Chapter 13

Chapter 13/17
Measuring the Economy’s
• Inflation-
prolonged rise in the general price level of
goods and services which threatens the economy and makes
measuring the economy difficult.
• Economic indicators- statistics that help economists
judge the health of an economy.
• Gross domestic product (GDP)- the market value of all
final goods and services produced in a country during a
given period of time.
• Unemployment rate- the percentage of the labor force
that is not employed but is actively seeking work.
• Inflation rate- the percentage increase in the average
price level of goods and services from one month or year to
the next.
• Consumer price index (CPI)- a measure of price changes
in consumer goods and services. The CPI shows changes in
the cost of living over time.
• Business cycle- a recurring pattern of growth and
decline in economic activity over time.
• Recession- a period of declining national activity,
usually measured as a decrease in GDP for at least two
consecutive quarters (six months).
• GDP- the market value of all final goods and services
produced in a country during a given period of time.
• Market Value- the price buyers are willing to pay for
a good or service in a competitive marketplace.
• Final goods- any new good that is ready for use by a
• Intermediate goods- goods that are used in the
production of final goods,
example: grains used to produce cereal or steel and
rubber used to manufacture cars. These are not
included in GDP.
Gross Domestic Product- the market value of all
final goods and services produced in a country
during a given period of time.
Nominal GDP- measures the output of an economy
valued at today’s prices or in current dollars.
Real GDP- measures the output of an economy in
constant dollars. Constant dollars is a fixed rate
that was current in a specific base year.
Per capita GDP- is a nations’ real gross domestic
product divided by its population. (It’s an accepted
measure of a society’s standard of living.)
C= Household Consumption- goods and services bought by
people in households for personal use. It ranges from food and
fuel to movie tickets and medical care.
I= Business Investment- business invest in capital goods such
as buildings and machinery. It also includes goods produced but
not yet sold.
G= Government Purchases- Federal, state and local
governments purchases of goods and services.
NX= Net exports- this is the value of all exports minus all
Economists only measure final products so that things are not counted twice.
For example, when calculated revenue from bread, they do not consider the
wheat that bread producers bought from wheat farmers.
Economists do not count used items, because they have already been counted.
If you buy a I-phone off Ebay for $100 that sale is not computed, because
the original owner’s purchase was already counted.
Weakness of GDP
1. GDP leaves out unpaid household and volunteer
2. GDP ignores informal and illegal exchanges.
(babysitters, barter).
3. GDP counts some negatives as positive.
(hurricane can generate rebuilding and economic
activity but people are still far worse off than
they would have been if disaster didn’t strike.
4. GDP ignores negative externalities. (a rapidly
industrializing country may have a rising GDP
but they are polluting air and water).
5. GDP places no value on leisure time.
6. GDP says nothing about income distribution.
Employed-members of the labor force who have jobs.
Unemployed- members of the labor force who are
jobless but looking for work.
Frictional unemployment- when a person seeks to
enter the workforce or quits one job to seek another.
Structural unemployment- when advances in
technology eliminate jobs.
Seasonal unemployment- when businesses shut down
or slow down for part of the year.
Cyclical unemployment- when there is a decline in
business activity during an economic downturn.
Discouraged workers- people who have given up
looking for work.
Involuntary part-time workers- those people unable
to find full-time work and settle for part-time jobs.
Number unemployed
Unemployment rate=
% = _____________ X 100
Number in labor force
-------------------------------------------------In 2010 the unemployment rate was
9.6% =
14.8 million persons X 100
153.9 million persons
The Consumer Price Index (CPI)an indicator used to track changes in the prices
of basic household goods and services.
Market Basket- representative group of goods
and services used to compile the CPI. Examples:
food, housing, transportation, apparel,
education, recreation, medical care and personal
care. Every 10 years the basket is updated with
new items.
Each group of items in the CPI’s market basket is given a
“weight,” or percentage, that reflects how much
consumers spend on it. Average consumers spend the
largest part of their income on housing, which includes
rent or mortgage payments, property taxes, heat,
electricity, and furniture.
Adjusting for Inflation
Nominal Cost of Living- the price a person pays for a pair
of shoes or any other product. It’s its cost in current
Real Cost of Living-the nominal cost of basic goods and
services adjusted for inflation.
Creeping Inflation- in the U.S. we have to expect a certain
amount of gradual inflation every year. Since 1914 the
average rate of inflation has been about 3.4%.
Hyperinflation-runaway inflation. (50% or higher). No one
can predict how high price will go and people lose confidence
in their currency.
U.S.- 10% in late 1970’s
Germany after WWI-300% per month
Russia- 874% between 1993-2004
Deflation- when prices go down over time. Good for
consumers, bad for businesses.
Economic Indicators- Statistics that measure variables
in the economy.
Leading indicators-economic factors that change before
the economy starts to follow a particular pattern or
trend. They are used to predict changes in the economy,
but are not always accurate. Examples:
1. Average weekly hours for workers in manufacturing.
2. Weekly initial claims for unemployment insurance.
3. New orders for consumer goods.
4. Speed with which companies make deliveries.
5. Numbers of contracts and orders for factories and
6. Number of building permits issued for private housing.
7. Changes in the money supply in circulation.
8. Stock prices.
9. Changes in interest rates.
10.Changes in consumer expectation.
Coincident indicators- an economic factor that provides
information on the current state of the economy. It does
not show which way the economy is heading, but where it is
at. Examples:
1. Number of nonagricultural workers who are employed.
2. Personal income minus transfer payments.
3. Rate of industrial production.
4. Sales of manufacturers, wholesalers and retailers.
Lagging Indicators- economic factors that tend to change
only after an economy has already changed, or has begun to
follow a particular pattern or trend. Examples:
1. Average length of employment.
2. Size of manufacturing and trade inventories.
3. Labor cost per unit of output in manufacturing.
4. Average interest rate charged by banks to their best
1. Number of commercial and industrial loans to be repaid.
2. Ratio of consumer debt (credit cards) to personal income.
3. Changes in the CPI for services.
The Business Cycle- a recurring pattern of
change as an economy expands and contracts.
Expansion- economic activity generally
increases from month to month.
Peak- the point at which expansion ends. At
the peak economic activity has reached its
highest level.
Contraction- a period of general economic
decline marked by a falling GDP and rising
Trough- the lowest pint of a contraction. Once
the economy hits the bottom, a new expansion

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