CHAPTER 23.2Measuring the Economy

Why is it important to measure “the economy?”

• What is meant by “the economy?”• What is the purpose of measuring the economy?• Why is it important to policy makers?• What is being measured?

• What are the different variables that can be measured which indicates a change in the economy?

Gross Domestic Product (GDP)

• GDP: the total value (in dollars) of all the “final” goods and services produced in a country during a single year.• You can’t count the goods and services that are used in creating a

final good. Why?

• GDP measures quantity, not quality.• What does this mean? (Hint: I-Phone and the I-Phone 5S)• Why is this a problem?

Weaknesses of GDP• GDP is deceptive

• GDP measures the value of all goods/services in $. What happens to $ over time?

• What happens to prices of goods/services over time?• Economists have created real GDP.

• Real GDP: GDP after the distortions of prices changes/inflation have been removed

Business Fluctuations• Business Cycle- alternating periods of growth and decline

in economic performance.• What are the two variables being measured?

Business Cycle• Expansion: Real GDP increases (does not measure

intensity of the growth).• Peak: the highest point of expansion before decline

• Recession: Real GDP decreases for 6 straight months.

• During a recession, what other measurement is usually discussed to help explain how weak the economy is currently or how quickly the economy is coming out of recession?

Unemployment Rate• 1st- Identify the Civilian Labor Force (CLF): those 16 or

older looking for jobs or who have jobs.

• Unemployment rate is the % of the people in the civilian labor force who are not working, but are looking for jobs.

• Unemployment Rate = Members of the CLF without a job, but looking / All the members of the CLF

• Current CLF: 155,460,000• 1% unemployment costs America $46.5 Billion if median

income is at $30,000.

Price Stability• Inflation: sustained increase in the general level of prices

• Consumer Price Index (CPI): government tool to sample prices and determine inflation.• It averages prices because it is expected that some will increase

and others will decrease.

• What is being measured?• What does inflation mean? What does deflation mean?

Stock Market• What is a stock (share)?

• Why sell stock?• Spread risk• Create capital

• Why buy stock?• Dividends: share of the corporation’s profits which are distributed

to shareholders.• Capital Gains: Profit from stock sold for more than it was bought.

• How should America tax the income made from stocks?

Stock Market• Stock exchanges (markets): specific locations designated

for the purposes of buying and selling stocks.• Stockbrokers are people who are certified to buy and sell stocks on

these exchanges.

• Stock Indexes: a method of measuring the value of a specific section of the stock market.• Measures the expectations of investors and can indicate growth or

decline in an economy.• S&P 500, Dow Jones Industrial, NASDAQ

Why is it important to measure the economy?

• Private Sector?• Public Sector?

• Fiscal Policy: government spending and taxes spent in order to regulate, control, and react to business fluctuations in the business cycle.