Economic Indicators and Measurements

Economic Indicators and Measurements

Economic Indicators and Measurements NEXT Chapter 12: Economic Indicators and Measurements KEY CONCEPT National income accounting uses statistical measures of income, spending, and output to help people understand what is happening to a countrys economy. WHY THE CONCEPT MATTERS

The economic decisions of millions of individuals determine the fate of the nations economy. Understanding the countrys economy will help you make better personal economic decisions. NEXT Gross Domestic Product and Other Indicators What is GDP? KEY CONCEPTS

Microeconomics examines actions of individuals and single markets Macroeconomics examines the economy as a whole Macroeconomists use national income accounting: statistical measures that track nations income, spending, output gross domestic product (GDP) is most important investors measure NEXT What is GDP? The Components of GDP GDPmarket value of final goods, services produced in set time

period To be included in GDP, product must fulfill three requirements: must be final, not intermediate product must be produced during the time period, regardless of when sold must be produced within nations borders NEXT What is GDP? Calculating GDP

Expenditures approach often used to measure GDP; tracks four sectors Consumptionhousehold spending on durable, nondurable goods, services Investmentbusiness spending on capital goods, inventory Government spendingfederal, state, local; not transfer payments Net exportsvalue of exports minus value of imports NEXT What is GDP? Two Types of GDP

When GDP grows, economy creates more jobs and business opportunities Nominal GDPprice levels for the year in which GDP is measured states GDP in terms of current value of goods and services Real GDPGDP adjusted for changes in prices estimate of GDP if prices were to remain constant NEXT What GDP Does Not Measure KEY CONCEPTS

GDP does not measure all output, such as nonmarket activitiesfree services with potential economic value underground economyunreported market activities GDP also does not measure quality of life NEXT What GDP Does Not Measure Nonmarket Activities

Some productive activities outside of economic markets Examples: performing own home repairs, volunteer work Biggest nonmarket activity is homemaking NEXT What GDP Does Not Measure Underground Economy Illegal activities are unreported when goods are rationed or restricted, black market arises Legal activities paid for in cash not always declared

Estimates suggest underground economy 8 to 10 percent of U.S. GDP NEXT What GDP Does Not Measure Quality of Life Countries with high GDPs have high living standards GDP does not show how goods and services are distributed GDP does not show what goods are being made or services offered

NEXT Other Economic Performance Measure KEY CONCEPTS Other measures of economic performance derived by adjusting GDP Gross national product (GNP)market value of all final goods, services GDP plus products produced abroad; minus domestic products of foreign nations

Net national product (NNP)GNP minus depreciation of capital stock National income (NI)total income from production of goods, services NEXT Other Economic Performance Measures KEY CONCEPTS Personal income (PI)income received by people from all sources Disposable personal income (DPI)personal income minus income taxes

actual income available for consumer spending NEXT Reviewing Key Concepts Explain the relationship between the terms in each of these pairs: nominal GDP and real GDP gross national product and net national product personal income and disposable personal income

NEXT Business Cycles What Is the Business Cycle? KEY CONCEPTS Changes in the economy often follow a broad pattern Business cycleseries of periods of expanding and contracting activity measured by increases or decreases in real GDP has four phases: expansion, peak, contraction, trough; length can vary

NEXT What Is the Business Cycle? Stage 1: Expansion Expansion is period of economic growthincrease in real GDP real GDP grows from a low point, or trough Jobs easier to find; unemployment drops More resources needed to keep up with spending demand as resources become scarce, their prices rise NEXT

What Is the Business Cycle? Stage 2: Peak Peak is point at which real GDP is highest As prices rise and resources tighten, businesses become less profitable businesses cut back production and real GDP drops NEXT What Is the Business Cycle? Stage 3: Contraction

During contraction, producers cut back and unemployment increases resources become less scarce, so prices tend to stabilize or fall Recessioncontraction lasting two or more quarters Depressionlong period of high unemployment, slow business activity Stagflationstagnation in business activity with inflation of prices NEXT What Is the Business Cycle?

