Unit 2: Economic Indicators and the Business Cycle

The Circular Flow Model (and why we measure the economy)

Macroeconomics studies the economy “as a whole,” so you need a simple map of how money, resources, and production connect. The circular flow model is that map. It shows how households (consumers) and firms (producers) exchange real resources and finished output, while money flows in the opposite direction.

In the simplest version, there are two big players:

• Households/consumers supply factors of production (especially labor) and demand goods and services.
• Firms demand factors of production (hire labor and buy/lease land and capital) and supply goods and services.

This basic model can be expanded to include:

• Government, which is an employer of inputs and a provider of goods and services.
• The foreign sector, which creates imports and exports.

A closed economy is a model that assumes there is no foreign sector (no imports or exports).

Product markets vs factor markets

The circular flow is easiest to understand by separating two markets.

Product market (goods and services market) is where firms sell goods and services and households buy them. The interaction of demand and supply here helps determine (1) the prices of goods and services and (2) the quantity exchanged.

Factor market is where factors of production such as labor, land, and capital are bought and sold. Households supply these factors; firms demand them. Payments here are incomes to households (wages, rent, interest, profit).

The key insight: output, spending, and income are linked

A common confusion is to treat “production,” “spending,” and “income” as separate things. In the circular flow, they mirror each other:

• Firms produce goods and services (output).
• Someone buys that output (spending).
• The revenue becomes wages, rent, interest, and profits (income).

That’s why GDP can be interpreted as total spending, total output, or total income (with accounting adjustments).

K.I.S.S. identity (a memory anchor)

K.I.S.S.: Keep It Simple, Silly

• GDP is computed as spending:

GDP = C + I + G + (X - M)

• The same total also represents:

GDP = Aggregate\ Spending = Aggregate\ Income\ (Y) = Sum\ of\ all\ value\ added

Exam Focus

• Typical question patterns
  • Identify which flows occur in factor vs product markets and what each represents.
  • Explain briefly why, in aggregate, output and income are equal.
  • Connect a change (like lower consumer spending) to output and unemployment.
  • Recognize how adding government and foreign sectors changes the model (taxes, transfers, imports/exports).
• Common mistakes
  • Mixing up the direction of “real flows” (resources and goods) vs “money flows.”
  • Treating saving as “money disappearing” rather than money flowing into financial markets.
  • Forgetting that in the aggregate, one person’s spending becomes another person’s income.

Gross Domestic Product (GDP): what it is, what it isn’t, and why “final” matters

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country’s borders in a given period (usually a year or quarter). Each word prevents a common measurement error.

“Market value” (why we use prices)

GDP adds up many different items, so it uses market prices as weights. Something with a higher price contributes more to GDP because it reflects what buyers are willing to pay, not necessarily what is “morally” or “socially” most important.

“Final” vs intermediate goods (double counting)

A final good is bought by its end user; an intermediate good is used up to make another good. Counting intermediate goods causes double counting. For example, if steel is used to make a car, counting both the steel sale and the car sale counts the steel twice.

A clean alternative is the value-added approach, which sums the value each firm adds at each production stage:

• Value added = value of output minus value of inputs purchased from other firms.

“Within a country’s borders”: GDP vs GNP

GDP is based on location (domestic production). Gross National Product (GNP) is based on ownership (production by a country’s residents, regardless of where it occurs). A frequent trap is including income earned by a citizen abroad in GDP; it is not included unless the production occurs within the country.

What GDP includes

GDP includes:

• Tangible goods (cars, machinery, food)
• Services (healthcare, haircuts, education services, financial services)
• New production within the time period

What is not included in GDP (and why)

GDP measures market production, not total well-being.

• Used goods: resale is not new production; it’s a transfer of ownership.
• Financial assets: buying stocks and bonds is an exchange of claims, not production (but broker fees are a service and are included).
• Unpaid work: volunteering and caregiving done outside markets are not counted.
• Illegal or unreported activity (shadow/black market): often excluded because it’s hard to measure reliably.
• Transfer payments: Social Security benefits, unemployment insurance, and similar payments do not represent current production.
• Depreciation: GDP is gross, meaning it does not subtract depreciation. If you want an output measure that subtracts wear and tear, that concept is captured by Net Domestic Product (NDP), not GDP.

