MEASURING THE ECONOMY ECONOMIC INDICATORS What are Economic

MEASURING THE ECONOMY

ECONOMIC INDICATORS • What are Economic Indicators? • Statistics that help economist judge the health of an economy. They provide information on important aspects of the economy. • Examples: • GDP = Gross Domestic Product • GNP = Gross National Product • Unemployment Rate • Inflation • Interest rate

ECONOMIC INDICATORS ARE DIVIDED INTO CATEGORIES: • Leading Indicators • Coincident Indicators • Lagging indicators

LEADING INDICATOR • An economic or financial variable that consistently rises or falls several months before the economy experiences expansion or a contraction.

COINCIDENT INDICATOR • Measures that consistently rise or fall along with expansions or contractions of the economy. • i. e. Real GDP or Inflation

LAGGING INDICATOR • These are measured several months after the rise or fall of an expansion or contraction. • Economist use them to confirm that one phase of the business cycle has ended another has begun. • i. e. Unemployment rate

GDP – GROSS DOMESTIC PRODUCT • Real GDP – Measure of a country’s economic output valued in constant dollars. • Real GDP reflects inflation. • Nominal GDP – measure of a country’s economic output valued in current dollars. • Nominal GDP does not reflect inflation.

HOW DO ECONOMIST CALCULATE GDP? • Divide the economy into four sectors: households, businesses, government and foreign trade. • GDP reflects the cumulative effect of each sector’s spending on goods and services produced within a country. • Four components of GDP: household consumption (C), business investment (I), government purchases (G), and the next exports minus imports (NX)

IS AN INCREASE IN GDP A GOOD INDICATOR OF A COUNTRY’S HEALTH? • GDP is a good indicator for a country’s economy. • It does have some limitations.

GDP LIMITATIONS • Leaves out unpaid households and volunteer work. • Ignores informal and illegal exchanges. • Counts some negatives as positives (rebuilding after a natural disaster) • Ignores negative externalities • Says nothing about leisure time or income redistribution

UNEMPLOYMENT RATE IS ALSO AN IMPORTANT INDICATOR OF AN ECONOMY'S HEALTH • Divide the total number of unemployed workers by the total number of people in the labor force. • Labor includes people of working age who are either working or seeking work.

TYPES OF UNEMPLOYMENT • Frictional: Results when workers are seeking their first job or have left one job and are seeking another. • Usually temporary.

TYPES OF UNEMPLOYMENT • Structural: Occurs because changes in technology reduce the demand for people with certain skills or jobs. • i. e. increase of internet has decreased the need for travel agents.

TYPES OF UNEMPLOYMENT • Seasonal: occurs when businesses shut down or slow down for part of the year. • i. e. lifeguards, ski instructors, tourism and some agricultural jobs. • Usually predictable, workers can reapply for their job when season is appropriate.

TYPES OF UNEMPLOYMENT • Cyclical: occurs during periods of economic decline. • When economic activity slows down. • Many workers with similar skills are laid off, compete with each other due to limited jobs. • Cyclical unemployed wont get jobs unless they retrain or economy improves.

OKUN’S LAW • Relationship between a country’s unemployment rate and a drop in its GDP. • Okun: each 1% increase in the cyclical unemployment rate will be matched by a 2% decline in GDP. • Okun’s law not accepted by all economist.

WHAT IS THE BUSINESS CYCLE? • A reoccurring pattern of growth and decline in economic activity over time. • 4 phases: • 1. period of expansion. • 2. the peak – point of highest economic activity. • 3. period of contraction or recession. • 4. Trough – point at which contraction reaches its lowest point.

WHAT IS INFLATION? WHAT ARE ITS CAUSES? • An increase in the money supply (if the amount of money pumped into the economy exceeds an increase in productivity. • Demand-Pull Inflation: A rise in the price of goods and services caused by an increase in overall demand. • Cost-Push inflation: A rise in the price of goods and services caused by increases in the cost of the factors of production.

HOMEWORK • Look up these terms and write down their definitions: • Economic Expansion • Economic Contraction • Economic Trough