Get Started. It's Free
or sign up with your email address
Rocket clouds
Chapter 13 by Mind Map: Chapter 13

1. 13-2: How do Economists Measure the Size of an Economy?

1.1. Gross Domestic Product, or GDP, plays a major role in our economy. GDP is a way that economists can determine how much our country produces or provides for a monetary value. GDP is only the measure of final goods, which are goods that are ready for consumer use, and all products that are "owned" by America. The people who calculate GDP, or the Bureau of Economic Analysis, determine this amount every quarter, or every three months.

1.2. GDP is calculated by adding household consumption, business investments, government purchases, and our net exports minus imports. GDP can be used to help prepare the economy for either inflation or population. The national GDP can be adjusted based on these aspects. It is also used to compare us to other countries to see where we stand. It helps economists to plan for certain things and to be ready for what may come based on the previous data that has been collected.

1.3. GDP leaves out certain things even though they have value, such as household and volunteer work. It also ignores informal or illegal exchanges because they are considered as part of the informal economy. GDP can count bad things as good (rebuilding after natural disasters) because of an increase in economic activity. It ignores negative externalities, places no value on leisure time, and says nothing about income redistribution.

1.4. GDP makes people better off. As GDP increases, so do other indicators of a healthy economy. Countries with a high GDP reflect a literacy rate that is close to or reaches 100%. On average, life expectancy is much longer and the infant mortality rate is lower in countries with a high GDP. This is because these countries have more money to spend on healthcare in order to take care of their citizens.

2. 13-3: What does the Unemployment Rate Tell Us about an Economy's Health?

2.1. The job of tracking the nation's unemployment rate belongs to the Bureau of Labor Statistics, or the BLS. Each month, the BLS conducts a survey, examining at least 60,000 representative households across the nation. This survey excludes those under 16 years of age, those who are active in the military, or in an institution such as a prison or a nursing home. Each person who meets these qualifications can either state themselves as employed (has a job), unemployed (no job, but actively looking for one), or not in the labor force (no job, but not seeking one).

2.2. There are four different types of unemployment. The first of which 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. The second is structural unemployment, which occurs when the demand for certain skills declines, often because of changes in technology or increased foreign competition. The third is seasonal unemployment, which results when businesses shut down or slow down for part of the year. The fourth is cyclical unemployment, which comes from a period of decline in the business cycle; unemployment is caused by contraction.

2.3. The natural rate of unemployment is defined as the percentage of the labor force without work when the economy is at full employment; a condition in which the economy is strong and there is no cyclical unemployment. BLS does not include discouraged workers, involuntary part-time workers, or underground economy workers in their unemployed numbers.

2.4. The rate of unemployment can reflect on the well-being of the economy as a whole. The higher the unemployment rate is, the worse off our country is and vice versa. If it is high, that means that our GDP will decrease due to the lack of production and spending.

3. 13-4: What does the Inflation Rate Tell Us about an Economy's Health?

3.1. BLS track the changes in the cost of living using the consumer price index (CPI). With this tool, it is easier to measure the average change in the price of a type of good over a certain period of time. The CPI market is based on surveys that are given to thousands of representative households that are asked about their spending habits. BLS data collectors then continue to use this information to find out the prices of the items listed and can determine the average cost of living.

3.2. Nominal cost of living is defined as the cost in current dollars of all the basic goods and services needed by the average consumer. Opposite of that is the real cost of living, which is defined as the cost in constant dollars of all the basic goods and services needed by the average consumers. This is the nominal cost of living, but it is adjusted for inflation. Nominal wages are based on current dollars, and real wages are based on constant dollars.

3.3. Creeping inflation is a gradual, steady rise in the price of goods and services over time. Hyperinflation is the opposite of this, where prices increase quickly and consistently. Deflation is another opposite, which is a fall in the price of goods and services. While this is good for consumers, it is not for producers. There are two different types of inflation: demand-pull and cost-push. Demand-pull inflation is a rise in the price of goods and services caused by an increase in overall demand. Cost-push inflation is a rise in the price of goods and services cause by increases in the cost of factors of production.

3.4. There are limitations of the CPI as a measure of inflation. Substitution bias occurs when CPI does not take into account the substitutions of products, like when the price of peanuts rise, more people will buy almonds. Quality change bias is when products are made to last longer than they did in the past. There are multiple economic costs of inflation, such as the loss of purchasing power, higher interest rates, and the loss of economic efficiency.

4. 13-5: How does the Business Cycle Relate to Economic Health?

4.1. The business cycle is a recurring pattern of growth and decline in economic activity over time. It has four phases: expansion, peak, contraction, and trough. Expansion is a period of economic growth. The peak is the highest point of an expansion. A contraction is a period of general economic decline marked by falling GDP and rising unemployment. The trough is the lowest point of a contraction.

4.2. The business cycle has several different economic indicators. The leading indicators are measures that consistently rise or fall several months before an expansion or a contraction begins. Coincident indicators are measures that consistently rise or fall along with expansions or contractions. Lagging economic indicators are measures that consistently rise or fall several months after an expansion or contraction.

4.3. Business cycles are also known as times of boom and bust. Boom is the expansion phase while bust is the contraction phase. Several different factors can contribute towards a "booming" economy. If businesses were to invest into capital good, it can increase their employment, therefore increasing the business's productivity. The discovery of new resources and innovations can also help the economy grow.

4.4. There are also many things that can contribute to a bust economy, or a recession (a period of declining national economic activity). Rapidly growing oil prices, a terrorist attack, or a stock market crash and cause significant damage to the economy. A rise in interest rate makes it harder for consumers to borrow money and a shortage of raw materials can cause prices to increase and productivity to go down.

5. Key Terms

5.1. Inflation: an increase in the overall price level of goods and services produced in an economy.

5.2. Unemployment: the state of being unemployed.

5.3. Poverty: the state of being extremely poor.

5.4. Gross Domestic Product: the market value of all final goods and services produced within a country during a given period of time.

5.5. Recession: a period of declining national economic activity, usually measured as a decrease in GDP for at least two consecutive quarters.

5.6. Stagflation: a combination of economic stagnation-or slowdown-and high inflation; features of stagflation include slow or zero economic growth, high unemployment, and rising prices.

5.7. Poverty Rate: the percentage of the population that has a family income below a government-defined threshold, or poverty line.

5.8. Poverty Threshold: the estimated minimum income needed to support a family.

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

5.10. Income Redistribution: a policy designed to reduce income inequality by taking money from the rich and distributing in to the poor.

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

5.12. Consumer Price Index: a measure of price changed in consumer goods and services over time; CPI shows changes in the cost of living from year to year.

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

5.14. Hyperinflation: an extreme and rapid rise in the price of goods and services.

5.15. Final Good vs. Intermediate Good: a final good is any new good that is ready for consumer use while an intermediate good is a good used in the production of a final good.

5.16. Deflation: a fall in the price of goods and services; the opposite of inflation.

6. Business Cycle

6.1. Contraction

6.2. *Trough*

6.3. Expansion

6.4. *Peak*