Chapter 13 - Measuring the Economy

1. 13.2--How Do Economists Measure the Size of an Economy?

1.1. Key Terms: -Gross Domestic Product - is the market value of all final goods and services produced within a country during a given period of time -Final Good - any new good that is ready for use by a consumer.

1.1.1. New vocabulary

1.2. Key Point 1: GDP is calculated by measuring spending from four different sectors, including households, businesses, government, and foreign trade, on goods and services produced in a given country.

1.3. Key Point 2: GDP is used to calculate if a nation's economy is either growing or shrinking. To account for inflation, economists use what is known as real GDP, which measures constant dollars, rather than current dollars.

1.4. Key Point 3: Economists also use GDP to compare countries' economies. To account for size differences within nations, GDP per capita is used. This is done when the GDP is divided by the population. GDP is also used as an effected measure of standard of life.

1.5. Key Point 4: Although growth of GDP does leave nations in a better state, it doesn't full encompass every aspect od an economy, such as unpaid or volunteer work, illegal exchange, or leisure time.

2. 13.3--What Does the Unemployment Rate Tell Us About an Economy’s Health?

2.1. Key Terms: -Unemployment rate: the percentage of the labor force that is seeking work -Structural unemployment: comes about mainly when advances in technology reduce the demand for certain skills -Involuntary Part-Time Worker: people who, unable to find full-time jobs, settle for part-time employment

2.2. Key Point 1: To calculate the unemployment rate, the BLS, an organization dedicated to collecting and analyinf economic data, sends out a sample survey to around 600,000 people to determine whether or not they're working. When they get the results, they make a larger estimate in relation to the nation as a whole.

2.3. Key Point 2: When the BLS gets their report, they also indicate which of the four different types of unemployment the nation is facing. The four types depend on the economic status of the nation as a whole, what season a given industry thrives in, demand for specific skills, and several other things.

2.4. Key Point 3: While the BLS is the best tool we have to calculate unemployment, there are three major flaws within it. It doesn't calculate people who have given up hope for finding a job, people who settle for part-time jobs because they can't get full-time jobs, and people who's income comes from underground sources, such as gambling.

2.5. Key Point 4: Although it is slightly flaws, the BLS truly is a good indicator of unemployment, as it shows a relatively accurate representation of the unemployment rate, which is used to determine the health of an economy, meaning the rate doesn't necessarily have to be accurate down to the decimal.

3. 13.4--What Does the Inflation Rate Reveal About an Economy’s Health?

3.1. Key Terms: -Inflation Rate: The percentage increase in the average price level of goods and services from one month or year to the next. -Consumer Price Index(CPI): A price index for a “market basket” of consumer goods and services -Cost Of Living Index(CLI): The primary measure of inflation in the United States

3.1.1. Text book, exercises 34, 35, 36, 37

3.2. Key Point 1: The CPI is based off of surveys of thousands of households that ask about spending habits. This is then used to create a list of items that should be tracked. Every month, collectors visit some 25,000 retail stores and record the prices of the items. CPI is determined by comparing each month's price information to the prices paid for the same goods and services.

3.3. Key Point 2: While prices have drastically increased in the past decades, it's really not as bad as it seems. Yes, prices have risen, but so have wages, making these new high prices bearable.

3.4. Key Point 3: Inflation is a very sticky concept.often, consumers see prices rise and put off buying because they think the price will eventually decrease. Because of this, the company doesn't make money, forcing them to raise prices even more. Prices going up is a result of inflation. There are three main types of inflation. Creeping inflation is the rate that slowly increases over time. Hyperinflation is when the rate of inflation drastically increases in a very short period of time. This can be seen in various countries right after wars are over. The last type is

3.5. Key Point 4: Obviously, infaltion is bad for any given economy. The major things that inflation affects are that consumers lose purchasing power, meaning that they can buy less things with more money. They also have to pay higher interest rates. The other big disturbance caused by inflation is the loss of economic efficiency. This causes people, consumers and producers alike, to not really understand what's happening in the current economy and market.

4. 13.5--How Does the Business Cycle Relate to Economic Health?

4.1. Key Terms: -Business Cycle: The recurring periods of growth and decline in economic activity that all economies experience -Leading Economic Indicators: Measures that consistently rise or fall several months before an expansion or a contraction begin -Recession: A decline in economic activity lasting at least six months

4.2. Key Point 1: The business cycle includes four main phases. These are expansion, a time where the economy is growing and is also calculated from month ot month. The next phase is known as the peak. Here is where expansion ends and decline begins. In the moment, it is not known if you've hit the peak, only looking. The third phase is contraction. This phase can stike fear in the heart of any economist. It is when GDP falls and unemployment rises rapidly. And example of this is the Great Depression in the 19030's. However, everything is cyclical. Once the economy has hit rock bottom, it can only go up. This low dip is known as the trough.

4.3. Key Point 2: In the business cycle, there are three main indicators that relate to the business cycle. Leading Indicators, Lagging Indicators, and Concident Indicators all contribute to and signal change in the economy or if it's about to change.

4.4. Key Point 3: The economy is a pretty unpredictable thing. There will always be falls but there will also always be recoveries from the falls. The economy is cyclical. One factor that helps the economy boom is new business. Take World War 2 for example. When all of the men had to go to war, the women stepped in and had to start not only producing things that the men were previously making, but they had to produce new things for the war, as well. The new high production rates are credited for picking the US up out of the Great Depression.

4.5. Key Point 4: Consumer confidence is the number one priority after a recession. If people don't feel comfortable spending their money, the wont begin to spend and put money back into the economy.