Introduction to Business

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Chapter 3 Economic Activity in a Changing World
pp. 34-47
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Learning Objectives
After completing this chapter, youll be able to

1. Identify how economic activity is measured.

1. Explain how inflation and deflation work.

continued
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Learning Objectives
After completing this chapter, youll be able to

1. Discuss the four phases of the business cycle.

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Why Its Important
Economic activity affects everyday life. The
history of the economy affects industries and
people of today and tomorrow.
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Key Words
gross domestic product (GDP) standard of living
inflation deflation budget deficit national debt
budget surplus
continued
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Key Words
business cycle prosperity recession depression rec
overy
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Measuring Economic Activity
Economic indicators are figures used to measure
economic performance.
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Measuring Economic Activity
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)
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)
The total value of the goods and services
produced in a country in a given year is called
its gross domestic product (GDP).
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Gross Domestic Product (GDP)
To calculate the GDP, economists compute the sum
of goods and services.
continued
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Gross Domestic Product (GDP)
Economists include four main areas in calculating
the GDP

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

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Gross Domestic Product (GDP)
The GDP doesnt include the goods and services
that arent reported to the government.
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Gross Domestic Product (GDP)
The standard of living is the amount of goods and
services the average citizen can buy.
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Figure 3.1
GROSS DOMESTIC PRODUCT
The gross domestic product (GDP) is the output of
goods and services produced in a country. What
percentage did the GDP increase from the end of
Year 2 to the beginning of Year 3?
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Graphic Organizer
Graphic Organizer
Gross Domestic Product
Goods and services sold to other countries
Government goods and services
Business goods and services
Consumer goods and services
Gross Domestic Product




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Unemployment Rate
The unemployment rate measures the number of
people who are able to work but dont have a job
during a given period of time.
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Unemployment Rate
There are different reasons for being unemployed,
including

• Temporary
• Seasonal
• Changes in industry
• Economic slowdown

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

1. What are some of the types of unemployment?
2. What is the difference between inflation and
   deflation?

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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 four phases of the business cycle are

• Prosperity
• Recession
• Depression
• Recovery

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Figure 3.2
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
In a global economy, in which several countries
are trading goods and services with one another,
one countrys economy can affect its trading
partners economies.
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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, 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
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
A recession can affect only one industry, related
industries, or spread to the entire economy.
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Recession
The ripple effect is when a recession in one
industry leads to a recession in other industries.
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Depression
A deep recession that affects the entire economy
and lasts for several years is called a
depression.
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Depression
During a depression there is high unemployment,
low production of goods and services, and excess
capacity in manufacturing plants.
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Depression
A depression can be limited to one country but
usually spreads to related countries.
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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.
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Depression
During the Great Depression, the number of people
out of work rose nearly 800 percent.
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Depression
During the Great Depression, many banks failed.
The money supply fell by one-third.
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Recovery
A rise in business activity after a recession or
depression is called a recovery.
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Recovery
During a recovery

• Production starts to increase
• People start going back to work and have money to
  spend again

continued
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Recovery
During a recovery

• The new demand for goods and services stimulates
  more production
• The GDP grows
• New businesses open

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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

1. What are the four phases of the business cycle?
2. How does the ripple effect impact the economy?

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Did colonists develop their own industries?
How do factories influence the workplace?
continued
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How did the assembly line change American society?
How has the Internet changed the way people do
business?
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Making an Ethical Decision

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

continued
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Making an Ethical Decision

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

continued
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Making an Ethical Decision

1. 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 of Chapter 3 Economic Activity in
a Changing World
pp. 34-47