Stage 4: Trough Trough is point at which real GDP and employment stop declining A business cycle is complete when it has gone through all four phases NEXT Aggregate Demand and Supply KEY CONCEPTS Business cycles can be explained through concept of supply and

demand apply concept to the economy as a whole NEXT Aggregate Demand and Supply Aggregate Demand Aggregate demandtotal amount of products that might be bought at every level includes all goods and services, all purchasers Aggregate demand curve is downward sloping

vertical axis shows average price of all goods and services horizontal axis shows the economys total output NEXT Aggregate Demand and Supply Aggregate Supply Aggregate supplysum of all goods and services that might be provided at every price level Aggregate supply curve almost horizontal when real GDP is low

businesses do not raise prices when economy is weak Curve slopes upward as prices increase with rise in real GDP Curve almost vertical with inflationno rise in real GDP NEXT Aggregate Demand and Supply Macroeconomic Equilibrium Macroeconomic equilibriumaggregate demand equals aggregate supply aggregate demand curve intersects aggregate supply curve

Figures 12.9, 12.10: P1 is equilibrium price level; Q1 equilibrium real GDP increase in aggregate demand shifts AD curve to right decrease in aggregate supply shifts AS curve to left NEXT Why Do Business Cycles Occur? KEY CONCEPTS Four major factors that affect the business cycle: decisions made by businesses changes in interest rates expectations of consumers

external shocks to the economy NEXT Why Do Business Cycles Occur? Factor 1: Business Decisions Decisions by businesses affect suppliers, related businesses if enough make similar decisions, can affect economy and business cycle Demand slump can lead to decreased production, lay offs

contraction New technology can raise productivity, demand, employment expansion NEXT Why Do Business Cycles Occur? Factor 2: Changes in Interest Rates Rising interest rates make borrowing costly, lower aggregate demand decrease household purchases, business investment in capital goods

promote contraction Low rates increase home salesmore people qualify for mortgage related economic activities increase and economy expands NEXT Why Do Business Cycles Occur? Factor 3: Consumer Expectations Consumers ideas on prices, business activity, jobs influence choices consumers choices can change aggregate demand confident consumers tend to consume more, raising aggregate

demand Consumer Confidence Survey report published monthly NEXT Why Do Business Cycles Occur? Factor 4: External Issues A nations economy can be influenced by events beyond its control Natural disasters can damage capital, infrastructure example: damage of hurricanes Katrina and Rita to Gulf Coast in

2005 Conflicts overseas and political decisions made by other countries example: OPEC decision to reduce amount of oil supplied to West in 1973 NEXT Predicting Business Cycles KEY CONCEPTS

Economic indicatorsmeasures for predicting changes in business cycle help businesses and government make informed choices Leading indicatorsmeasures that usually change before real GDP Coincident indicatorsmeasures that usually change at same time as real GDP Lagging indicatorsmeasures that usually change after real GDP NEXT Business Cycles in U.S. History KEY CONCEPTS

National Bureau of Economic Research (NBER) tracks economic indicators and business cycles Identified 20 recessions in U.S. in 20th century NEXT Business Cycles in U.S. History The Great Depression Began with stock market crash of 1929, lasted over a decade worldwide U.S. did not fully recover until entered World War II in 1941

In U.S. from 1929 to 1933 real GDP declined by one third sales dropped and one in four people left jobless many businesses and banks failed NEXT Business Cycles in U.S. History The New Deal President Franklin D. Roosevelt enacted New Deal programs focused on federal spending to revive economy; government

employed many federal spending tripled from the 1920s to the mid-1930s placed economy under closer government regulation Debate over New Deal and economic growth; WWII reduced unemployment NEXT Business Cycles in U.S. History Business Cycles Since the Great Depression

Since Depression, U.S. has had about a dozen contractions, expansions Recessions have been less severe than before 1930s 1970s contraction triggered in part by OPEC Oil Embargo of 1973 unemployment rose to 7.4 percent; prices rose, creating stagflation 1990s great expansion, partly from growth of information technology NEXT Reviewing Key Concepts Explain the relationship between the terms in each of these pairs:

contraction and expansion aggregate demand and aggregate supply leading indicators and lagging indicators NEXT Stimulating Economic Growth What Is Economic Growth? KEY CONCEPTS

