1. What Does the Unemployment Rate Tell Us About an Economy's Health?
1.1. How the Government Measures Unemployment
1.1.1. 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. Every month, the BLS reports the total number of people who were unemployed for the previous month. 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.
1.2. Types of Unemployment
1.2.1. In its interviews, the BLS gathers detailed information about people who are unemployed. Based on those data and further research, economists identity four types of unemployment: frictional, structural, seasonal, and cyclical. Have you ever heard someone talk about being "between jobs"? This situation, which exists when a person has left one job and is looking for another, is what economists call frictional unemployment. Structural unemployment comes about mainly when advances in technology reduce the demand for certain skills. Seasonal unemployment occurs when business shut down or slow down for part of the year, often because of weather. Every economy goes through prosperous times and hard times. Such cycles of growth and decline are the cause of cyclical unemployment. This type of unemployment occurs during periods of decline.
1.3. Full Employment and the Natural Rate of Employment
1.3.1. Some people will always be out of work, even in an economy with full employment. When an economy reaches full employment, job exists for everyone who wants to work, even though a certain percentage of those jobs and workers will not yet have been matched together. Economists call this percentage the natural rate of unemployment.
1.4. The Economic Costs of High Unemployment
1.4.1. The main economic cost of high unemployment is lost potential output. Unemployed workers also pay a serious economic cost. High unemployed is also costly for society at large.
2. What Does the Inflation Rate Reveal About an Economy's Health?
2.1. Tracking Inflation with the Consumer Price Index
2.1.1. The BLS tracks inflation by gathering information on Americans' cost of living. Economists at the BLS track changes in the cost of living using what is known as the consumer price index. A price index measures the average change in price of a type of good over time. The consumer price index is a price index for a "market basket" of consumer goods and services.
2.2. Adjusting for Inflation: Nominal vs Real Cost of Living
2.2.1. 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. The real cost of living can then be used to compare prices over time. Consumers pay nominal costs with nominal wages, or wages based on current prices. As prices go up, wages go up as well. By using the CPI to adjust for inflation, economists can calculate real wages and compare them over time.
2.3. Demand-Pull vs Cost-Push Inflation
2.3.1. You are already familiar with one cause of inflation: an increase in the money supply. This increase in overall demand results in demand-pull inflation. A second cause of inflation is an increase in overall demand. Whether caused by increased demand or rising costs, inflation can set off a kind of "feedback loop" known as a wage-price spiral.
2.4. Limitations of the CPI as a measure of Inflation
2.4.1. The BLS relies on the consumer price index to estimate the level of inflation in the United States each month. However, critics point to several biases that may distort the CPI, making the reported inflation rate less than accurate. Because the CPI measures the price changes of a fixed list of goods, it does not take into account consumer's ability to substitute goods in response to price changes. The CPI is slow to reflect changing trends in shopping patterns. 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. Over time, technological advances may improve the quality or add to the lifetime of a product.
3. Key Terms From 13.4
3.1. 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 measure of price changes in consumer goods and services over time; the CPI shows changes in the cost of living from year to year. Price Index: a measure of the average change in price of a type of good over time Cost-Of-Living Index: a measure of change in the overall cost of goods and services; another term for the consumer price index.
4. How do Economists Measure the Size of an Economy?
4.1. Gross Domestic Product: What an Economy Produces
4.1.1. The main measure of the size of a nation's economy is its gross domestic product. GDP is an economic indicators that measure a country's total economic outcome. A consistent growing GDP is generally considered a sign of economic health.
4.2. Adjusting for Inflation: Nominal vs Real GDP
4.2.1. Economists use GDP figures to determine not only how big an economy is, but whether it is growing or shrinking and at what rate. Simply calculating GDP by adding the spending on its four components yield what economists call nominal GDP. Nominal GDP measures the output of an economy valued at today's prices, or in current dollars. To compensate for the effects of inflation, the Commerce Department calculates what is called real GDP. Real GDP measures the output of an economy not in current dollars, but in constant dollars
4.3. Adjusting for Population: Per Capita GDP
4.3.1. Economists also use GDP to compare the economies of individual countries. ' Per capita GDP is a nation's real gross domestic product divided by its population. It is an accepted measure of a society's standard of living.
4.4. Limitations of GDP as an Indicator of Economic Health
4.4.1. Gross domestic product is a useful tool for measuring economic growth. But as a measure of the overall health of an economy, GDP has several limitations. GDP ignores informal and illegal changes. GDP counts some negatives as positives. GDP ignores negative externalities. GDP places no value on leisure time. GDP says nothing about income distribution.
5. How Does the Business Cycle Relate to Economic Health?
5.1. Phases of the Business Cycle
5.1.1. 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. The lowest point of a contraction is called a trough.
5.2. Economic Indicators and The Business Cycle
5.2.1. Business cycles are 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.
5.3. From Boom to Bust to Boom Again
5.3.1. Business cycles are popularly known as periods of a boom and bust. A boom is when the expansion phase of the cycle. But inevitably, a boom turns into a bust over time. The bust, or contract-ion phase in the business cycle has another name called a downturn, downswing, or a recession. On rare occasions a recession will last a long time and cause serious damage to the economy. Economists refer this severe contraction as a depression
5.4. Leading Indicators
5.4.1. Measures the consistently rise or fall several months before an expansion or a contraction begins is called a leading economic indicators.