Chapter 13- Measuring the Economy

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Chapter 13- Measuring the Economy by Mind Map: Chapter 13- Measuring the Economy

1. GDP places no value on leisure time. since time isn't sold on markets, it is not in GDP. GDP says nothing about income distribution. it could say that people are rich, but it could only be on the very few that are actually rich.

2. GDP ignores negative externalities. it doesn't take into count of pollution.

3. GDP counts some negatives as positive. if a disaster struck, GDP would increase since people are rebuilding. people are worse than before.

4. GDP ignores informal and illegal exchanges, which means that anything not regulated by the government.

5. GDP leaves out unpaid household and volunteer work. since there is no money being paid, it doesn't count into GDP

6. Using current dollars does not take the effect of inflation into account. Inflation can cause prices in current dollars to rise from year to year. And if prices go up, nominal GDP will increase over time, even if the actual output of the economy does not

7. GDP is the market value of all final goods and services produced within a country during a given period of time

8. 3.2 - How Do Economists Measure the Size of an Economy?

9. Gross Domestic Product: What an Economy Produce

10. The market value . The economies production of goods and services, just like that of guitar lessons.

11. All final goods and services . GDP is based on the market price of every “final” good or service that can be legally sold in a country. Final goods are not counted in GDP since they are at the free market count.

12. Produced within a country . . . To be included in GDP, goods and services must be produced within the country’s borders. This does not mean that it must be owned by America.

13. During a given period of time. Economists use the calendar year GDP to compare production from year to year or from country to country. The annual GDP is calculated from January to December, in addition is that the goods do not have to bee sold during this time.

14. net exports—the value of all exports minus all import

15. household consumption (C), business investment (I), government purchases (G), and the net of exports minus imports (NX). Economists calculate GDP using this formula: C + I + G + NX = GD

16. How Economists Calculate GDP

17. Household consumption, C. This consists of goods and services bought by people in households for personal use. Business investment, I, consists largely of business investment in capital goods, such as buildings and machinery. Government purchases, G. Federal, state, and local government purchases of goods and services. Net exports, NX. To calculate the impact of trade on GDP, economists focus on net exports.

18. Adjusting for Inflation: Nominal vs. Real GDP

19. nominal GDP: a measure of a country’s economic output (GDP) valued in current dollars; nominal GDP does not reflect the effects of inflatio

20. real GDP: a measure of a country’s economic output (GDP) valued in constant dollars; real GDP reflects the effects of inflatio

21. Simply calculating GDP by adding the spending on its four components yields what economists call nominal GD

22. Because the purchasing power of constant dollars is fixed, real GDP allows us to compare the total output of an economy from year to year as if prices had never changed

23. Limitations of GDP as an Indicator of Economic Healt

24. 3.3 - What Does the Unemployment Rate Tell Us About an Economy's Health?

24.1. unemployment rate: the percentage of the labor force that is not employed but is actively seeking wor

24.2. underground economy: a sector of the economy based on illegal activities, such as drug dealing and unlawful gamblin

24.3. frictional unemployment: a type of unemployment that results when workers are seeking their first job or have left one job and are seeking anothe

24.4. structural unemployment: a type of unemployment that results when the demand for certain skills declines, often because of changes in technology or increased foreign competitio

24.5. cyclical unemployment: a type of unemployment that results from a period of decline in the business cycl

24.5.1. How the Government Measures Unemployment Every month, the BLS reports the total number of people who were unemployed for the previous month. The BLS does not attempt to count every job seeker in the country. It conducts a sample survey each month. By examining a small sample of the population, the BLS can gauge how many people in the entire population are unemployed They survey about 60,000 households and asks those that can work about their activities during a one-week time period. The survey does not go to those under 16, in the military, or in prison or in a nursing home. Employed. Members of the labor force who have jobs and includes people who worked for at least one hour for pay or profit during the survey week Unemployed. Members of the labor force who are jobless, but are looking for work, must have actively looked for work in the four weeks preceding the survey week. Not in the labor force. Everyone who is eligible to be in the labor force but is neither working nor looking for work is classified as not in the labor force. Includes full-time students as well as people who are retired, disabled unemployment rate = number unemployed/number in labor force x 100

