# Chapter 23.2 Measuring the Economy.

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Chapter 23.2 Measuring the Economy

Why is it important to measure “the economy?”
What is meant by “the economy?” What is the purpose of measuring the economy? Why is it important to policy makers? What is being measured? What are the different variables that can be measured which indicates a change in the economy?

Gross Domestic Product (GDP)
GDP: the total value (in dollars) of all the “final” goods and services produced in a country during a single year. You can’t count the goods and services that are used in creating a final good. Why? GDP measures quantity, not quality. What does this mean? (Hint: I-Phone and the I-Phone 5S) Why is this a problem?

Weaknesses of GDP GDP is deceptive
GDP measures the value of all goods/services in \$. What happens to \$ over time? What happens to prices of goods/services over time? Economists have created real GDP. Real GDP: GDP after the distortions of prices changes/inflation have been removed

Business Cycle- alternating periods of growth and decline in economic performance. What are the two variables being measured?

Business Cycle Expansion: Real GDP increases (does not measure intensity of the growth). Peak: the highest point of expansion before decline Recession: Real GDP decreases for 6 straight months. During a recession, what other measurement is usually discussed to help explain how weak the economy is currently or how quickly the economy is coming out of recession?

Unemployment Rate 1st- Identify the Civilian Labor Force (CLF): those 16 or older looking for jobs or who have jobs. Unemployment rate is the % of the people in the civilian labor force who are not working, but are looking for jobs. Unemployment Rate = Members of the CLF without a job, but looking / All the members of the CLF Current CLF: 155,460,000 1% unemployment costs America \$46.5 Billion if median income is at \$30,000.

Price Stability Inflation: sustained increase in the general level of prices Consumer Price Index (CPI): government tool to sample prices and determine inflation. It averages prices because it is expected that some will increase and others will decrease. What is being measured? What does inflation mean? What does deflation mean?

Stock Market What is a stock (share)? Why sell stock? Why buy stock?
Spread risk Create capital Why buy stock? Dividends: share of the corporation’s profits which are distributed to shareholders. Capital Gains: Profit from stock sold for more than it was bought. How should America tax the income made from stocks?

Stock Market Stock exchanges (markets): specific locations designated for the purposes of buying and selling stocks. Stockbrokers are people who are certified to buy and sell stocks on these exchanges. Stock Indexes: a method of measuring the value of a specific section of the stock market. Measures the expectations of investors and can indicate growth or decline in an economy. S&P 500, Dow Jones Industrial, NASDAQ

Why is it important to measure the economy?
Private Sector? Public Sector? Fiscal Policy: government spending and taxes spent in order to regulate, control, and react to business fluctuations in the business cycle.

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