1. 13.4--What Does the Inflation Rate Reveal About an Economy’s Health?
1.1. Tracking Inflation with the Consumer Price Index 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.
1.2. Adjusting for Inflation: Nominal vs. Real Cost of Living The price a person pays for a pair of shoes or any other product is its nominal cost, or its cost in current dollars. The cost in current dollars of all the basic goods and services that people need is the nominal cost of living. Like the nominal GDP, the nominal cost of living is based on current prices.
1.3. Demand-Pull vs. Cost-Push Inflation.A second cause of inflation is an increase in overall demand. The spending that makes up GDP comes from households, businesses, government, and foreign buyers. Cost-push inflation is often triggered by increases in energy prices. Rising fuel costs affect every link in the supply chain, from farms and factories to the delivery of goods to retail stores. The higher costs of making and moving goods are then passed on to consumers in the form of higher prices.
1.4. Limitations of the CPI as a Measure of Inflation 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. Substitution bias, Outlet substitution bias. New product bias. Quality change bias. are examples of this.
2. 13.5--How Does the Business Cycle Relate to Economic Health?
2.1. The Four Phases of the Business Cycle The business cycle consists of four phases. These phases include a period of growth and a period of decline, as well as the turning points that mark the shift from one period to the next.
2.2. Economic Indicators and the Business Cycle The term business cycle implies that expansions and contractions occur at regular, predictable intervals. But in fact, the opposite is true. 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.
2.3. One of the key characteristics of a growing economy is an increase in business investment. When firms invest in capital goods, such as factories, machinery, and equipment, their productivity increases. This increased productivity contributes to a rise in real GDP. At the same time, firms hire more people to work in their stores, offices, and factories, thus increasing employment throughout the economy. Other factors can also contribute to growth.
2.4. From Boom to Bust to Boom Again Business cycles are popularly known as periods of boom and bust. 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.
3. 13.2--How Do Economists Measure the Size of an Economy?
3.1. Gross Domestic Product: What an Economy Produces. 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. In formal terms, gross domestic product is the market value of all final goods and services produced within a country during a given period of time. A steadily growing GDP is generally considered a sign of economic health.
3.2. Different types of GDP. Nominal GDP [nominal GDP: a measure of a country’s economic output (GDP) valued in current dollars; nominal GDP does not reflect the effects of inflation. real GDP: a measure of a country’s economic output (GDP) valued in constant dollars; real GDP reflects the effects of inflation
3.3. How to determine the wellness of an economy based off of GDP?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.
3.4. How GDP growth benefits the people.For all its limitations, GDP still matters. As a country's per capita GDP increases, so too do other indicators of well-being. Literacy and education,
4. 13.3--What Does the Unemployment Rate Tell Us About an Economy’s Health?
4.1. Every month, the BLS reports the total number of people who were unemployed for the previous month. To arrive at this figure, the BLS does not attempt to count every job seeker in the country. Instead, it conducts a sample survey each month. By examining a small but representative sample of the population, the BLS can gauge how many people in the entire population are unemployed.Employed. 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.
4.2. Four Types of Unemployment. Frictional unemployment is when someone is between jobs. Structural unemployment, is when people chose to leave their jobs for a different one. Seasonal unemployment is when people only work in certain seasons like a lifeguard. Cyclic unemployment is when people are getting laid off.
4.3. When the unemployment rate means bad news for an economy. 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.
4.4. The Economic Costs of High Unemployment. Unemployed workers also pay a serious economic cost. They and their families lose income and the goods and services that income would have purchased. They may become unable to pay their monthly mortgage, leading to the loss of a home. Unemployment can also mean the loss of medical benefits, which then become an added expense. 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.
