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Measuring the Economy
Measur
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?
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
These economic indicators are sometimes
divided into the following categories:
Leading
indicators
Coincident
indicators
Lagging
indicators
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.
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.
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.
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.
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
Y = C + I + E + G
9817.0 = 6739.4 + 1735.5 - 379.5 + 1721.6
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
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?
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
Demand-Pull inflation can be depicted as
follows. Note how the Aggregate Demand
curve shifts and affects the Price Level.
Cost-push inflation can be represented
graphically as follows.
Inflation is often measured by the Consumer
Price Index (CPI) (aka the Cost-of-Living Index)
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