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

2. 3 Key
Economic
indicators

3. 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

4. NOT Counted in GDP Intermediate goods Used 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

5. 4 Components of GDP C: consumer spending
Daily spending on goods and services
I: business investment spending
Machinery, factories, equipment etc.

6. 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)

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

8. 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

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

10. Unemployment because your job skills are no longer needed
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

11. 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.

12. 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

13. 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

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

15. 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
GDP
Prices
Unemployment
GDP
Prices

16. 4 Stages of the Business Cycle
The 1st stage: when the economy has economic growth
GDP is rising
Expansion

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

18. Business Cycle Contraction
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

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

20. Business Cycle – 4 stages
Peak
Contraction
Expansion
Trough

21. 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

22. 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

23. 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

24. Total production of ALL FINAL goods and services in the economy
Aggregate Supply
Total production of ALL FINAL goods and services in the economy
from all producers in the economy
for all prices levels