Business cycle is pattern of expansion and contraction in economy Economic growth can be measured by changes in real GDP NEXT What Is Economic Growth? Gauging Economic Growth Early theories held that economic growth resulted from: collecting high taxes from growing population exporting more than importing Adam Smith argued wealth of nations came from productive

capacities Best measure of growth is increase in real GDP rate of real GDP change is good indicator of how well resources used NEXT What Is Economic Growth? Population and Economic Growth Population influences economic growth

if population grows faster than real GDP, growth may mean more workers Real GDP per capitareal GDP divided by total population Real GDP per capita is measure of standard of living everyone does not actually have that amount; does not measure quality of life NEXT What Determines Economic Growth? KEY CONCEPTS Four factors influence economic growth: natural resources, human resources, capital, technology and

innovation NEXT What Determines Economic Growth? Factor 1: Natural Resources Access to natural resources is important arable land, water, forests, oil, mineral resources Resources not enough; also need free market, effective government Nigeria has oil but low GDP per capita, widespread poverty Japan has few resources but high GDP per capita from industry and trade

NEXT What Determines Economic Growth? Factor 2: Human Resources Labor inputsize of labor force multiplied by length of work week Population growth made up for shorter work week since early 1900s More important than size of labor force is its level of human capital NEXT

What Determines Economic Growth? Factor 3: Capital More and better capital goods increase output more and better machines can produce more goods Capital deepeningincrease in the capital to labor ratio providing more and better equipment to each worker increases production NEXT What Determines Economic Growth? Factor 4: Technology and Innovation

Technology, innovation make efficient use of resources, raise output Innovations can increase economic growth examples: reduce time needed to complete task; improve customer service Information technology has had strong impact on economic growth advances in production lower prices, make capital deepening cheaper NEXT

Productivity and Economic Growth KEY CONCEPTS Productivityamount of output produced from a set amount of inputs labor productivity: amount of goods and services produced by one worker in an hour capital productivity: amount produced by set amount of equipment and materials NEXT Productivity and Economic Growth

How Is Productivity Measured? For a business, compare amount of capital, work hours to total output Multifactor productivityapplies to an industry or business sector ratio between economic output and labor and capital inputs used Multifactor productivity data compiled for major industries, sectors used to estimate productivity of entire economy NEXT Productivity and Economic Growth What Contributes to Productivity?

Quality of laboreducated, healthy workforce is more productive Technological innovationnew technology helps increase output Energy costscheaper power lowers cost of using tools Financial marketsbanks, stock markets flow funds where needed NEXT Productivity and Economic Growth How Are Productivity and Growth Related?

Economic growth is a measure of a change in production Productivity is a measure of efficiency Economy can grow by increasing quantity of resources, labor, capital, or technology by increasing productivity NEXT Thomas Robert Malthus: The Population Problem A Natural Limit to Economic Growth?

Malthus called attention to issues of population growth, scarcity Said population would grow geometrically, food supply arithmetically An Essay on the Principle of Population attacked, but unrefuted Malthuss estimates have turned out to be wrong population has grown at slower rate; food production has risen sharply NEXT Reviewing Key Concepts Explain the differences between the terms in each of these pairs:

economic growth and real GDP per capita capital deepening and labor input NEXT Poland: Economic Freedom and Economic Growth Background Poland was under Communist rule from 1948 to 1989. In 1990, it held free elections and began moving toward a free market economy. Since then, Poland has experienced a surge in economic growth. In 2004, it joined the

European Union. Whats the Issue How successful is Polands economy? Thinking Economically Which economic measurements and indicators are evident in documents A and C? Explain what they convey about the strengths and weaknesses of

Polands economy. What factors have driven Polands economic growth? Compare documents A and C, written about six months apart. What continued economic trends and new economic strengths do they describe? NEXT

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