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Chapter 12: Economic Indicators and Measurements
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National income accounting uses statistical measures of income, spending, and output to help people understand what is happening to a country's economy.
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What is GDP?
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Microeconomics examines actions of individuals and single markets
Macroeconomics examines the economy as a whole; uses national income accounting
- statistical measures that rack nation's income, spending, output
- gross domestic product (GDP) is most important measure
GDP market value of final goods and services produced in a set time period
Macroeconomics examines the economy as a whole; uses national income accounting
- statistical measures that rack nation's income, spending, output
- gross domestic product (GDP) is most important measure
GDP market value of final goods and services produced in a set time period
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Calculating GDP
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GDP tracks four sectors
1) Consumption: household spending on durable, nondurable goods, services
2) Investment: business spending on capital goods, inventory
3) Government Spending: federal, state, local; not transfer payments
4) Next Exports: value of exports minus value of imports
1) Consumption: household spending on durable, nondurable goods, services
2) Investment: business spending on capital goods, inventory
3) Government Spending: federal, state, local; not transfer payments
4) Next Exports: value of exports minus value of imports
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Types of GDP
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• When GDP grows, economy creates more jobs and business opportunities
Nominal GDP price levels for the year in which GDP is measured; states GDP in terms of current value of goods and services.
Real GDP GDP adjusted for changes in prices; estimate of GDP if prices were to remain constant.
Nominal GDP price levels for the year in which GDP is measured; states GDP in terms of current value of goods and services.
Real GDP GDP adjusted for changes in prices; estimate of GDP if prices were to remain constant.
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What GDP does not measure
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• GDP does not measure all output
- non market activities
- underground economy
- quality of life
- non market activities
- underground economy
- quality of life
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Other Economic Performance Measures
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Gross National Product (GNP) market value of all final goods, services
Net National Product (NNP) GNP minus depreciation of capital stock
National Income (NI) total income from production of goods, services
Personal Income (PI) income received by people from all sources
Disposable Personal Income (DPI) personal income minus income taxes
Net National Product (NNP) GNP minus depreciation of capital stock
National Income (NI) total income from production of goods, services
Personal Income (PI) income received by people from all sources
Disposable Personal Income (DPI) personal income minus income taxes
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Why does the real GDP curve rise more gradually than the nominal GDP curve?
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The real GDP accounts for price differences over time.
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National income accounting tracks..
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The income, spending, and output of a country.
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The expenditures approach to calculating GDP takes into account..
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business investment
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GDP does not measure..
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the underground economy
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The value of all final goods and services produced by a country minus the depreciation of capital stock is..
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net national income
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What is the Business Cycle?
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series of periods of expanding and contracting activity
- measured by increases or decreases in real GDP
- four phases: expansion, peak, contraction, trough
- measured by increases or decreases in real GDP
- four phases: expansion, peak, contraction, trough
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Expansion
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Period of economic growth; increase in real GDP
- Job easier to find, unemployment drops
- More recourse needed to keep up with spending demand
- Job easier to find, unemployment drops
- More recourse needed to keep up with spending demand
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Peak
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Point at which real GDP is highest
- As prices rise and resources tighten, businesses become less profitable.
- As prices rise and resources tighten, businesses become less profitable.
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Contraction
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Producers cut back and unemployment increases; resources become less scarce, so prices tend to stabilize or fall
• Recession: contracting lasting two or more quarters
• Depression: long period of high unemployment, slow business activity
• Stagflation: stagnation in business activity with inflation of prices
• Recession: contracting lasting two or more quarters
• Depression: long period of high unemployment, slow business activity
• Stagflation: stagnation in business activity with inflation of prices
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Trough
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Point at which real GDP and employment stop declining
- Marks completion of business cycle
- Marks completion of business cycle
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Aggregate Demand
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Total amount of products that might be bought at every level; includes all odds and services, all purchasers.
- Downward loping
- Downward loping
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Aggregate Supply
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Sum of all goods and services that might be provided at every price level.
