Chapter 13- Measuring the Economy

1. 13.4- What does the inflation rate reveal about an economy's health?

1.1. Limitations of the CPI- The Bureau of Labor Statistics has taken steps to rid bias in CPI to help the economy's health.

1.2. The types of Bias- Substitution bias, outlet substitution bias, new product bias, quality change bias

1.3. The Economic Costs of Inflation- Inflation erodes purchasing power. As a result, it undermines one of the basic functions of money: its use as a store of value.

1.4. Consumer Price Index/CPI- a price index for a “market basket” of consumer goods and services.

1.5. Nominal wages- wages based on current prices.

1.6. In the link, it explains what an inflation is and it has a timeline of the U.S that the BLS has put together. I chose this link because it has a very good description and examples of what and how inflation works and affects us.

2. 13.5- How does the business cycle relate to economic health?

2.1. Four Phases of the Business Cycle- Expansion, peak, contraction, trough.

2.2. 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.

2.3. Types of indicators- Leading, coincident, and lagging indicators.

2.4. Recession- a decline in economic activity lasting at least six months. During a recession, real GDP falls, as do real wages, employment, profits, and production.

2.5. Depression- a prolonged economic downturn characterized by a plunging real GDP and extremely high unemployment.

2.6. Graph

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

3.1. How Government measures unemployment- A survey happens to get an average or a percent. People who are eligible to be in the labor force are interviewed about their activities during a specific one-week period. The survey excludes those who are under 16 years of age, on active duty in the military, or in an institution such as a prison or nursing home. Based on the interview data, the BLS classifies those who are eligible as employed, unemployed, or not in the labor force.

3.2. Four Types of Unemployment- Frictional, Structural, Seasonal, and Cyclical.

3.3. Economic cost of high unemployment- The main economic cost of high unemployment is lost potential output. The smaller the number of people who are working, the fewer goods and services the economy can generate. Potential output is lost because labor resources are not being fully utilized. An increasing unemployment rate, then, means a decreasing real GDP.

3.4. Unemployment rate- the percentage of the labor force that is seeking work.

3.5. Underground economy- made up of people who earn income from gambling, drug dealing, and other illegal activities.

4. 13.2- How do economist measure the size of an economy?

4.1. What an economy produces- the main measure of the size of a nation’s economy is its gross domestic product.

4.2. What is counted in measuring the GDP- Measuring goods and services produced in a country. Divide the economy into four sectors: households, businesses, government, and foreign trade. Each sector’s spending makes up one of the four components of GDP: household consumption (C), business investment (I), government purchases (G), and the net of exports minus imports (NX).

4.3. How GDP is calculated- Economists calculate GDP using this formula constructed from the types of spending: C+I+G+NX=GDP

4.4. Gross Domestic Product- GDP is an economic indicator that measures a country’s total economic output.

4.5. Market Value- the price buyers are willing to pay for a good or service in a competitive marketplace.