Economic Indicators Gross Domestic Product (GDP) Housing Starts Retail Sales Unemployment Rate Consumer Price Index (CPI) Interest Rate Trade Balance Exchange Rate Why do we measure the health of the economy?
What is gross domestic product (GDP)? Currency value (such as U.S. dollar) of all final goods and services produced within a country in a given period Measure of a nation’s economic growth from one period to the next
What’s included in GDP? Consumption by households – Goods: groceries, clothes, iPods – Services: haircuts, oil changes
What’s included in GDP? Investment by businesses – assets for production – New machinery, supplies – Inventories
What’s included in GDP? Government expenditures by local, state, and federal government – Roads and schools – Government buildings
What’s included in GDP? Net exports (F) – Value of a country’s exports to other nations, less its imports from other nations X – M (X = exports, M = imports)
What’s included in GDP? GDP = Consumption (consumer spending)+ Investment (business spending)+ Government spending + Net exports (F) GDP = C + I + G + F
What’s not included in GDP? Intermediate goods Used goods Underground production (black market) Financial transactions Household production Transfer payments
What % of GDP is each component? Consumption 70 % Investment 16% Government 19% Net Exports -5% Component % of GDP GDP 100% Average Percent of GDP since 2003 Source: Bureau of Economic Analysis
Real and nominal GDP When GDP is computed in the current year’s prices, rising prices (inflation) can make it difficult to determine if a change in GDP from one year to the next is due to the country’s production of more goods and services or to increases in the price level. – Nominal GDP: GDP that is not adjusted for inflation. The value of goods and services in current prices. – Real GDP: The dollar price of GDP in a base year’s price, used to compare changes in GDP from one year to the next. An increase in real GDP is an increase in economic growth.
Gross Domestic Product Gross Domestic Product (GDP): the dollar value of all final goods and services produced within the nation’s borders in a year 2011 U.S. GDP: $14,991,300,000,000 2012 15,685,000,000,000 2013 15,965,000,000,000 Per capita:$53,149 (World Bank) Avg. increase in U.S. GDP since 1947: 3.23% (economic growth rate)
World Rankings by GDP http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf
1. Qatar$179,000 2. Liechtenstein141,000 3. Luxembourg82,600 4. Bermuda69,900 5. Singapore61,100 6. Jersey57,000 7. Norway54,600 8. Brunei51,600 9. United Arab Emirates49,600 10. Kuwait48,900 Countries with highest GDP per capita
1.Burundi $300 2. Congo, Democratic Republic of the300 3. Liberia500 4. Zimbabwe600 5. Eritrea700 6. Somalia600 7. Central African Republic700 8. Niger700 9. Malawi800 10. Madagascar900 1. Countries with the lowest GDP per capita
GDP-Output Expenditure Model Output Expenditure model—a way of calculating GDP C + G + I + F = GDP C = consumer expenditures (spending) G = government expenditures (spending) I = private investment (business spending on capital goods) F = foreign spending or net exports (exports minus imports) What is the total GDP? (numbers are in trillions) Consumer expenditures: $9936.6 Private investment: 2082.1 Exports: 1737.7 Imports: 2446.6 Government spending: 2764.4 Tax Revenue 3000.0
GDP answer (C) 9936.6 + (G) 2764.4 + (I) 2082.1 + (F) (1737.7 – 2446.6) = GDP = $14074.2T
Unemployment The unemployment rate reflects the number of people who would prefer to be working but are not. Types of unemployment – Frictional: short term, seasonal, etc. – Structural: when jobs in the economy change long term—not coming back in the same form – Cyclical: due to fluctuations in the business cycle, demand is down for goods—leads to layoffs
Unemployment Rate How is the unemployment rate determined? – The unemployment rate shows how many people are in the civilian labor force but who cannot find a job. – Not everyone in the country is automatically a part of the civilian labor force. Children under 16, retired persons, members of the military, persons in prison or other institutions, and people who are not working by choice are not counted as part of the civilian labor force. Only those who either have a job or who are actively looking for a job are counted in the civilian labor force.
Unemployment Rate Economists use the following formula to calculate the labor force and the unemployment rate: Total Civilian Labor Force = Employed persons + unemployed persons Unemployment Rate = # of unemployed workers ÷ total civilian labor force (see handout with unemployment rate problems)
Inflation What is inflation? – A general increase in prices of goods and services over time What causes inflation? – Demand pull: during an economic expansion, consumer demand for goods and services will exceed the current supply, driving prices up. – Cost push: the costs of production rises and businesses must raise prices to cover the costs.
Inflation What is a wage-price spiral? – This occurs when workers ask for wage increases, then spend the additional wages which creates greater demand for goods/services, which causes businesses to raise prices, which then causes workers to ask for wage increases, etc. A spiral! – Nominal dollars: face value--$20 is $20 – Real dollars: dollars that have been adjusted for inflation and reflect their “real” value—what they can buy
Inflation What are the effects of inflation? – The value of a dollar goes down as a result of inflation, therefore….. – Savers and creditors can be hurt by inflation while debtors can be helped. Why? – A COLA can help offset the effects of inflation. What is a COLA?
Inflation How is inflation measured? – The CPI—the Consumer Price Index – This measures the change in the price that an average consumer pays for a predefined “market basket of goods and services.” – See handout with inflation problems
The Business Cycle What is the business cycle? – Consecutive phases of expansion and contraction that the economy moves through on a regular basis What causes business cycles? – The tendency of consumers to vary the amount of income they put back into the economy with the amount they put away for future consumption— spending vs. saving
Phases of the Business Cycle Expansion—confidence in the economy leads to increased spending, which leads businesses to produce more, which means they need more workers, who with their earned income, spend more in the economy. This increase in demand leads to higher prices. – Low unemployment, but higher prices
Phases of the Business Cycle Peak—as prices rise, consumers start to slow their spending and the economy starts to level off. Businesses, who have been producing at a very fast pace can now coast for awhile on their inventory. The businesses no longer need as many workers, which lead to layoffs, and as unemployment rises, spending really slows down—a contraction, or recession. – High unemployment, decreased spending— characteristics of a contractionary phase
Phases of the Business Cycle Once prices start to level off (trough), spending starts to pick back up a little. When businesses become low on inventory, they need to start producing again and need more employees, so they start to hire again. So, unemployment starts to go down. As people go back to work, they start to spend money again and demand for goods and services goes up—back to an expansionary phase. It goes in a CYCLE!
Phases of the Business Cycle Recession: Sometimes a contractionary phase of the business cycle is known as a recession due to the length of time the contractionary phase lasts—usually 6 months or more.