- Upward sloping
- Upward sloping
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Macroeconomic Equilibrium
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When Aggregate demand = Aggregate supply
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Factors of Business Cycle #1 Decisions made by businesses
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Decisions made by businesses affect suppliers, related businesses
• Demand slump can lead to decreased production, lay offs--contraction
• New technology can raise productivity, demand, employment--expansion
• Demand slump can lead to decreased production, lay offs--contraction
• New technology can raise productivity, demand, employment--expansion
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Factors of Business Cycle #2 Changes in interest Rates
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Rising interest rates make borrowing costly, lower aggregate demand
• Low rates increase home sales; related economic activities increase and economy expands
• Low rates increase home sales; related economic activities increase and economy expands
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Factors of Business Cycle #3 Expectations of Consumers
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Consumers' ideas on prices, business activity, jobs influence choices
• Consumers choices can change aggregate demand; confident consumers tend to consumer more and raise aggregate demand
• Consumers choices can change aggregate demand; confident consumers tend to consumer more and raise aggregate demand
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Factors of Business Cycle #4 External Shocks to the Economy
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A nation's economy can be influenced by events beyond its control
• Natural Disasters
• Conflicts overseas
• Natural Disasters
• Conflicts overseas
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Economic Indicators
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Measures for predicting changes in business cycle; help businesses and government make informed choices
• Leading Indicators: measures that usually change before real GDP
• Coincident Indicators: measures that usually change at the same time as real GDP
• Lagging Indicators: measures that usually change after real GDP
• Leading Indicators: measures that usually change before real GDP
• Coincident Indicators: measures that usually change at the same time as real GDP
• Lagging Indicators: measures that usually change after real GDP
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What phase of the business cycle is indicated on the graph by the letter "c"?
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contraction
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Macroeconomic equilibrium is the point where..
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Aggregate demand equals aggregate supply.
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Which factor can affect both business investment in capital goods and consumer participation in the housing market?
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interest rates
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Measures of economic performance that usually change at the same time as real GDP are called..
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coincident indicators
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The longest contraction of the U.S. economy followed..
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the stock market crash of 1929.
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Economic Growth
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• Business cycle is pattern of expansion and contraction in economy
• Economic growth can be measured by changes in real GDP; Best measure of growth
Population influences economic growth
- If population grows faster than real GDP, growth may mean more workers
• Real GDP per capita--real GDP divided by total population; measure of standard of living
• Economic growth can be measured by changes in real GDP; Best measure of growth
Population influences economic growth
- If population grows faster than real GDP, growth may mean more workers
• Real GDP per capita--real GDP divided by total population; measure of standard of living
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Factor of Economic Growth #1: Natural Resources
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Access to natural resources is important:
- arable land
- water
- forests
- oil
- mineral resources
• Resources are not enough; need free market and effective government
- arable land
- water
- forests
- oil
- mineral resources
• Resources are not enough; need free market and effective government
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Factor of Economic Growth #2: Human Resources
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Labor Input = size of labor force X length of work week
• Population growth made up for shorter work week since early 1900s
• Population growth made up for shorter work week since early 1900s
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Factor of Economic Growth #3: Capital
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More and better capital goods increase output --More and better machines can produce more goods
- Capital deepening: increase in the capital to labor ratio
- Capital deepening: increase in the capital to labor ratio
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Factor of Economic Growth #4: Technology and Innovation
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Innovation: increase economic growth
- reduce time needed to complete task; improve customer service
Technology: strong impact on economic growth
- advances in production lower prices, make capital deepening cheaper
- reduce time needed to complete task; improve customer service
Technology: strong impact on economic growth
- advances in production lower prices, make capital deepening cheaper
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Productivity
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Amount of output produced from a set amount of inputs
- Labor productivity: amount of goods and services produced by one worker in an hour
- Capital productivity: amount produced by set amount of equipment and materials
- Labor productivity: amount of goods and services produced by one worker in an hour
- Capital productivity: amount produced by set amount of equipment and materials
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Measure Productivity
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Compare amount of capital: work hours to total output
• Multifactor productivity: ratio between economic output and labor and capital inputs used
- Multi-factor productivity data compiled for major industries and sectors to estimate productivity of entire economy.
• Multifactor productivity: ratio between economic output and labor and capital inputs used
- Multi-factor productivity data compiled for major industries and sectors to estimate productivity of entire economy.
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Contributions of Productivity
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Quality of Labor: educated, healthy workforce is more productive
Technological innovation: new technology helps increase output
Energy Costs: cheaper power lowers costs of using tools
Financial markets: banks, stock markets flow funds where needed
Technological innovation: new technology helps increase output
Energy Costs: cheaper power lowers costs of using tools
Financial markets: banks, stock markets flow funds where needed
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What do the productivity increases on the graph reveal?
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Industries becoming more efficient.
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Real GDP per capita is used as a measure of..
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A nation's standard of living.
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An increase in the capital to labor ratio is called..
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capital deepening
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Which factors promote the efficient use of other resources?
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technology and innovation
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How do financial institutions and stock markets promote productivity?
