Measurement of Economic Performance

Three Major Economic Goals

Promote economic growth, limit unemployment, keep prices stable

Gross Domestic Product

Dollar value of all final goods and services produced within a country's borders in one year

GDP per Capita

GDP/population

Not Included in GDP

Intermediate goods, non-production transactions, non-market and illegal activities

Expenditures Approach

Add up all the spending on goods and services produced in a given year

Income Approach

Add up all income that resulted from selling all final goods and services produced in a given year

Components of GDP

Consumer spending, investment, government spending, net exports

Components of Income Approach

Labor income, rental income, interest income, profit

Nominal GDP

GDP not adjusted for inflation

Real GDP

GDP adjusted for inflation

Problems with GDP

Doesn't differentiate between good and bad spending, inflation

Business Cycle

Unemployment

Workers that are actively looking for a job, but aren't working

Unemployment Rate

(Number unemployed/number in labor force)*100

Labor Force

People who are older than 16; able and willing to work; not institutionalized; not in military, in school full times, or retired

Types of Unemployment

Frictional, structural, cyclical

Frictional Unemployment

Temporary unemployment or in between jobs

Seasonal Unemployment

Specific type of frictional unemployment due to time of year and nature of the job

Structural Unemployment

Changes in labor force make some skills obsolete

Technological Unemployment

Type of structural unemployment where automation and machinery replace workers

Cyclical Unemployment

Unemployment caused by a recession

Natural Rate of Unemployment

Amount of unemployment that exists when the economy is healthy and growing

Full Employment Output

Real GDP created when there is no cyclical unemployment

Discouraged Workers

People no longer looking for a job because they have given up

Underemployed Workers

People who want to work more hours but can't get them

Inflation

Rising general level of prices; reduces purchasing power of money

Deflation

Decrease in general price levels

Disinflation

Prices increase at a slower rate

Hurt by Inflation

Lenders at fixed interest rates, people with fixed incomes, savers

Helped by Inflation

Borrowers, businesses where the price of the product increases faster than the price of resources

Nominal Wage

Wage not adjusted for inflation

Real Wage

Wage adjusted for inflation

Inflation Rate

Percent change in prices from year to year

Price Index

Index numbers assigned to each year that show how prices have changed relative to a specific base year

Consumer Price Index

(Price of market basket/price of market basket in base year)*100

Calculating Inflation Rate

((Year 2-year 1)/year 1)*100

Calculating GDP Deflator

(Nominal GDP/real GDP)*100

Causes of Inflation

Government prints too much money, demand-pull inflation, cost-push inflation

Demand-Pull Inflation

Too much money and not enough goods

Cost-Push Inflation

High costs push demand down

Real Interest Rate

Percent increase in purchasing power that a borrower pays

Calculating Real Interest Rates

Nominal interest rate-inflation

Nominal Interest Rate

Percent increase in money that the borrower pays, not adjusted for inflation

Calculating Nominal Interest Rate

Real interest rate+expected inflation