Economics - Measuring Economic Performance Review

A. Macroeconomics

  • Definition: Branch of economics studying economy as a whole (aggregate changes).

  • Important Issues: Economic Growth, Unemployment, Inflation.

  • Major Sectors: Households, Business, Government, Foreign.

  • GDP Calculation (Expenditure Approach): Y=C+I+G+(X−M)Y = C + I + G + (X - M)

    • YY = Aggregate Output (GDP)

    • CC = Consumption

    • II = Investment

    • GG = Government Spending

    • XX = Exports

    • MM = Imports

B. Economic Goals of U.S. Society

  • Goals: Full Employment, Inflation Control, Economic Growth.

  • Definitions:

    • Full Employment: All willing/able to work can find jobs.

    • Inflation: General increase in prices, fall in purchasing power.

    • Economic Growth: Sustained increase in goods/services (Real GDP).

  • Measuring Goals:

    • GDP: Primary indicator.

    • Nominal GDP: Current prices.

    • Real GDP: Adjusted for inflation.

C. Price Index and Inflation

  • Anticipated Inflation: Expected inflation.

  • Unanticipated Inflation: Unexpected; disrupts planning, can redistribute wealth.

  • Measuring Price Changes:

    • Generic Price Index Formula: Price Index=Cost of Basket in Current YearCost of Basket in Base Year×100\text{Price Index} = \frac{\text{Cost of Basket in Current Year}}{\text{Cost of Basket in Base Year}} \times 100

    • Consumer Price Index (CPI): CPI=Cost of Market Basket NowCost of Market Basket in Base Year×100\text{CPI} = \frac{\text{Cost of Market Basket Now}}{\text{Cost of Market Basket in Base Year}} \times 100

    • Inflation Rate: Inflation Rate=CPI Currently−CPI in Earlier YearCPI in Earlier Year×100\text{Inflation Rate} = \frac{\text{CPI Currently} - \text{CPI in Earlier Year}}{\text{CPI in Earlier Year}} \times 100

  • Real Value Calculation: Real Value=Nominal ValuePrice Index×100\text{Real Value} = \frac{\text{Nominal Value}}{\text{Price Index}} \times 100

D. Employment and Unemployment

  • Unemployment (U): Ppl without jobs, actively seeking work (% of labor force).

  • Employment (E): Total ppl employed.

  • Labor Force (LF): E + U.

  • Key Rates:

    • Unemployment Rate: Unemployment Rate=UnemployedLabor Force×100\text{Unemployment Rate} = \frac{\text{Unemployed}}{\text{Labor Force}} \times 100

    • Participation Rate: Participation Rate=Labor ForcePopulation×100\text{Participation Rate} = \frac{\text{Labor Force}}{\text{Population}} \times 100

    • Employment Rate: Employment Rate=EmployedPopulation×100\text{Employment Rate} = \frac{\text{Employed}}{\text{Population}} \times 100

  • Types of Unemployment:

    • Frictional: Short-term, matching workers to jobs.

    • Structural: Mismatch of skills/job requirements.

    • Cyclical: Correlated with business cycle (rises in recessions).

E. Business Cycle

  • Phases: Expansion, Peak, Recession, Trough.

  • Recession Definition: Significant decline in economic activity (e.g., two consecutive quarters of negative GDP growth).