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They help move funds to businesses that need them.
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Chapter 13: Facing Economic Challenges
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Unemployment has a variety of causes. Come level of unemployment is expected, even when an economy is healthy.
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Measuring Unemployment
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Unemployment rate: percent of labor force jobless and looking for work
• Civilian Labor force: people 16+ working or looking for work
• Bureau of Labor statistics determines unemployment rate:
- divides # of unemployed workers by total in civilian labor force
- doesn't count discouraged workers (gave up looking for work) or underemployed (working part-time, want to be working full-time)
• Civilian Labor force: people 16+ working or looking for work
• Bureau of Labor statistics determines unemployment rate:
- divides # of unemployed workers by total in civilian labor force
- doesn't count discouraged workers (gave up looking for work) or underemployed (working part-time, want to be working full-time)
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Full Employment
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No unemployment caused by decreased economic activity
• Always some degree of unemployment
• U.R. of 4-6% is considered full employment in U.S.
• Always some degree of unemployment
• U.R. of 4-6% is considered full employment in U.S.
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Type of Unemployment #1: Frictional
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Temporary, experience by people changing jobs
Not a threat to economic stability:
- childrearing parents returning to work
- new college graduates looking for first job
- experienced workers who want to switch jobs
Not a threat to economic stability:
- childrearing parents returning to work
- new college graduates looking for first job
- experienced workers who want to switch jobs
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Type of Unemployment #2: Seasonal
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due to seasonal work
Demand for some jobs change from season to season:
- construction work falls off in winter
- tourism peaks at times of year
- farm work drops of in winter
Demand for some jobs change from season to season:
- construction work falls off in winter
- tourism peaks at times of year
- farm work drops of in winter
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Type of Unemployment #3: Structural
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jobs exist but workers not qualified
As businesses become more efficient, fewer workers required
- new tech. replaces workers, requires them to retrain
- new industries require special education don't employ unskilled
- change in consumer demand shifts type of workers needed
- offshore outsourcing
As businesses become more efficient, fewer workers required
- new tech. replaces workers, requires them to retrain
- new industries require special education don't employ unskilled
- change in consumer demand shifts type of workers needed
- offshore outsourcing
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Type of Unemployment #4: Cyclical
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caused by decreased activity in business cycle
Employers lay off workers during low points in business cycle
- during recession hard to find new jobs since demand for labor drops
Employers lay off workers during low points in business cycle
- during recession hard to find new jobs since demand for labor drops
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Impact of Unemployment
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• Excessive, persistent unemployment inefficient: wastes human resources
• Promotes inequality since least experienced lose jobs first
• Discourages workers who lose motivation to do good work.
• Promotes inequality since least experienced lose jobs first
• Discourages workers who lose motivation to do good work.
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Who is included when calculating the unemployment rate?
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Unemployed workers who have looked for work in the previous four weeks.
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Full employment is a situation in which..
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unemployment is caused by decrease economic activity.
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What kind of unemployment results when workers looking for jobs do not have the necessary skills for the jobs that are available?
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structural unemployment
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Why do economists consider frictional unemployment normal?
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It is a reflection of workers' freedom to find the best job for themselves.
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How does persistent unemployment hurt the economy?
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It damages workers' self confidence.
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What is Poverty?
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Lack of income, resoucres to have minimum standard of living
- No universal standard, varies from country to country
- No universal standard, varies from country to country
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Poverty Threshold
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Official minimum income to pay for basic needs--set by government
- People considered in poverty if income falls below poverty threshold/poverty line
- Calculated based on costs of nutrious food, other necessities
- People considered in poverty if income falls below poverty threshold/poverty line
- Calculated based on costs of nutrious food, other necessities
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Poverty Rate
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Percent of poeple in households below poverty threshold
- based on population as a whole
Does not hit all sectors of society equally; Most as risk:
• Children
• Minorities
• Inner City
• Rural
• Single-mother families
- based on population as a whole
Does not hit all sectors of society equally; Most as risk:
• Children
• Minorities
• Inner City
• Rural
• Single-mother families
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Factors Affecting Poverty
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1) Education
- the higher level of education, the higher the income
2) Discrimination against minoriites and women
- sometimes face wage discrimination, occupational segregation
3) Demographic Trends
- single parent families have more economic problems
4) Change in Labor Force
- change from manufacturing to service jobs has resulted in lower wages for low-skilled workers
- the higher level of education, the higher the income
2) Discrimination against minoriites and women
- sometimes face wage discrimination, occupational segregation
3) Demographic Trends
- single parent families have more economic problems
4) Change in Labor Force
- change from manufacturing to service jobs has resulted in lower wages for low-skilled workers
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Income Distribution
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how income is dividided among people in a nation
Income inequality: uneuqal distribution of income; some always exists
• Lorenz curve shows degree of income inequality in a nation: the more it dips away from diagonal line, the greater inequality
Income inequality: uneuqal distribution of income; some always exists
• Lorenz curve shows degree of income inequality in a nation: the more it dips away from diagonal line, the greater inequality
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Antipoverty Programs
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• SNAP program (food stamps)
• Unemployment Insurance (cyclical unemployment)
• TANF: temporary assistance to needy families (welfare)
• Medicaid: health insureance for those under the poverty line (double poverty line--some states)
• Unemployment Insurance (cyclical unemployment)
• TANF: temporary assistance to needy families (welfare)
• Medicaid: health insureance for those under the poverty line (double poverty line--some states)
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What does a Lorenz curve show?
