Economics Measuring the Economy

Gross Domestic Product Gross Domestic Product is a measure of the size of the economy. It is the total value, in dollars, of all final goods and services produced in the country during a single year. Final goods are goods sold to their users. If the new GDP is higher than the previous one, then the economy is expanding. If it is lower, the economy is declining. Economists study GDP figures regularly to analyze patterns.

Gross Domestic Product Change over time Standard of living is the quality of life based on the possession of needs and wants that make life easier. When GDP grows faster than the population, there are more goods and services, for us to enjoy, so the standard of living increases.

Gross Domestic Product Real GDP - Converts nation's annual output into constant dollars by taking out increases in prices based on inflation (when the value of money decreases). When prices increase, GDP would go up even if the economy was not growing. To avoid this false impression, economist use real GDP. This is also helpful to compare GDP from year to year.

Gross Domestic Product Economic Growth When the economy grows, businesses are producing more goods and services, and they hire more workers. People then have more money to buy more goods and services. Businesses then need to hire more people because of the increase in demand for their goods and services. What causes economic growth? a. Increase in labor force (people who want to work) b. Increase in productivity, improved technology c. Increase in capital investment d. Increase in consumer spending/ foreign imports

Gross Domestic Product Shortcomings of GDP GDP does not measure society’s overall well- being. Other things- such as a reduction in crime or drug abuse - can make a country better off without raising GDP. GDP also fails to account for improvements in product quality (if the price stays the same). Ex: What is one product that has improved a lot over time, but the price has stayed the same?

Business Cycles Phases of the business cycle 1. Expansion- GDP growing 2. Peaks- Highest point of expansion 3. Recession- real GDP decreases for 6 consecutive months 4. Troughs- low point of recession 5. Depression- a severe recession Causes of business cycles 1. Political and social upheavals (war) 2. Increase or decrease in consumer confidence

Unemployment Rate Labor force: Includes all civilians 16 years or older who are either working or looking for work.  a. employed: people who are actively working  b. unemployed: includes only those people who do not have a job and are looking for a job  c. not in labor force: people without jobs who are not actively seeking work are considered neither employed or not employed.  (Examples: students, staying home to take care of children)

Unemployment Rate The percentage of people in the labor force who are not working but are looking for jobs. 2. The unemployment rate reflects the health of the economy. a. Tends to rise sharply during recessions and then slowly decline Unemployment Rate = Number of Unemployed Labor Force  100

Unemployment Unemployment affects the income of the economy as a whole and individuals When people lose their jobs, they decrease consumption (they buy less goods/services) Some go into debt Costs of unemployment 1. increase in government assistance 2. increase in crime and substance abuse 3. increase in family problems

Unemployment Types of unemployment 1. frictional: people who are temporarily between jobs 2. structural: a mismatch between job seekers and job openings (Examples: decline in manufacturing jobs; increase in service jobs) (technological: form of structural unemployment caused by replacing people with technology) 3. seasonal: temporary unemployment due to seasonal conditions (Example: construction in winter) 4. cyclical: caused by lack of overall demand in the economy (Example: due to the recession)

Price Stability Inflation: a sustained increase in the general level of prices. Hurts the economy because it reduces purchasing power and may alter the decisions people make Prices act as signals that help individuals and businesses make economic decisions. High inflation distorts this process.

Price Stability Measuring Inflation- Consumer Price Index To track inflation, the government samples prices every month for about 400 products commonly used by consumers. The rate of inflation is the change in the level of prices as measured by the CPI If the price index doubles, you would need twice as many dollars to buy the item. The purchasing power of your dollar has decreased.

IV. Price Stability C. Who is hurt by inflation? 1. People on fixed incomes. 2. Savers 3. Lenders D. Who is helped by inflation? 1. Borrowers

Daily Assessment Which of the following indicators do you think is the most effective measure of our economy (i.e. which one is the best way to tell if our economy is healthy): GDP, standard of living, the business cycle, unemployment, or price stability? Define the indicator AND write why it is the best.