1. 6.02 Understand economic indicators to recognize economic trends and conditions. 6.00 Understand economics trends and communication.

2. 5-170 5-171 Defining 5-170 5-171 Defining Inflation: A persistent increase in the average price level in the economy. Inflation Rate: The percentage change in the price level from one period to the next. Deflation: A persistent decrease in the average price level in the economy. Consumer Price Index: An index of prices of goods and services typically purchased by urban consumers. Standard of Living: The amount of goods and services that a nation’s people have Targeted Inflation Rate: An acceptable rate of increase that the country attempts to control Price Stability: The condition in which the average price level in the economy changes very slowly, if at all.

3. Inflation Describe causes of inflation. ◦ Inflation results when the economy has too much demand for available production. ◦ The two causes of inflation:  Demand-pull inflation results when economy-wide shortages are created by increases in aggregate demand.  Cost-push inflation results when an economy-wide shortages are created by decreases in aggregate supply, which are so named because they are more often than not triggered by increases in production cost.

4. Inflation Explain how inflation impacts the economy. ◦ Makes products more expense, shifting how consumers will spend Describe the relationship between price stability and inflation. ◦ Price stability means that inflation rates will be low Explain problems associated with deflation. ◦ Manufacturers will be earning smaller profits or losing money as deflation occurs

5. Deflation Explain problems associated with deflation. ◦ Deflation can haphazardly redistribute income and wealth. If some prices decrease more than others, then income and wealth is redistributed to the owners of those resources with the smaller price decreases. ◦ Deflation creates uncertainty. If prices unexpectedly decline, then consumers and producers alike might be less willing to pursue long-term activities, because they just do not know what will happen to the price level.

6. Inflation Discuss reasons why the inflation rate should be above zero. ◦ Indicates that demand is growing Explain how businesses can use the Consumer Price Index. ◦ It provides timely information for consumers, businesses, and government leaders who make decisions that are sensitive to inflation. http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=inflation

7. CPI Discuss the purpose of the Consumer Price Index (CPI). ◦ The CPI is commonly used as: (1) an indicator of the price level and economic activity, (2) a method of converting nominal economic indicators to real terms, and (3) a means of adjusting wage and income payments for inflation. Describe how the Consumer Price Index is determined. ◦ an index of prices of goods and services typically purchased by urban consumers. This index, compiled and published monthly by the Bureau of Labor Statistics, provides a relatively accurate indication of the average price level in the economy, and thus inflation.

8. CPI total expenditures on market basket in current period CPI = total expenditures onx 100 market basket in base period

9. CPI Identify the major kinds of consumer spending that make up the Consumer Price Index. ◦ measures goods typically purchased by urban consumers

10. 5-170 5-171 Explain how the Consumer Price Index is used to find the rate of inflation. ◦ CPI measures the prices of a fixed market basket of goods ◦ If their price is going up, inflation is occurring Describe limitations on the use of the Consumer Price Index. ◦ CPI excludes goods purchased by rural consumers. It also excludes capital goods purchased by the business sector and the whole myriad of purchases made only by the government and foreign sectors. ◦ Measures about 60% of the economy and misses 40%

11. 5-172 5-173 Define 5-172 5-173 Define Gross Domestic Product (GDP): ◦ the market value of the goods and services produced BY a country. Personal Consumption Expenditures: ◦ measures household consumption expenditures on gross domestic product. Personal consumption expenditures are far and away the largest and most stable of the four expenditures, averaging about 65 to 70 percent of gross domestic product. Gross Private Domestic Investment: ◦ measuring capital investment expenditures. Gross private domestic investment is expenditures on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period

12. Define Government purchases of goods and services: ◦ Expenditures made by the government sector on final goods and services, or gross domestic product. Government purchases are used to buy the goods and services needed to operate the government (such as administrative salaries) and to provide public goods (including national defense, highway construction). ◦ Government purchases annually account for about 10 to 15 percent of the total or aggregate expenditures on gross domestic product. Net exports of goods and services: the official government measure of net exports with the foreign sector, the difference between exports and imports. ◦ They are positive when exports are greater than imports and negative when exports are less than imports.

13. Define Trade deficit: ◦ importing more than we export Trade surplus: ◦ exporting more than we import Uncounted production: ◦ production not tracked or counted in economic measurements Underground economy: “off the books” Double counting: ◦ shows up two ways in the measurements

14. GDP Identify the categories of goods and services that make up GDP. ◦ Consumption – largest component ◦ Investment ◦ Government ◦ Net exports – exports minus imports http://www.quickmba.com/econ/macro/gdp/ Describe problems encountered in calculating GDP. ◦ Getting all production reported  Underground or uncounted Explain the importance of a country's GDP. ◦ one the primary indicators used to gauge the health of a country's economy It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. http://www.investopedia.com/ask/answers/199.asp#ixzz1hBoT3I Gy http://www.investopedia.com/ask/answers/199.asp#ixzz1hBoT3I Gy

15. 5-172 5-173 Describe ways to increase GDP. ◦ Invest in infrastructure, enforce laws, lower taxes (usually short-term) Describe how the government responds to changes in GDP. Describe ways that businesses respond to changes in GDP.

16. 5-174 5-175 Defining 5-174 5-175 Defining Unemployment rate: Frictional unemployment: Structural unemployment: Cyclical unemployment: Seasonal unemployment: Technological unemployment: Full employment:

17. 5-174 5-175 Discuss individual costs of unemployment. Describe economic benefits of unemployment.

18. 5-174 5-175 Explain theories of the causes of unemployment. Explain why the unemployment rate understates employment conditions. Describe the costs of unemployment for a nation.

19. 5-176 5-177 Defining 5-176 5-177 Defining Interest rate: Nominal interest rate: Real interest rate: Interest-rate fluctuation: Default risk, liquidity risk: Maturity risk:

20. 5-176 5-177 5-176 5-177 Discuss causes of interest-rate fluctuations. Explain the impact of interest rate fluctuations on an economy. Describe the relationship between interest rates and the demand for money.

21. 5-176 5-177 5-176 5-177 Describe the relationship between inflation and interest rates. Discuss factors that create differences in the amount of interest charged on credit transactions (e.g., levels and kinds of risk, borrowers’ and lenders’ rights, and tax considerations). Describe kinds of risk associated with variances in interest rates (i.e., default, liquidity, and maturity).

22. 5-176 5-177 5-176 5-177 Explain how fiscal policies can affect interest rates.

23. 5-178 5-182 Defining 5-178 5-182 Defining business cycles, expansion, peak, contraction and trough.

24. 5-178 5-182 5-178 5-182 Identify the phases of a business cycle. Describe the expansion phase of a business cycle. Describe the peak phase of a business cycle.

25. 5-178 5-182 5-178 5-182 Describe the contraction phase of a business cycle. Describe the trough phase of a business cycle. Explain how knowledge of business cycles benefits businesspeople.

26. 5-178 5-182 5-178 5-182 Describe internal causes of business cycles. Explain external causes of business cycles.