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degree of income inequality in a nation
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The percentage of people living in households with incomes below the minimum needed to cover basic necessitites is the poverty..
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rate
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Which group is especially at risk for poverty?
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All of the above: single mothers, inner city and rural families, children
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Which of the following factors have a strong influence on who is likely to live in poverty?
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education and demographic trends
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Which program covers health care for the poor?
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Medicaid
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Inflation
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Defined two ways:
- sustained rise in the level of prices generally
- sustained fall in the purchasing power of money
- sustained rise in the level of prices generally
- sustained fall in the purchasing power of money
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Consumer Price Index (CPI)
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measures changes in prices of products
U.S. government surverys people to learn what they buy regularly
- creates a "market basket" of about 400 typical products
- each month researches current prices of these items
- compares prices to reference base
U.S. government surverys people to learn what they buy regularly
- creates a "market basket" of about 400 typical products
- each month researches current prices of these items
- compares prices to reference base
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Producer Price Index (PPI)
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measures changes in wholesale prices--relfects prices producers get for goods; tied to a reference base
- Over 10,000 PPIs for individual products and groups of products
- Inflation rate: rate of change in prices over a set period of time
- PPi tends to lead CPI as indicator of inflation
- Over 10,000 PPIs for individual products and groups of products
- Inflation rate: rate of change in prices over a set period of time
- PPi tends to lead CPI as indicator of inflation
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Types of Inflation
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Creeping inflation: moderate inflation over a period of time
Galloping inflcaiton: rapid increase
Hyperinflation: over 50% per month
Deflation: decrease in general price level--happens rarely
Galloping inflcaiton: rapid increase
Hyperinflation: over 50% per month
Deflation: decrease in general price level--happens rarely
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Demand-Pull Inflation
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total demand rises faster than production
- If total demand rises faster than production, it creastes scarcity
- Too much money printed during lag period will drive prices up
- If total demand rises faster than production, it creastes scarcity
- Too much money printed during lag period will drive prices up
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Cost-Push Inflation
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increases in production costs push up prices
- When production costs increase, producers make less profit
- May be due to higher price of materials, energry
- Wages can be a large part of production costs; wage-price spiral
- When production costs increase, producers make less profit
- May be due to higher price of materials, energry
- Wages can be a large part of production costs; wage-price spiral
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Impact of Inflation: Decreasing Value of the Dollar
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• Rising consumer price index represents declining value of the dollar
- People on fixed income especially vulnerable
- Inflation helps people who borrowed at a fixed interest rate
- People on fixed income especially vulnerable
- Inflation helps people who borrowed at a fixed interest rate
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Impact of Inflation: Increasing Interest Rates
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• Lenders raise interest rates to ensure profit on loans--Businesses avoid borrowing to expand or make capital imporvements
- Consumers less likely to finance high-price items
- Monthy credit card payments go up as rates rise
- Consumers less likely to finance high-price items
- Monthy credit card payments go up as rates rise
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Impact of Inflation: Decreasing Real Returns on Savings
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• Interest on savings tends to increase during inflationary times: but rate of inflation tends to outpace interest rates
- Inflation worries people about drop in standard of living, retirement
- Inflation worries people about drop in standard of living, retirement
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What kind of inflation is the wage-price spiral an example of?
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cost-push inflation
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The consumer price index measures..
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changes in the prices of products commonly purchased by households.
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A rate of inflation in excess of 50 percent per month is called..
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hyperinflation
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What is one effect inflation has on the economy?
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raises interest rates
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What is one effect inflation has on consumers?
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decreases the purchasing power of the dollar
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