1. 13.2--How Do Economists Measure the Size of an Economy?
1.1. The main measure of the size of a nation's economy is its gross domestic product. GDP is an economic indicator that measures a country's total economic output.
1.1.1. gross domestic product: the market value of all final goods and services produced within a country during a given period of time
1.2. Economists use GDP figures to determine not only how big an economy is, but whether it is growing or shrinking and at what rate.
1.3. To compensate for the effects of inflation, the Commerce Department calculates what is called real GDP
1.3.1. real GDP: a measure of a country’s economic output (GDP) valued in constant dollars; real GDP reflects the effects of inflation
1.4. real GDP: a measure of a country’s economic output (GDP) valued in constant dollars; real GDP reflects the effects of inflation
2. 13.3--What Does the Unemployment Rate Tell Us About an Economy’s Health?
2.1. Like the GDP, the unemployment rate is a useful indicator of the health of an economy. In general, a high unemployment rate means the overall health of the economy is poor.
2.1.1. unemployment rate: the percentage of the labor force that is not employed but is actively seeking work
2.2. Members of the labor force who have jobs are classified as employed. Members of the labor force who are jobless, but are looking for work, are classified as unemployed. 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.
2.2.1. unemployment rate = number unemployed/number in labor force x 100
2.3. When an economy reaches full employment, jobs exist for everyone who wants to work, even though a certain percentage of those jobs and workers will not yet have been matched together.
2.3.1. natural rate of unemployment: 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
2.4. The first problem is that at any one time, a number of unemployed people have given up looking for work. The second problem is that the official unemployment rate does not recognize involuntary part-time workers. A third problem with the unemployment rate involves people working in informal or underground economies.
2.4.1. involuntary part-time workers: people who settle for part-time employment because they are unable to find full-time workunderground economy: a sector of the economy based on illegal activities, such as drug dealing and unlawful gambling
3. 13.4--What Does the Inflation Rate Reveal About an Economy’s Health?
3.1. The German experience was proof, if any was needed, that runaway inflation can send an economy into a tailspin. That is why economists keep a close eye on a third economic indicator: 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. The BLS tracks inflation by gathering information on Americans' cost of living. That is, it studies the cost of buying the goods and services that households like yours purchase every day. As you would expect, the cost of living changes all the time because prices do not stay the same.
3.2.1. price index: a measure of the average change in price of a type of good over time
3.3. 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, adjusted for inflation.
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
3.4. You are already familiar with one cause of inflation: an increase in the money supply. A dramatic increase in the amount of money in circulation can cause hyperinflation. A second cause of inflation is an increase in overall demand. This increase in overall demand results in demand-pull inflation.
3.4.1. demand-pull inflation: a rise in the price of goods and services caused by an increase in overall demand
4. 13.5--How Does the Business Cycle Relate to Economic Health?
4.1. Economies are always changing. Or, as economics writer Charles Wheelan puts it, they “proceed in fits and starts.” Wheelan is referring to the recurring periods of growth and decline in economic activity that all economies experience. Economists call this recurring pattern the business cycle
4.1.1. business cycle: a recurring pattern of growth and decline in economic activity over time
4.2. The business cycle consists of four phases. A period of economic growth is known as an expansion. The point at which an expansion ends marks the peak of the business cycle.Following the peak comes the contraction phase of the business cycle.The lowest point of a contraction is called the trough.
4.2.1. contraction: a period of general economic decline marked by falling GDP and rising unemployment
4.2.2. peak: the highest point of an expansion, or period of economic growth; a peak is followed by economic decline
4.2.3. trough: the lowest point of a contraction, or period of economic decline; a trough is followed by economic growth
4.3. 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 illustration on the opposite page shows how three of these indicators—GDP, inflation rate, and unemployment rate—relate to each phase of the business cycle.
4.4. But inevitably, boom turns to bust. The bust, or contract-ion phase of the business cycle, is also called a downturn, a downswing, or a recession. On rare occasions, a recession will last a long time and cause serious damage to the economy. Economists refer to this kind of severe contraction as a depression.
4.4.1. recession: a period of declining national economic activity, usually measured as a decrease in GDP for at least two consecutive quarters (six months)
4.4.2. depression: a prolonged economic downturn characterized by plunging real GDP and extremely high unemployment