H A P T E R 2
BORROWING
● Government debt
● Governments provide services, which cost $
● $ gets that money through taxes and borrowing
● A gov’t that spends less than it brings in is said
to have a budget suprlus
● A gov’t that spend more than it brings in has a
budget deficit
● The total amount owed by the federal
government is called the national debt

65. Principles of Business, 8e
C H A P T E R 2
BORROWING
● Business debt
● Consumer debt

66. Principles of Business, 8e
C H A P T E R 2
Checkpoint ✓
● What is the cause of a budget deficit?
● A budget deficit occurs when a government or
organization spends more than it takes in.

67. Principles of Business, 8e
C H A P T E R 2
FUTURE ECONOMIC
CHALLENGES
● Emerging markets are places where
consumer incomes and buying power
are increasing due to economic
expansion
● Weak economies provide
opportunities

68. Principles of Business, 8e
C H A P T E R 2
Checkpoint ✓
● What economic challenges do countries
face in the future?
● Future economic concerns for any country
include the ability to increase its output and
provide a means for its citizens to meet the
basic needs of food and shelter, adequate
health care, education, transportation,
employment, and safety.