24.5.2. Four Types of Unemployment Frictional unemployment. It applies to people who change jobs as well as to people seeking their first jobs. Frictional unemployment is usually short term, lasting only as long as is needed to find the right job. Structural unemployment. Structural unemployment comes about mainly when advances in technology reduce the demand for certain skills. These skills come from the people looking for new jobs. Seasonal unemployment. Seasonal unemployment occurs when businesses shut down or slow down for part of the year, often because of weather. Tourism, construction, and agriculture are among the industries that typically lay people off for part of the year. Cyclical unemployment. Every economy goes through prosperous times and hard times. This type of unemployment occurs during periods of decline. At such times, economic activity slows, GDP drops, and people lose their jobs.

24.5.3. Problems with the Unemployment Rate as an Indicator of Economic Health The first problem is that at any one time, a number of unemployed people have given up looking for work. Though willing and able to work, they no longer expect to find jobs. The second problem is that the official unemployment rate does not recognize involuntary part-time workers. These are people who, unable to find full-time jobs, settle for part-time employment. Others who once worked full time may have had their hours cut back. A third problem with the unemployment rate involves people working in informal or underground economies.

24.5.4. The Economic Costs of High Unemployment The main economic cost of high unemployment is lost potential output. Potential output is lost because labor resources are not being fully utilized. An increasing unemployment rate, then, means a decreasing real GDP. Unemployed workers also pay a serious economic cost. High unemployment is also costly for society at large. Unemployed workers no longer contribute income taxes to the government. In fact, many begin taking money from the government in the form of unemployment insurance and other benefits. This may call for shifting money from other programs to pay the additional benefits, or it may mean raising taxes on those workers who remain employed.

25. 3.4 - What Does the Inflation Rate Reveal About an Economy's Health?

25.1. Adjusting for Inflation: Nominal vs. Real Cost of Living

25.1.1. The cost in current dollars of all the basic goods and services that people need is the nominal cost of living. This is based on current prices. The real cost of living is the nominal cost of basic goods and services, adjusted for inflation. Knowing the rate of inflation allows economists to calculate the real cost of goods and services in constant dollars. This can then be used to compare prices over time.

25.1.2. Consumers pay nominal costs with nominal wages, or wages based on current prices. As prices go up, wages generally go up as well. By using the CPI to adjust for inflation, economists can calculate real wages and compare them over time.

25.2. Creeping Inflation, Hyperinflation, and Deflation

25.2.1. Creeping inflation. In the United States we have come to expect a certain amount of gradual inflation, or creeping inflation, every year.

25.2.2. Hyperinflation. Runaway inflation creates extreme uncertainty in an economy. Nobody can predict how high prices will go, and people lose confidence in their currency as a store of value.

25.2.3. Deflation. The inflation rate can be negative, a condition that economists call deflation. Deflation occurs when prices go down over time. Deflation is good news for consumers and savers. The value of every dollar they set aside now to spend later will increase over time as prices fall. Deflation is also good for lenders. The dollars they receive from borrowers tomorrow will be worth more than the dollars they lent them yesterday. The increase in value can be bad for borrowers

25.2.4. Deflation may also be bad news for businesses. When prices are dropping, people tend to put off spending, hoping for still lower prices later on. As consumer spending slows, businesses cut wages, lay off workers, and may even go bankrupt. This is also called a deflation spiral.

25.3. Demand-Pull vs. Cost-Push Inflation

25.3.1. A second cause of inflation is an increase in overall demand. This increase in overall demand results in demand-pull inflation. The extra demand by buyers exerts a “pull” on prices, forcing them up.

25.3.2. Inflation can also be caused by increases in the cost of the factors of production. Higher production costs reduce the economy’s ability to supply the same output at the same price level. The result is cost-push inflation. The rising cost of land, labor, or capital “pushes” the overall price level higher.