Exam Focus

• Typical question patterns
  • Decide whether a scenario is included in GDP (new vs used goods, services, financial transactions, illegal/unpaid activity).
  • Explain why intermediate goods are excluded (double counting) and how value added avoids the problem.
  • Distinguish domestic production (GDP) from national production (GNP).
  • Identify transfers vs government purchases.
• Common mistakes
  • Counting stock or bond purchases as GDP.
  • Including used goods.
  • Confusing GDP with a measure of happiness or equality.
  • Thinking depreciation is “subtracted out” of GDP (GDP is gross).

Calculating GDP with the expenditure approach (and connecting it to income)

One standard method is to add up spending on final goods and services. This is the expenditure approach:

Y = C + I + G + (X - M)

Economists use Y for total output/total income because aggregate production generates aggregate income of equal value.

Consumption (C)

Consumption is household spending on goods and services:

• Durable goods (cars, appliances)
• Nondurable goods (food)
• Services (healthcare, entertainment, education services)

Consumption is typically the largest component of GDP in the United States.

Investment (I): “future production” spending

In GDP accounting, investment is current spending to increase output or productivity later, not buying financial assets. Three types are included:

• Business fixed investment: machines, factories, equipment
• New construction for firms or consumers (including residential investment like new housing)
• Change in inventories: the market value of unsold inventories

Inventories count because producing goods this period adds to this period’s output even if the goods aren’t sold yet. Falling inventories imply sales exceeded current production, which reduces this period’s measured production.

Government purchases (G)

Government purchases are spending on final goods and services and investment in infrastructure.

Included: salaries for public employees (teachers, firefighters), highways, public services.

Excluded: transfer payments (Social Security, unemployment benefits). Transfers redistribute income and may increase consumption later, but the transfer itself is not production.

Net exports (X - M)

• Exports (X): domestically produced goods/services purchased by foreigners (added).
• Imports (M): foreign-produced goods/services purchased domestically (subtracted).

Imports are subtracted because C, I, and G include spending on imports, but GDP counts only domestic production. “Imports reduce GDP” in the accounting sense; it does not automatically mean imports are economically harmful.

Aggregate income (AI) and the income connection

Aggregate income (AI) is the sum of all income earned by suppliers of resources:

• Wages + Rent + Interest + Profit

With accounting adjustments, aggregate spending equals aggregate income and also equals the sum of value added.

Example: classifying GDP components

Suppose the following happens in one year:

• Households buy new furniture made domestically.
• A firm builds a new factory.
• The government pays for road repairs.
• A household receives Social Security and spends it on groceries.
• A domestic firm sells software services to a foreign customer.

Classification:

• Furniture: C
• New factory: I
• Road repairs: G
• Social Security payment: not in G (transfer); grocery spending is C
• Software exports: X

Exam Focus

• Typical question patterns
  • Categorize transactions as C, I, G, X, or M.
  • Explain why imports are subtracted and why transfers are excluded.
  • Interpret changes in inventories as investment.
  • Connect “spending” to “income” (wages, rent, interest, profit) and value added.
• Common mistakes
  • Treating transfer payments as part of G.
  • Calling stock purchases “investment” in GDP terms.
  • Forgetting residential construction is part of I.

Uses of GDP and limitations (including the P-I-E-S checklist)

GDP is a central indicator because it summarizes production, but you need to know what it can and cannot tell you.

Common uses of GDP

1. Measuring economic growth: Higher GDP typically indicates expansion; lower GDP indicates contraction.
2. Comparing living standards: GDP per capita (especially real GDP per capita) is used as a rough proxy for average material living standards.
3. Assessing business cycles: GDP helps identify expansions and contractions.
4. Formulating economic policies: Governments use GDP to guide fiscal and monetary policy (for example, stimulus when growth is too slow).
5. Attracting foreign investment: Higher GDP can signal stability and prosperity to foreign investors.

GDP and standard of living: useful but incomplete

GDP is correlated with material well-being, but it misses or poorly measures:

• Leisure time
• Environmental quality
• Income distribution
• Underground/shadow economy
• Quality improvements that are hard to price

Limitations of GDP: P-I-E-S

A helpful acronym for standard-of-living limitations is P-I-E-S:

• Population: Two countries may produce similar total output, but if populations differ, total GDP gives a misleading comparison.
• Inequality: Countries with the same GDP can have very different income distributions.
• Environment: GDP doesn’t subtract environmental damage or resource depletion.
• Shadow economy: Black-market and unreported transactions aren’t fully counted.

