Ch 03

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Chapter 3 Economic Activity in aChanging World

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Introduction to Business, Economic Activity in a Changing World Slide 2 of 42

Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:

1.1. IdentifyIdentify how economic activity is measured.

2.2. ExplainExplain how inflation and deflation work.3.3. DiscussDiscuss the four phases of the business

cycle.

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Why It’s ImportantWhy It’s Important

Economic activity affects everyday life. The history of the economy affects industries and people of today and tomorrow.

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Key WordsKey Wordsgross domestic product (GDP) standard of living inflationdeflationbudget deficitnational debt budget surplus

business cycleprosperityrecessiondepressionrecovery

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Measuring Economic Activity Measuring Economic Activity Economic indicators are figures used to measure economic performance.

Economic indicators measure things like how much a country is producing, whether its economy is growing, and how it compares to other countries.

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Gross Domestic Product (GDP) Gross Domestic Product (GDP) One way of telling how well an economy is performing is to determine how many goods and services it produces during a certain period of time.

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Gross Domestic Product (GDP) Gross Domestic Product (GDP) The total value of the goods and services produced in a country in a given year is called its gross domestic product (GDP). To calculate the GDP, economists compute the sum of goods and services.

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Gross Domestic Product (GDP) Gross Domestic Product (GDP)

• Consumer goods and services• Business goods and services• Government goods and services• Goods and services sold to other

countries

Economists include four main areas in calculating the GDP:

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Gross Domestic Product (GDP) Gross Domestic Product (GDP) The GDP doesn’t include the goods and services that aren’t reported to the government.The standard of living is the amount of goods and services the average citizen can buy.

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Figure3.1 GROSS DOMESTIC PRODUCT

The gross domestic product (GDP) is the output of goods and services produced in a country.

Q1. What percentage did the GDP increase from the end of Year 2 to the beginning of Year 3?

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Graphic OrganizerGross Domestic ProductGross Domestic Product

Graphic OrganizerGraphic Organizer

ConsumerConsumergoods goods

andandservicesservices

BusinessBusinessgoodsgoods

andandservicesservices

GovernmentGovernmentgoodsgoods

andandservicesservices

GoodsGoodsandand

servicesservicessold tosold tootherother

countriescountries

+ =++GrossGross

DomesticDomesticProductProduct

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Unemployment Rate Unemployment Rate The unemployment rate measures the number of people who are able to work but don’t have a job during a given period of time.

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Unemployment Rate Unemployment Rate There are different reasons for being unemployed, including:

• Temporary• Seasonal• Changes in industry• Economic slowdown

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Unemployment Rate Unemployment Rate Changes in the unemployment rate show whether an economy is picking up or slowing down.

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Rate of Inflation Rate of Inflation Inflation is a general increase in the cost of goods and services.

Inflation can happen when an economy actually becomes too productive.

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Rate of Inflation Rate of Inflation As the demand for goods goes up, producers raise their prices.

To pay the higher prices, workers demand higher wages.

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Rate of Inflation Rate of Inflation When wages go up, producers raise prices again to pay for the higher wages, and so on.

This situation can spiral out of control and lead to hyperinflation.

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Rate of Inflation Rate of Inflation Deflation is a general decrease in the cost of goods and services.

When an economy produces more goods than people want, it has to lower prices and cut production.

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Rate of Inflation Rate of Inflation The United States tries to maintain a slow but steady rate of economic growth to avoid both inflation and deflation.

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National Debt National Debt When the government spends more on programs than it collects in taxes, the difference in the amount is called the budget deficit.

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National Debt National Debt The total amount of money a government owes is its national debt.

If the debt gets too large, a nation can become dependent on other nations or unable to borrow any more money.

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National Debt National Debt If a nation spends less than its income, it has a budget surplus.

The government will probably use a surplus to cut taxes, reduce the national debt, or increase spending for certain programs.

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Fast Review

Q2. What are some of the types of unemployment?

Q3. What is the difference between inflation and deflation?

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The Business Cycle The Business Cycle Over long periods of time economic changes seem to form patterns.

The rise and fall of economic activity over time is called the business cycle.

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The Business Cycle The Business Cycle The four phases of the business cycle are:

• Prosperity • Recession• Depression• Recovery

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Figure3.2 BUSINESS CYCLE MODEL

The repeated rise and fall of economic activity over time is called a business cycle.

What are the four phases of the cycle?

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The Business Cycle The Business Cycle In a global economy, in which several countries are trading goods and services with one another, one country’s economy can affect its trading partners’ economies.

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Prosperity Prosperity Prosperity is a peak of economic activity.

Unemployment is low, production of goods and services is high, and new businesses open.

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Prosperity Prosperity Prosperity, however, does not last. Any number of things can change.

Companies produce too much, people stop buying, or inflation rises dramatically.

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Recession Recession During a recession, economic activity slows down.

There is a general drop in the total production of goods and services, so the GDP declines.

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Recession Recession A recession can affect only one industry, related industries, or spread to the entire economy.

The ripple effect is when a recession in one industry leads to a recession in other industries.

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Depression Depression A deep recession that affects the entire economy and lasts for several years is called a depression.

During a depression there is high unemployment, low production of goods and services, and excess capacity in manufacturing plants.

A depression can be limited to one country but usually spreads to related countries.

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Depression Depression The stock market crash on October 29, 1929, or “Black Tuesday,” marked the beginning of the Great Depression. Between 1929 and 1933, GDP fell from approximately $103 billion to $55 billion.During the Great Depression, the number of people out of work rose nearly 800 percent.During the Great Depression, many banks failed. The money supply fell by one-third.

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Recovery Recovery A rise in business activity after a recession or depression is called a recovery.

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Recovery Recovery During a recovery:• Production starts to increase• People start going back to work and have money to

spend again• The new demand for goods and services stimulates

more production• The GDP grows• New businesses open

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Recovery Recovery A recovery can take a long time or it can happen quickly.

During World War II, the United States recovered from the Great Depression much faster because of the demand for war production.

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Fast Review

Q4. What are the four phases of the business cycle?

Q5. How does the ripple effect impact the economy?

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Q6. Did colonists develop their own industries?

Q7. How do factories influence the workplace?

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Q8. How did the assembly line change American society?

Q9. How has the Internet changed the way people do business?

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Making an Ethical Decision

Q10. Should you encourage other company executives to sell your product to countries that have an economic system you disapprove of?

Q11. Does it matter if your product is desperately needed by the country to save lives?

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Making an Ethical Decision

Q13. If the United States bans trade with that country, would you still discuss the topic with other executives? If the executives want to help the banned country, how else could your company get a product to those who need it?

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End ofChapter 3 Economic Activity in aChanging World