25.3.3. Whether caused by increased demand or rising costs, inflation can set off a kind of “feedback loop” known as a wage-price spiral. This spiral starts when workers demand higher wages in order to keep up with inflation

25.4. Limitations of the CPI as a Measure of Inflation

25.4.1. Substitution bias. Because the CPI measures the price changes of a fixed list of goods, it does not take into account consumers’ ability to substitute goods in response to price changes.

25.4.2. Outlet substitution bias. The CPI is slow to reflect changing trends in shopping patterns.

25.4.3. New product bias. In a market economy, new products are introduced all the time. Because the BLS cannot predict which new products will succeed, the new products are not incorporated into the market basket until they have become commonplace.

25.4.4. Quality change bias. Over time, technological advances may improve the quality or add to the lifetime of a product.

26. 3.5 - How Does the Business Cycle Relate to Economic Health?

26.1. The Four Phases of the Business Cycle

26.1.1. A period of economic growth is known as an expansion. During this phase of the business cycle, economic activity generally increases from month to month.

26.1.2. The point at which an expansion ends marks the peak of the business cycle. At that peak, economic activity has reached its highest level. The peak also marks the start of a decline in economic activity. Economists don't know when it will occur as well.

26.1.3. Following the peak comes the contraction phase of the business cycle. A contraction is a period of general economic decline marked by a falling GDP and rising unemployment.

26.1.4. 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.

26.2. Economic Indicators and the Business Cycle

26.2.1. Leading indicators. Measures that consistently rise or fall several months before an expansion or a contraction begins are called leading economic indicators. They are used to forecast the peak and trough of a business cycle, although not very precisely.

26.2.2. Coincident indicators. Coincident economic indicators are measures that consistently rise or fall along with expansions or contractions. They coincide with the phases of the business cycle. Coincident indicators are most helpful in tracking expansions and contractions as they happen.

26.2.3. Lagging indicators. Measures that consistently rise or fall several months after an expansion or a contraction are known as lagging economic indicators. Economists use lagging indicators to confirm that one phase of the business cycle has ended and another has begun.

26.3. From Boom to Bust to Boom Again

26.3.1. 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. This inspires people to look for jobs and other ways of making a healthy growing economy.

26.3.2. The bust, or contract-ion phase of the business cycle, is also called a downturn, a downswing, or a recession. Most economists define a recession as a decline in economic activity lasting at least six months.

26.3.3. A number of different obstacles to growth can push an economy into recession. They include: • a negative shock to the economy, such as rapidly rising oil prices, a terrorist attack, or a stock market crash. • a rise in interest rates, which makes it harder for consumers and firms to borrow money. • shortages of raw materials, which can cause price increases.

26.3.4. Consumers typically react to higher prices and higher interest rates by cutting back on spending. As sales slow, businesses begin to see profits fall and inventories rise. Inventory is merchandise that companies or stores have on hand. Faced with rising inventory, firms cut back production and lay off workers.

27. inflation rate: the percentage increase in the average price level of goods and services from one month or year to the next

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

27.2. consumer price index : a measure of price changes in consumer goods and services over time

27.3. nominal cost of living: the cost in current dollars of all the basic goods and services needed by the average consumer

27.4. 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

27.5. deflation: a fall in the price of goods and services; the opposite of inflation

28. business cycle: a recurring pattern of growth and decline in economic activity over time

28.1. expansion: a period of economic growth

28.2. peak: the highest point of an expansion, or period of economic growth

28.3. contraction: a period of general economic decline marked by falling GDP and rising unemployment

28.4. recession: a period of declining national economic activity, usually measured as a decrease in GDP for at least two consecutive quarters (six months)

28.5. depression: a prolonged economic downturn characterized by plunging real GDP and extremely high unemployment

28.6. trough: the lowest point of a contraction, or period of economic decline; a trough is followed by economic growth