Exam Focus

• Typical question patterns
  • Choose the best GDP-based measure for a comparison (total GDP vs GDP per capita; nominal vs real).
  • Explain why GDP is an imperfect measure of well-being.
  • Apply P-I-E-S to critique GDP comparisons across countries.
• Common mistakes
  • Treating GDP as a complete scorecard of welfare.
  • Comparing countries using total GDP when populations differ greatly.
  • Ignoring inequality and environmental effects when asked about “standard of living.”

Nominal vs real GDP, the GDP deflator, and the “latte” price index idea

GDP can rise because the economy produces more, or because prices rise. Separating those requires distinguishing nominal from real values.

Nominal GDP

Nominal GDP measures current production using current-year prices. It is also called current-dollar GDP or money GDP.

Real GDP

Real GDP measures current production using prices from a fixed base year, so it reflects quantity changes more cleanly. It is also called constant-dollar GDP.

Base year and price index

A base year is the reference year set to 100 for an index. A price index measures the average price level compared to that base year, interpretable as “current prices as a percentage of base-year prices.”

The GDP deflator

The GDP deflator is a price index for all final goods and services included in GDP.

GDP\ Deflator = \frac{Nominal\ GDP}{Real\ GDP} \times 100

To convert nominal to real using the deflator:

Real\ GDP = \frac{Nominal\ GDP}{GDP\ Deflator} \times 100

An equivalent way to remember the conversion is: divide by the price index “in hundreds.”

Real\ GDP = \frac{Nominal\ GDP}{Price\ Index\ (in\ hundreds)}

Worked example: nominal to real GDP

Suppose nominal GDP is 22,000 billion dollars and the GDP deflator is 110.

Real\ GDP = \frac{22000}{110} \times 100

Real\ GDP = 20000

Using percentages (a quick approximation)

A useful approximation is:

\%\Delta\ Real\ GDP \approx \%\Delta\ Nominal\ GDP - \%\Delta\ Price\ Index

If nominal GDP rises 5 percent and the price index rises 1 percent, real GDP rises approximately 4 percent.

Latte Price Index (LPI) example idea

To make index logic intuitive, imagine GDP is made up of just one product: cups of latte. Using a base year (say 2012), you can build a latte price index:

LPI\ in\ year\ t = 100 \times \frac{Price\ of\ latte\ in\ year\ t}{Price\ of\ latte\ in\ base\ year}

Then you would “deflate” nominal latte GDP into real latte GDP using the same logic as any price index.

Real GDP per capita

Real GDP per capita divides real GDP by population and is often more informative than total GDP for living-standard comparisons, though it still doesn’t capture distribution, leisure, or environment.

Exam Focus

• Typical question patterns
  • Compute the GDP deflator from nominal and real GDP or compute real GDP from nominal and the deflator.
  • Explain why nominal GDP can rise even if real output does not.
  • Use the percent-change approximation to infer real growth.
  • Interpret index values relative to the base year.
• Common mistakes
  • Forgetting to multiply by 100 when using index formulas.
  • Mixing up nominal vs real definitions (current prices vs base-year prices).
  • Confusing an index point change with a percent change.

Inflation, CPI, real vs nominal income, and the costs of inflation

Inflation is a sustained increase in the overall price level. Because inflation changes purchasing power and affects lenders/borrowers, economists measure it with price indices.

Related terms:

• Deflation: a general decrease in prices.
• Disinflation: a decrease in the rate of inflation (inflation is still positive, but smaller).

The Consumer Price Index (CPI)

The Consumer Price Index (CPI) measures the average change over time in prices paid by urban consumers for a market basket of consumer goods and services. It is the main measure of consumer inflation.

A market basket is a collection of goods and services used to represent typical consumption.

A price index uses a base year of 100:

CPI = \frac{Cost\ of\ Market\ Basket\ in\ Current\ Year}{Cost\ of\ Market\ Basket\ in\ Base\ Year} \times 100

Inflation rate from CPI

Inflation is the percent change in CPI from one period to the next:

Inflation\ Rate = \frac{CPI_{t} - CPI_{t-1}}{CPI_{t-1}} \times 100

Worked examples: inflation calculations

If CPI last year was 200 and CPI this year is 210:

Inflation\ Rate = \frac{210 - 200}{200} \times 100

Inflation\ Rate = 5

Another example using actual CPI-style numbers: in January 2000, CPI was 169.30 and in January 2001 it was 175.60. Inflation is the percentage change:

Inflation\ Rate = \frac{175.60 - 169.30}{169.30} \times 100

Inflation\ Rate \approx 3.7

CPI vs GDP deflator

Both measure inflation, but they differ in what they cover.

