Measuring the Economy. Measur

Transcription

1 Measuring the Economy Measur

2 Economic indicators Economic indicators are statistics that help economists judge the health of an economy. They provide information about important aspects of the economy. What are some examples of economic indicators?

3 Some examples of economic indicators: GDP (=Gross Domestic Product) GNP (=Gross National Product) Unemployment Rate Per Capita Income Inflation (as measured by the Consumer Price Index (or CPI)) Net Imports and Exports Housing Starts/ New Building Permits Stock Market Interest Rate (Prime rate, etc.) Inventory Levels

4 These economic indicators are sometimes divided into the following categories: Leading indicators Coincident indicators Lagging indicators

5 What is a leading economic indicator? How would you define it? A leading indicator is an economic or financial variable that consistently rises or falls several months before the economy experiences an expansion or a contraction. The Census Bureau s monthly estimate of housing starts is an example of a leading indicator.

6 What is a coincident economic indicator? These are measures that consistently rise or fall along with expansions or contractions of the economy. They are helpful in tracking expansions and contractions as they occur. An example of a reliable coincident indicator is real GDP. Inflation is another.

7 What is a lagging economic indicator? These are measures that consistently rise or fall several months after an expansion or contraction. Economists use them to confirm that one phase of the business cycle has ended and another has begun. The unemployment rate is one of the most important lagging indicators.

8 GDP is one of the most important economic indicators. Many economists prefer to measure it in terms of real GDP as opposed to nominal GDP. What is the difference? Real GDP is a measure of a country s economic output valued in constant dollars. Real GDP reflects the effects of inflation. Nominal GDP, on the other hand, is a measure of a country s economic output (GDP) valued in current dollars. Nominal GDP does not reflect the effects of inflation.

9 How do economists calculate GDP? They typically 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 The four components of GDP are: household consumption (C), business investment (I), government purchases (G), and the net of exports minus imports (NX) This is sometimes referred to as the National Income Formula. It is commonly called the Expenditures Approach. Y is often used to represent GDP in the formula

10 Y = C + I + E + G =

11 Another way of calculating GDP is the so-called Income or Allocations Approach With this approach, GDP = Wages + Rents + Interest + Profits The total amount of GDP should be the same with either the Expenditures Approach or the Income Approach

12 Is an increase in GDP a good indicator of a country s health? While recognizing GDP as a good indicator of a country s economic vitality, many economists also recognize its limitations. What are some of these limitations?

13 GDP has several limitations GDP leaves out unpaid household and volunteer work. GDP ignores informal and illegal exchanges. Bartering or criminal activities (distributing drugs, e.g.) may represent a significant part of a country s economic activity but they are not normally counted as part of GDP. GDP counts some negatives as positives (e.g., rebuilding after a natural disaster) GDP ignores negative externalities. GDP says nothing about leisure time or income redistribution.

14 The unemployment rate is another important indicator of an economy s health. How is it determined? It is determined by dividing the total number of unemployed workers by the total number of people in the labor force. The labor force includes people of working age who are either working or seeking work.

15 Why is there unemployment? Is it always caused by the same factors? The short answer is no. There are different kinds of unemployment. Your text identifies four major ones.

16 The first kind is frictional unemployment. - This is a type of unemployment that results when workers are seeking their first job or have left one job and are seeking another. - This type of unemployment is usually temporary.

17 Another kind of unemployment is structural unemployment This kind of unemployment occurs because changes in technology reduce the demand for people with certain skills or jobs. In the recent past, a number of people have lost jobs because their skills and experience were no longer needed. For example, the Internet has made many travel agents redundant. People just book tickets online.

18 A third kind of unemployment is seasonal unemployment Seasonal unemployment occurs when businesses shut down or slow down for part of the year, often because of the weather. Workers like lifeguards at the beach or ski instructors, for instance, know that they won t be needed outside certain months of the year. Tourism, construction and agriculture are some parts of the economy that lay off workers for part of the year. Unemployment of this sort is predictable but usually temporary. Workers can reapply for their jobs once the weather changes.

19 The last major kind of unemployment is cyclical unemployment Cyclical unemployment occurs during periods of economic decline. When economic activity slows down and GNP drops, many workers lose their jobs. When the economy contracts, there are often many workers with similar skills who are laid off. With many workers competing for a limited number of jobs, the cyclically unemployed won t get jobs unless they retrain or until the economy improves.

20 Okun s Law Okun s Law concerns the relationship between increases in a country s unemployment rate and a drop in its GDP. According to Okun, each increase of 1% in the cyclical unemployment rate will be matched by a 2% decline in national output (or GDP). Okun s law is not accepted by some economists. They say it is more of a rule of thumb than a law and doesn t account for other factors that can also influence the GDP (changes in productivity, for example).

21 What is the business cycle? The business cycle is a recurring pattern of growth and decline in economic activity over time. It consists of 4 phases: 1. a period of expansion; 2. the peak, i.e. the point at which economic activity reaches its highest level; 3. a period of contraction (or recession); and 4. the trough, the point at which a contraction reaches its lowest point.

22 What is inflation? What are its causes? 1. An increase in the money supply (if the amount of money pumped into the economy exceeds an increase in productivity) 2. Demand-pull inflation. A rise in the price of goods and services caused by an increase in overall demand. 3. Cost-push inflation. A rise in the price of goods and services caused by increases in the cost of the factors of production.

23 Demand-Pull inflation can be depicted as follows. Note how the Aggregate Demand curve shifts and affects the Price Level.

24 Cost-push inflation can be represented graphically as follows.

25 Inflation is often measured by the Consumer Price Index (CPI) (aka the Cost-of-Living Index)