Economic Indicators

Economic Indicators How do we measure the health of our economy?

3 Key Economic indicators

GDP • Gross Domestic Product • market value of all final goods and services produced within a country in a year • Final goods are purchased by the last user and will not be resold or used to produce anything else

NOT Counted in GDP • Intermediate goods • Resources of any kind • Used goods • Ex: Used cars, purchase of an older home, thrift store clothing, Craigslist, Ebay • Illegal goods/services • Ex: Drugs, theft etc. • Purely financial transactions • Ex: Investment in stocks or savings • Transfer Payments • Ex: Social Security, Food Stamps • Barter • Ex: Babysitting for yardwork

4 Components of GDP • C: consumer spending • Daily spending on goods and services • I: business investment spending • Machinery, factories, equipment etc.

G: government spending • Spending by all levels of government - military, school, highways, supplies etc. • NX: net export spending • Purchases of U.S. goods and services by foreign buyers (exports) minus purchases of foreign goods and services by U.S. consumers (imports)

GDP= C+I+G+NX • Example: • In 2000, estimates in trillions of dollars • GPP = C + I + G + NX $10.04 = $6.81 + $1.87 + $1.75 + ($1.13-$1.52)

Unemployment • Unemployment Rate • Percentage of labor force who is not working • Labor Force: everyone 16 – 65 who is working or actively looking for work • 3 types of unemployment

Frictional • People are out of work temporarily • Seasonal work • Changing jobs • Looking for 1st job • This is acceptable unemployment

Structural • Unemployment because your job skills are no longer needed • Ex. Technology replaces workers so people are laid off • People can go back to school and learn new skills

Cyclical • People are unemployed due to fluctuations in the business cycle • As the economy declines, people lose their jobs • Worst kind of unemployment, can not easily fix. Economy must recover first.

CPI • Consumer Price Index • Index of all goods and services produced in a country • Measured by a market “basket” of all goods and services that are commonly bought year after year by the typical urban household

Effects of Changing CPI • Inflation • Rising price levels • purchasing power of the dollar falls • Dollar buys less • Deflation • Falling price levels • purchasing power of the dollar rises • Dollar buys more

Hyperinflation: rapid inflation ex. Germany after WWII Stagflation: rising prices with falling GDP and rising unemployment

Relationship between GDP, Unemployment and CPI • As GDP rises, unemployment rates fall and prices begin to rise • As GDP falls, unemployment rises and prices begin to decline Unemployment Prices GDP Unemployment GDP Prices

4 Stages of the Business Cycle The 1st stage: when the economy has economic growth GDP is rising Expansion

Business Cycle Peak 2nd stage: GDP is at it’s maximum

Business Cycle 6 months or more of a contraction is called a recession If the recession is bad enough, it is a depression Contraction 3rd stage: GDP is falling

Business Cycle The bottom of the contraction where GDP stops falling Trough

Business Cycle – 4 stages Peak Contraction Expansion Trough

Aggregate Demand • Aggregate means “total” • Total demand for ALL FINAL goods and services in the economy • from all people in the economy • for all prices levels

Components • Aggregate demand consists of: • consumer spending (C) • investment spending (I) • government spending (G) • net export spending (NX). • If any component increases, GDP increases, AD curve shifts right. • If any component decreases, GDP decreases, AD curve shifts left

THE CURVE • High price level leads to lower quantity of aggregate demand P P stands for price levels in the economy AD is aggregate demand – total demand for all final goods and services in the economy Q is real GDP (output) of all final goods and services AD Q

Aggregate Supply • Total production of ALL FINAL goods and services in the economy • from all poducersin the economy • for all prices levels

Economic Indicators