How do economists measure a nation’s economic health? Measuring the Economy Unit 13 Essential Question: How do economists measure a nation’s economic health?

3 main goals…measures Economy should grow – GDP People should have jobs – Unemployment rate Prices should be stable – Inflation rate

How big is the economy? To measure “how big”…snake (inches/feet), steer (pounds), baseball production (batting average), academic production (GPA), but how to measure an economy? We use GDP = gross domestic product – value of all goods & services produced in a country during a time period (usually a quarter, or year) GDP formula… C + I + G + (X – M) = GDP C = consumption I = investments G = government spending (X – M) = (eXports – iMports). Also called NX = net exports.

What about inflation? Inflation – yearly rise in prices – makes it hard to compare this year vs. say 50 years ago. Two measures… Nominal GDP – measures GDP in “current dollars” (today’s prices) Inflation is NOT pulled out, so comparing to other years is hard. Real GDP – does NOT use current dollars, but uses “constant dollars”. This means they use a base year & pull out inflation. GDP can then be compared from year to year.

Notice the base year…2000, Q1.

Per capita GDP = GDP ÷ population What about population? What if a country has lots of people vs. a country with just a few? We use per capita GDP. Per capita – per person, so it’s… Per capita GDP = GDP ÷ population Left = nominal GDP Right = per capita GDP

Unemployment Unemployment helps measure the economy. Low = good, high = bad Unemployment rate — % of labor force seeking employment Employed – people in labor force & have a job Unemployed – people in labor force who are jobless but looking Not in labor force – eligible for labor force but not working or not looking (students, retired, disabled, etc.) Formula: (Unemployed/Labor Force) X 100 Usual unemployment rate is 4 to 6% Right now, it is http://www.tradingeconomics.com/united- states/unemployment-rate

4 types of unemployment Frictional – when you’re “between jobs” Structural – changes outdate your job or skills (new technology) Seasonal – some jobs have slow periods Cyclical – the economy has good times and hard times

Inflation Inflation is the rise in prices. Inflation rate -- % increase in average price of goods/services To measure this, we use CPI = Consumer Price Index = % change in prices CPI uses a “market basket”, a group of common items purchased Last year – a market basket was $200 This year – a market basket was $208 % change formula is (N – O) ÷ O N=new number, O=old number, so… 208 – 200 = 8 8 ÷ 200 = .04 (x100 gives us 4%) Inflation is 4% here.

Cont. We also use a “cost of living” index. Nominal cost of living – cost for basic goods people need in today’s prices Real cost of living – has inflation taken out, so now we can compare to earlier years Inflation types Creeping inflation – a slow steady rise, average is 3.4% per year Hyperinflation – fast inflation, rare in U.S. Deflation – drop in prices; good news is things are cheap, bad news is it’s bad for business What’s the current inflation rate? http://www.tradingeconomics.com/united- states/inflation-cpi