A memory shortcut: CPI tracks what consumers buy; the GDP deflator tracks what the economy produces domestically.

Nominal vs real income (purchasing power)

• Nominal income is measured in today’s dollars (not adjusted for inflation).
• Real income is measured in base-year dollars (inflation-adjusted), so it reflects purchasing power.

To convert nominal income to real income using CPI:

Real\ Income\ This\ Year = \frac{Nominal\ Income\ This\ Year}{CPI\ This\ Year\ (in\ hundredths)}

Real income example (Kelsey)

Kelsey’s nominal income was $40,000 in 2014 and $41,000 in 2015. CPI was 234.8 at the end of 2014 and 236.5 at the end of 2015 (base year CPI = 100 in 1984).

Real\ Income\ 2014 = \frac{40000}{2.348} = 17036

Real\ Income\ 2015 = \frac{41000}{2.365} = 17336

Nominal vs real interest rates (expected vs unexpected inflation)

Inflation matters for borrowers and lenders because loans are repaid in future dollars.

• Real interest rate: the percentage increase in purchasing power a borrower pays a lender.
• Nominal interest rate: the stated rate in dollars.

When inflation is predictable (expected inflation), lenders build it into the nominal rate:

Nominal\ Interest\ Rate = Real\ Interest\ Rate + Expected\ Inflation

A common approximation for realized real interest is:

Real\ Interest\ Rate \approx Nominal\ Interest\ Rate - Inflation\ Rate

With unexpected inflation, some groups gain and others lose because contracts were set without accurate inflation expectations.

• Rapid unexpected inflation usually hurts employees (if real wages fall), fixed-income recipients, savers, and lenders.
• Rapid unexpected inflation usually helps firms (if real wages fall) and borrowers. It may also increase the value of some assets like real estate.

Costs of inflation

Moderate, predictable inflation is typically less damaging than high or unpredictable inflation. Common costs include:

• Menu costs: firms incur costs changing posted prices.
• Shoe-leather costs: time and effort managing cash holdings when inflation is high.
• Loss of purchasing power: each dollar buys less over time.
• Wealth redistribution: unexpected inflation shifts real wealth between groups (especially borrowers vs lenders).
• Confusion between nominal and real changes: wages or income may rise in dollars but fall in purchasing power.

A subtle but important point: inflation is an average. Some individual prices can fall while the overall price level rises.

Difficulties with CPI (why it can be biased)

CPI is extremely useful, but it has measurement challenges:

• Consumer substitution: as relative prices change, consumers switch goods; a fixed basket may overstate cost-of-living increases.
• Goods evolve: new products appear (smartphones) and others disappear (manual typewriters), so the basket must be updated.
• Quality differences: some price increases reflect improved quality rather than pure inflation; CPI can be overstated if quality changes aren’t fully captured.

Exam Focus

• Typical question patterns
  • Compute CPI or inflation rate from basket costs or CPI values.
  • Explain CPI vs GDP deflator differences (imports, coverage).
  • Convert nominal values to real values using CPI (especially wages/income).
  • Use interest-rate relationships to identify winners/losers from unexpected inflation.
  • Distinguish inflation vs disinflation vs deflation.
• Common mistakes
  • Treating a one-time price increase in one product as “inflation.”
  • Confusing “price level” (an index value) with “inflation rate” (percent change).
  • Forgetting CPI includes imports while the GDP deflator does not.
  • Misreading index changes (e.g., calling a 6-point CPI rise “6%”).

Unemployment and labor force data (what the unemployment rate really measures)

Unemployment statistics depend on strict definitions, which makes them powerful but easy to misinterpret.

Key labor market definitions

• Employed: someone who worked for pay at least one hour per week (including part-time; many definitions also include unpaid work in a family business).
• Unemployed: not working, available to work, and actively seeking work.
• Out of the labor force: not employed and not actively seeking employment.
• Discouraged workers: people who stop searching after a long jobless period; they are counted as out of the labor force, which can understate the unemployment rate.

