Ch. 13: Measuring the Economy

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Ch. 13: Measuring the Economy by Mind Map: Ch. 13: Measuring the Economy

1. 13.4: What does the inflation rate reveal about and economy's health?

1.1. The prices of goods and services are constantly changing due to inflation. BLS can see how much or little inflation has changed by looking at the cost of living over time. Everyday goods and services contribute so the BLS has to go to retail stores and record the data.

1.1.1. Price index: a measure of the average change in price of a type of good over time.

1.2. Like GDP, inflation is based on nominal and real costs. Nominal is on current price while real is on the changing prices. Even though $40 might buy less over time, $40 is easier to get overtime. Inflation and ease of gaining currency go up almost evenly. It's the sudden change that can devastate economies.

1.3. The United States' currency is always inflating but it does so at a gradual rate. When inflation increases rapidly the economy goes to crap and people question values. When it decreases it is good thing for consumers but businesses suffer and don't make very much money. Eventually this decrease can destroy businesses until it affects consumers (Great Depression).

1.3.1. Deflation: a fall int he price of goods and services; opposite of inflation.

1.3.2. Deflationary spiral: a downward trend in all business activity; causes business to suffer as well as wages and consumers.

1.4. More than just more printed money contributes to inflation. Demand and the costs of inputs effect inflation by boosting costs. Products are limited to reduce the inflation of them. Wages and minimum wage needs to keep steady with inflation so that purchasing power is steady.

1.4.1. Demand-pull inflation: a rise in the price of goods and services caused by increases in the cost of the factors of production.

2. 13.2: How do economists measure the size of an economy?

2.1. In a given amount of time, the amount of final products, at market value, in a certain country, the GDP is determined for that country.

2.1.1. Market value: price that buyers are willing to pay for a good or service

2.2. Economists add up household income (goods and services), business investment (machinery and buildings), government purchases (welfare), and net exports to find the GDP (Gross Domestic Product). Net exports are subtracted by all imports to have one number for all. A positive net exports means that the country is exporting more than it is importing, while negative is the other way.

2.3. Nominal GDP does not include inflation and only counts the current dollars. Nominal GDP does not show an accurate GDP. The more accurate reading takes inflation into account by counting constant dollars called real GDP

2.3.1. Current dollars: the value of a dollar in its current year (inflation is not applied so growth increases more)

2.3.2. Constant dollars: the value of the dollar adjusted over time. (inflation is included giving a more accurate reading)

2.4. GDP measures more than just how much a country is worth. It determines the economic growth and progress in developing countries, as well as measuring the standard of living per capita. The population and GDP shows how a country is managing and if they can support the population (standard of living).

3. 13.3: What does unemployment rate tell us about an economy's health?

3.1. Unemployment is the amount of people not working but are able to work. This being said, there are other people that are already employed and then people who can't work. The unemployment rate shows the number that aren't working divided by the amount in the work force.

3.2. The four types of unemployment are frictional (people between jobs and people finding their first jobs), structural (technology becomes more efficient than employees; certain skills decline in need), seasonal (business shuts down for part of the year), and cyclical (period of decline in the business cycle; GDP drop). All types of unemployment take a toll on GDP because the greater population decreases GDP.

3.3. Economy's will always have structural, frictional, and seasonal but cyclic really depends on how the economy is functioning. The rate of unemployment of all except cyclic is the natural rate of unemployment which is just the rate that we can't control.

3.3.1. Natural rate of unemployment: the percentage of the labor force without work when the economy is at full employment (no cyclical).

3.4. The rate can't recognize some unemployment that is technically employment. Some people don't want to work because finding a job is hard and drug dealers are considered unemployed, along with other illegal activities. An economy needs to strive for a low unemployment rate to be as efficient as possible and have a high GDP.

3.4.1. Underground economy: a part of the economy based on illegal activities.

3.4.2. Discouraged workers: unemployed workers who have ceased to look for work.

4. 13.5: How does the business cycle relate to economic health?

4.1. A business cycle can be used to predict how much an economy will change in a certain period of time. As it contracts and expands, it peaks and troughs. Economists can use the business cycle to help the country in times of change.

4.1.1. Business Cycle: a recurring pattern of growth and decline in economic activity over time.

4.2. There are also indicators of when the economy will go off the path out of its predicted ways. The Census Bureau first looks at the housing economy for major changes in living expenses. Real GDP is also an indicator that can tell a lot about what an economy will do in the future. The unemployment rate the last indicator mentioned.

4.2.1. Leading business indicator: measures that consistently rise or fall several months before an expansion or contraction begins.

4.3. Business cycles go either downward or upward. Upward is called boom and downward is called bust. When a bust is happening for a long period of time, it causes a recession. These can be caused by rapid rising prices, stock market crash, high interest, and shortage of resources.

4.4. If the business cycle is fairly consistent, and expansions are slightly higher than contractions, the GDP will slowly rise. Long periods of recession, called a depression, are devastating to countries and destroys that countries economy. If the country's contractions are greater than expansions, the GDP is is going down, and usually the unemployment rate and inflation are greatly increased.

4.4.1. Depression: a prolonged economic downturn characterized by plunging real GDP and extremely high unemployment.

5. Trough

6. Expansion

7. Peak

8. Contraction

9. Trough

10. Expansion

11. Business Cycle