Ch. 13 Measuring the Economy

1. 13.5 How Does the Business Cycle Relate to Economic Health?

1.1. Key Point #1 Four Phases of a Business Cycle: Expansion, Peak, Contraction, and trough. Expansion is self explanatory, the business is expanding, experience of economic growth, increasing from month to month, generally ending after three to five years. Peak is the point at which an expansion ends marks the peak of the business cycle. The peak also marks the start of a decline in economic activity. A contraction is a period of general economic decline marked by a falling GDP and rising unemployment. The lowest point of a contraction is called the trough. Like the peak, the trough marks a turning point. Once the economy hits bottom, a new expansion begins.

1.2. Key Point #2 Economic Indicators and the Business Cycle: The term business cycle implies that expansions and contractions occur at regular, predictable intervals. But in fact, the opposite is true. 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. The indicators are lagging, coinciding, and leading. Leading indicators measure that consistently rise or fall several months before an expansion or a contraction begins. Coinciding indicators measure that consistently rise or fall along with expansions or contractions. And lagging indicators measure that consistently rise or fall several months after an expansion or a contraction

1.3. Key Point #3 From Boom to Bust to Boom Again: Business cycles are popularly known as periods of boom and bust. A boom is the expansion phase of the cycle. It may also be known as a recovery, upturn, upswing, or period of prosperity. All these terms mean the same thing—the economy is healthy and growing.

1.4. Key Term #1 Business Cycle: recurring periods of growth and decline in economic activity that all economies experience.

1.5. Key Term #2 Recession: A period time in economic decline.

1.6. Connection: A business cycle relates to the health of the economy because if all the businesses are in recessions and economic failure and in troughs, then obviously the economy isn't very healthy.

2. 13.2 How Do Economists Measure the Size of an Economy?

2.1. Key Point #1 GDP or Gross Domestic Product is the main way of figuring out the size of an economy. GDP is a country's total economic output.

2.2. Key Point #2 Calculating GDP is C + I + G + Xn= GDP. The C stands for consumers, the household people, who goods and services for personal use. The I stands for business investment, mostly businesses investing in capital goods like buildings and machinery. The G stands for government purchases on goods and services, not welfare and social security benefits. The Xn stands for net exports. Net exports is the value of all exports minus imports. These four factors make up how the government calculates GDP.

2.3. Key Point #3 GDP Adjusting for the size of populations and inflation in the economy is done to find out if the economy is growing or shrinking using Nominal GDP, current dollars, and constant dollars. Nominal GDP is the output of an economy valued at today's prices. Or in current dollars, which reflects the purchasing power of the dollar in the year they are spent. Per Capita GDP is the real GDP divided by its population. Depending on the population, the GDP is going to be different.

2.4. Key Term #1 GDP: Gross Domestic Product is the market value of all final goods and services produced within a country during a given period of time.

2.5. Key Term #2 Nominal GDP: Measures the output of an economy at today's prices.

2.6. Over View and Connection: The whole article is how GDP is used to completely measure the size of an economy and if it is growing or shrinking. And economists use that information to determine if inflation is happening or if the growing economy is healthy so nothing has to be done to change the outcome.

3. 13.3 What Does the Unemployment Rate Tell Us about an Economy's Health?

3.1. Key Point #1 How the Government Measures Unemployment: The BLS or Bureau of Labor Statistics surveys 60,000 homes each month. The members of the house are then asking about their lives through a one week period and put in categories. Unemployed, Employed, or Not in the Work Force. If they have a steady job or currently employed, they are classified and employed. If they don't have a job, but are looking for work they are classified as unemployed. And if they can't have an official job because of disability or age, the are not included in unemployed, but not in the work force.

3.2. Key Point #2 The four Types of Unemployment: There are four types of unemployment, frictional, seasonal, structural, and cyclical. Frictional unemployment are people who left one job and are looking for another or people looking for their first job. Structural unemployment is where certain peoples skills are needed for a different job and they are in a period of no unemployment. This period of time is short normally, but this type of employment normally happens with advances in technology. Seasonal unemployment are people who are jobless because of the seasons, like Dairy Queen employees in the winter. And lastly, cyclical unemployment is the unemployment during times if decline in the economy.

3.3. Key Point #3 Problems with Unemployment Rate Indicates Economic Health: People say that one of the problems with the accuracy of the BLS is the number of people who have given up looking for work. People who are willing and able to work but gave up looking for a job or just don't expect to find a job. The second problem is the unemployment rate doesn't include involuntary part-time workers like high schoolers. People who work less then 35 hours a week. Unable to find full time jobs. So the BLS official unemployment rate is accurate to an extent.

3.4. Key Term #1 Unemployment Rate: People who are jobless but actively seeking work.

3.5. Key Term #2 Seasonal Unemployment: People jobless because of the season.

3.6. Connection: Unemployment rate has historically varied but is normally between four to six percent. They call that area natural rate of unemployment. With the four types of unemployment and whether household members are employed, unemployed, or not in the work force make up the number of people unemployed and the amount of people in the work force. Take and divide those two numbers and multiply it by 100 and that will give you the unemployment.

3.7. http://www.bls.gov/

4. 13.4 What does the Inflation Rate Reveal About the Economy's Health?

4.1. Key Point #1 Tracing Inflation with Consumer Price Index: The BLS uses Americans to study the amount of money to come up with the consumer price index, which is the price index of goods and services. And inflation can and will change those prices, not for the better. The price index measure the average change in prices over time. And when hyperinflation or just inflation, those prices will change and from there economists can measure how bad or good the economy is doing and which direction it is headed.

4.2. Key Point #2 Adjusting the Cost of Living due to Inflation: The cost in current dollars of all the basic goods and services that people need is the nominal cost of living. The real cost of living is the nominal cost of basic goods and services. Both of these things can be adjusted for inflation and will need to be based on the families it is affecting, some will need t adjust more.

4.3. Key Point #3 Creeping Inflation, Hyperinflation, and Deflation are the three types of inflation. In the U.S., we come to expect a certain amount of gradual inflation, or creeping inflation but during a lifetime, it stays pretty close to average amount of increasing or decreasing the percent of inflation or deflation. Hyperinflation just takes inflation to the next level, a quick period of extreme inflation. The inflation rate is usually a positive number, meaning that the overall price level is rising. But when that number turns negative, it is known as deflation.

4.4. Key Term #1 Consumer Price Index: a price index for a “market basket” of consumer goods and services.

4.5. Key Term #2 Inflation Rate: the percentage increase in the average price level of goods and services from one month or year to the next.

4.6. Connection: The CPI or Consumer Price Index changes and sometimes is called Cost of Living Index and the inflation rate can change that depending on how bad the inflation is increasing.