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)