CH.13 - Measuring The Economy

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CH.13 - Measuring The Economy by Mind Map: CH.13 - Measuring The Economy

1. 13.2 How Do Economists Measure The Size Of An Economy?

1.1. Key Point 1: The main way to measure the size the economy is the GDP. Which stands for Gross Domestic Product, and is basically the market value of all final goods and services produced in a specific place (or country) in a given amount of time! the Bureau of Economic analysis attaches a market value to each product which regulates what is being sold and different values in a competitive market.

1.1.1. Market Value: the amount of money consumers are willing to pay for a good or service.

1.2. Key Point 2: Economists calculate GDP by measuring expenditures on goods and service produced in a country. They do this by dividing the economy into four sectors. 1. Households 2. Businesses 3. Government 4. Foreign Trade. Each of these sector's spending makes up one of the four components of GDP: household consumption (C), business investment (I), government purchases (G), and the net exports minus imports (NX).

1.2.1. Formula for Calculating GDP: C+I+NX=GDP

1.3. Key Point 3: Economists use GDP figures to determine not only how big an economy is, but whether it is growing or shrinking and at what rate. The difference between Nominal GDP and Real GDP

1.3.1. Nominal GDP: a measure of a country's economic output (GDP) valued in current dollars; nominal GDP does not reflect the effects of inflation.

1.3.2. Real GDP: a measure of a country's economic output (GDP) valued in constant dollars; real GDP reflects the effect of inflation.

1.4. Key Point 4: Economists also use GDP to compare the economies of individual countries. They Adjust for population - Per Capita GDP. It is a nation's real gross domestic product dived by its population. It is an accepted measure of a society's standard of living.

1.4.1. Per Capital GDP: a nation's real GDP divided by its population; a measure of average economic output per person.

2. 13.3 What Does The Unemployment Rate Tell Us About The Economy's Health?

2.1. Key Point 1: The government measures unemployment by every month, the BLS reports the total number of people who were unemployed for the previous month.

2.1.1. Unemployment Rate: the percentage of the labor force that is not employed but is actively seeking work.

2.1.2. Employed: Members of the labor force who have jobs.

2.1.3. Unemployed: Members of the labor force who are jobless, but are looking for work.

2.2. Key Point 2: Different kinds of unemployment. Frictional, Structural, Seasonal and Cyclical.

2.2.1. Frictional Unemployment: A type of unemployment that results when workers are seeking their first job or have left one job and are seeking another. "in between jobs"

2.2.2. Structural Unemployment: A type of unemployment that results when the demand for certain skills declines, often because of changes in technology or increased foreign competitors; under such conditions workers may need retraining to find new jobs.

2.2.3. Seasonal Unemployment: A type of unemployment that results when businesses shut down or slow down for part of the year, often because of weather.

2.2.4. Cyclical Unemployment: A type of unemployment that results from a period of decline in the business cycle; unemployment caused by a contraction.

2.3. Key Point 3: The problems with the Unemployment Rate as being an Indicator of Economic Heath. to determine how many of the country's more than 315 million people are unemployed, the BLS makes every effort to be accurate. Still, critics point to several problems that may make the result less than exact. One of the problems is that at any time, a number of unemployed people have given up looking for work. Another problem is that the official unemployment rate does not recognize involuntary part-time workers. And also, a third problem with the unemployment rate involves people working in informal or underground economies.

2.3.1. Discouraged Workers: unemployed workers who have ceased to look for work. They are not considered part of the labor force and are not factored into the unemployment rate.

2.3.2. Involuntary Part-Time Workers: People who settle for part-time employment because they are unable to find full-time work.

2.3.3. Underground Economy: A sector of the economy based on illegal activities, such as drug dealing and unlawful gambling.

2.4. Key Point 4: The main cost of high unemployment is lost potential output. Also, unemployed workers pay serious economic cost. And high unemployment is also costly for society at large.

3. 13.4 What Does the Inflation Rate Reveal About The Economy's Health?

3.1. Key Point 1: A runaway inflation can send an economy into a tailspin. That s why economists keep a close eye on a third economic indication which is the inflation rate.

3.1.1. Inflation Rate: The percentage increase in the average price level of goods and services from one month or year to the next.

3.2. Key Point 2: The BLS tracks inflation by gathering information on Americans' cost of living. Economists at the BLS track changes in the cost of living using what is known as the consumer price index. Which is kind of like a "market basket" of consumer goods and services.

3.2.1. Price Index: a measure of the average change in price of a type of good over time.

3.2.2. Consumer Price Index: (CPI) a measure of price changes in consumer goods and services over time. It also shows changes in the cost of living fro year to year.

3.2.3. Cost Of Living Index: A measure of change in the overall cost of goods and services; another term for the consumer price index.

3.3. Key Point 3: The cost in current dollars of all basic goods and services that people needs is the nominal cost of living. The real cost of living is the nominal cost of basic goods and services, adjusted to inflation. The real cost of living can then be used to compare prices overtime. Consumers pay nominal costs with the nominal wages or wages based on current prices. As price goes up wages go up. By using the CPI to adjust for inflation, economists can calculated real wages and compare them overtime.

3.3.1. Nominal Cost Of Living: The cost in current dollars of all the basic goods and services needed by the average consumer.

3.3.2. Real Cost Of Living: The cost in constant dollars of all the basic goods and services needed by the average consumer; the nominal cost of living adjusted for inflation.

3.3.3. Nominal Wages: wage levels based on current dollars.

3.3.4. Real Wages: wage levels based on constant dollars; nominal wages adjusted for inflation.

3.4. Key Point 4: In the United States we have come to expect a certain amount of gradual inflation, or creeping inflation every year. Occasionally inflation goes into overdrive. The result is hyperinflation. There is also deflation and that occurs when prices go down overtime.

3.4.1. Deflation: a fall in the price of a good or service. The opposite of inflation.

3.4.2. Deflationary Spiral: a downward trend in prices, wages, and business activity; a deflationary pattern in which falling prices cause a business to slow down, which in turn leads to lower wages, a further fall in price, and even less business activity.

4. 13.5 How Does The Business Cycle Relate To Economic Health?

4.1. Key Point 1: The business cycle has four phases. Expansion, the point at which an expansion ends marks as peak of the business cycle, and following the peak comes the contraction phase of the business cycle. Then theres the lowest point of a contraction which is called the trough.

4.1.1. Expansion: A period of economic growth

4.1.2. Peak: The highest point of an expansion, or period of economic growth; a peak followed by a decline.

4.1.3. Contraction: a period of general economic decline marked by falling GDP and rising unemployment.

4.1.4. Trough: the lowest point of a contraction, or period of economic decline. A trough is followed by economic growth.

4.2. Key Point 2: Business cycles are irregular in both length and severity. This makes peaks and troughs difficult to predict. Nonetheless, economists attempt to do just that, using a variety of economic indicators.

4.2.1. Leading Economic Indicators: measures that consistently rise or fall several months before an expansion or a contraction begins.

4.2.2. Coincident Indicators: are measure that consistently rise or fall along with expansions or contractions.

4.2.3. Lagging economic Indicators: Measures that consistently rise or fall several months after an expansion or contraction begins.

4.3. Key Point 3: Business cycles are popularly known as periods of boom and bust. A boom is the expansion phase of a cycle.

4.4. Key Point 4: Invitably a boom turns into a bust. The bust or contract-ion phase of hte business cycle is also called a downturn a, a downswing, or a recession.

4.4.1. Recession: A period of declining national economic activity, usually measured as a decrease in GDP for at least 2 consecutive quarters (6 months).