The labor force is:

Labor\ Force = Employed + Unemployed

Unemployment rate and participation rate

Unemployment rate (jobless rate):

Unemployment\ Rate = \frac{Unemployed}{Labor\ Force} \times 100

Labor force participation rate (population 16+ or adult population, depending on the data label):

Labor\ Force\ Participation\ Rate = \frac{Labor\ Force}{Adult\ Population} \times 100

Worked example: unemployment rate vs participation

Suppose an adult population is 1,000 people.

• Employed: 600
• Unemployed (actively looking): 50
• Not in labor force: 350

Labor\ Force = 600 + 50 = 650

Unemployment\ Rate = \frac{50}{650} \times 100

Unemployment\ Rate \approx 7.69

Labor\ Force\ Participation\ Rate = \frac{650}{1000} \times 100 = 65

Now imagine 20 unemployed workers become discouraged and stop looking.

• Unemployed becomes 30
• Labor force becomes 630

Unemployment\ Rate = \frac{30}{630} \times 100 \approx 4.76

The unemployment rate fell, but not because jobs were created.

Types of unemployment

• Frictional unemployment: short-term job search or transitions (entering the labor force, switching jobs). Normal and relatively harmless.
• Seasonal unemployment: predictable, calendar-based unemployment; anticipated by workers and employers.
• Structural unemployment: skills or location mismatches due to underlying economic changes (technology, industry shifts). Often longer-lasting.
• Cyclical unemployment: rises and falls with the business cycle; economy-wide and the main focus of macro policy.

Full employment and the natural rate

Full employment exists when there is no cyclical unemployment (only frictional + structural + seasonal may remain).

The natural rate of unemployment is the unemployment rate associated with full employment. In the United States, it is often described as somewhere around 4 to 6 percent.

Limitations of the unemployment rate

The unemployment rate can miss:

• Discouraged workers (not counted as unemployed)
• Underemployment (part-time workers wanting full-time, or workers below skill level)
• Job quality and wage growth

Exam Focus

• Typical question patterns
  • Calculate unemployment rate and labor force participation from data.
  • Classify scenarios as frictional, seasonal, structural, or cyclical.
  • Explain why unemployment can fall even when conditions worsen (discouragement effect).
  • Explain what “full employment” means (no cyclical unemployment, not zero unemployment).
• Common mistakes
  • Using total population instead of labor force in the unemployment rate.
  • Labeling someone unemployed even if they are not actively searching.
  • Treating full employment as zero unemployment.

The business cycle, real GDP over time, and output gaps

Even if long-run growth is positive, economies rarely grow smoothly. The business cycle is the periodic rise and fall of economic activity, commonly measured by changes in real GDP.

Phases of the business cycle

AP Macroeconomics typically emphasizes:

• Expansion: real GDP rises; employment tends to rise.
• Peak: the top of the cycle where an expansion ends.
• Contraction: real GDP falls.
• Trough: the bottom of the cycle where contraction stops and recovery begins.

Related terms:

• Recession: often described (unofficially) as two consecutive quarters of falling real GDP.
• Depression: a prolonged, deep contraction.

Potential output (full-employment real GDP)

Potential output (also called full employment real GDP) is the level of real GDP the economy can produce when resources are used at normal, sustainable rates and unemployment is at the natural rate.

• If actual real GDP is below potential, idle resources exist and unemployment is above the natural rate.
• If actual real GDP is above potential, the economy may be overheating, often creating inflationary pressure.

Recessionary and inflationary gaps

• Recessionary gap: actual real GDP is below potential.
• Inflationary gap: actual real GDP is above potential.

A common way to express the output gap as a percent is:

Output\ Gap\ Percent = \frac{Actual\ Real\ GDP - Potential\ Real\ GDP}{Potential\ Real\ GDP} \times 100

Leading, coincident, and lagging indicators

Economists infer the cycle using many indicators:

• Leading indicators change before the overall economy (new orders, building permits, stock market performance).
• Coincident indicators move with the economy (real GDP, employment levels, industrial production).
• Lagging indicators change after a trend is underway (some measures of unemployment duration).

