Warm-Up:

What do you think the term “Economic Indicator” means?

Economic Indicators : Key Terms

Economic IndicatorsDefinition-is a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance.Examples:

CPI (Consumer Price Index) Unemployment Housing Sales Consumer Spending Investment Inflation Credit Availability

Gross Domestic Product (GDP)

The total dollar value of all goods and services produced in a particular economy in a given year.

Formula to Calculate GDP

GDP = C + I + G + X

Four Components of GDP:C = Personal Consumption ExpendituresI = Gross Private Domestic InvestmentG = Government Consumption ExpendituresX = Net Exports (Exports minus Imports) 

Real GDP vs. Nominal GDP

Real GDP: gross domestic product expressed in in constant, or unchanging prices.

Nominal GDP: gross domestic product measured in current prices.

Limitations of GDP

1.Non-market Activities: does not measure things people make themselves, I.e. watch children, mow the lawn. It does rise when they pay others for this service though

Limitations of GDP

2. Underground Economy: economic activity which, although income is generated, never reported to the government. Examples include black market transactions and "under the table" wages.

Limitations of GDP

4. Quality of Life: Measures output and income, not quality of life. Does not take into account leisure time, surroundings, etc.

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Negative Externalities3. Unintended economic side effects have a monetary value that is often not reflected in GDP.

Inflation

A general increase in prices.

Inflation

Inflation

Consumer Price Index (CPI)

Measure of the changes in prices of goods and services over a give time period. Based on a “market basket” of goods

and services.

Consumer Price Index (CPI)

Producer Price Index (PPI)A comprehensive index of price changes at the wholesale level. Because wholesale price changes eventually find their way into consumer prices, the producer price index is closely watched as an early indicator of future retail price changes. Formerly called wholesale price index.

Inflation: Purchasing Power, Income, & Interest RatesPurchasing Power: Is the ability to purchase goods and services. As prices rise, the purchasing power of money declines. Income (fixed): As income remains the same, and prices rise, the less purchasing power an individual has. Interest Rates: the greater the difference in percentage between one’s interest rate and the inflation rate equals greater monetary gains & vice versa.

What Is a Business Cycle?

A macroeconomic period of expansion followed by a period of contraction. A modern industrial economy

experiences cycles of goods times, then bad times, then good times again.

There are four main phases of the business cycle: expansion, peak, contraction, and trough.

The Business Cycle

Phases of the Business Cycle

Expansion

An expansion is a period of economic growth as measured by a rise in real GDP. Economic growth is a steady, long-term rise in real GDP.

Peak

When real GDP stops rising, the economy has reached its peak, the height of its economic expansion.

Phases of the Business Cycle

Contraction

Following its peak, the economy enters a period of contraction, an economic decline marked by a fall in real GDP. A recession is a prolonged economic contraction. An especially long or severe recession may be called a depression.

Trough

The trough is the lowest point of economic decline, when real GDP stops falling.

Recession

a period of reduced economic activity during which the level of unemployment rises, GDP falls, and general prosperity lags. Usually lasts 6 to 18 months.

Recession

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DepressionA recession that is especially long and severe.

StagflationA decline in real GDP combined with a rise in the price level.