Example: interpreting a recession using indicators

If over two quarters real GDP growth turns negative, unemployment rises, and consumer spending growth slows, a coherent demand-side story is that falling spending reduces firms’ output, which reduces labor demand and increases cyclical unemployment.

Exam Focus

• Typical question patterns
  • Identify the phase of the business cycle from changes in real GDP and unemployment.
  • Use potential output to describe recessionary vs inflationary gaps.
  • Interpret graphs showing actual real GDP relative to potential.
  • Recognize that a recession is commonly described as two consecutive quarters of negative real GDP growth (even if the official definition can be more nuanced).
• Common mistakes
  • Saying a recession must mean falling prices (inflation can slow without becoming negative).
  • Confusing long-run growth (trend) with short-run fluctuations (cycle).
  • Treating potential output as the absolute maximum physically possible output rather than a sustainable full-employment level.

Putting the three major indicators together (GDP, inflation, unemployment) + AP quantitative skills

Unit 2’s core skill is computing indicators and then interpreting them together to diagnose what’s happening.

A framework for interpretation

When you see new macro data, ask:

1. Is the economy growing in real terms? (real GDP)
2. Is the price level rising quickly? (inflation via CPI or GDP deflator)
3. How tight is the labor market? (unemployment and participation)

These are linked through the circular flow: spending drives production; production drives income and employment; the degree of slack or tightness can influence inflation pressure.

Common interpretation scenarios

Scenario 1: rising nominal GDP, flat real GDP
Nominal GDP uses current prices, so if prices rise while quantities don’t, nominal GDP rises without real growth.

Scenario 2: falling unemployment but falling participation
Unemployment can fall “for a bad reason” if people leave the labor force. Always check participation when the data allow it.

Scenario 3: strong real GDP growth with rising inflation
One interpretation is that overall spending is rising quickly relative to productive capacity, creating inflationary pressure. (A negative supply shock is another possibility, typically analyzed more deeply in later units.)

Nominal vs real wage thinking (inflation in everyday terms)

If nominal wages rise but inflation rises faster, real purchasing power falls. A useful approximation is:

Real\ Wage\ Growth\ Approx \approx Nominal\ Wage\ Growth - Inflation

Why revisions and measurement issues matter

Economic statistics are estimates. GDP can be revised as more data arrives; CPI has known biases (substitution, quality changes); unemployment depends on survey definitions. Precise language helps on AP questions (GDP measures market value of final output; unemployment counts active job seekers).

Common AP-style quantitative skills (with worked problems)

Skill 1: CPI and inflation calculations
A market basket costs 500 dollars in the base year and 550 dollars this year:

CPI = \frac{550}{500} \times 100 = 110

If CPI last year was 104 and CPI this year is 110:

Inflation\ Rate = \frac{110 - 104}{104} \times 100

Inflation\ Rate \approx 5.77

A common error is to compute 110 - 104 = 6 and call it “6 percent.” That is a change in index points, not a percent change.

Skill 2: GDP deflator and real GDP
Nominal GDP is 18,000 billion dollars and real GDP is 15,000 billion dollars:

GDP\ Deflator = \frac{18000}{15000} \times 100 = 120

A common error is forgetting the base-100 scaling and answering 1.2.

Skill 3: unemployment rate and labor force participation
Adult population is 2,000; employed is 1,200; unemployed is 100:

Labor\ Force = 1200 + 100 = 1300

Unemployment\ Rate = \frac{100}{1300} \times 100 \approx 7.69

Labor\ Force\ Participation\ Rate = \frac{1300}{2000} \times 100 = 65

A common error is using adult population in the unemployment formula, which understates unemployment.

Exam Focus

• Typical question patterns
  • Given a short data set (CPI values, GDP deflator, labor force stats), compute a rate and interpret what it implies.
  • Multi-step computations: find CPI then inflation; or find labor force then unemployment.
  • Choose the best index for the prompt (CPI for cost of living vs GDP deflator for domestically produced inflation).
  • Explain how two indicators can move in seemingly contradictory ways (unemployment down because labor force shrank; nominal GDP up because prices rose).
• Common mistakes
  • Confusing index levels with percent changes.
  • Dropping the “times 100” in index formulas.
  • Computing correctly but interpreting backward (e.g., CPI of 110 means prices rose 110 percent).
  • Treating one indicator as “the economy” and ignoring the others.
  • Using “inflation” when you mean “higher price level” (rate vs level confusion).