Economic Indicators and Measurements

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Economic Indicators and Measurements
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Chapter 12 Economic Indicators and Measurements

• KEY CONCEPT
• National income accounting uses statistical
  measures of income, spending, and output to help
  people understand what is happening to a
  countrys economy.
• WHY THE CONCEPT MATTERS
• The economic decisions of millions of individuals
  determine the fate of the nations economy.
  Understanding the countrys economy will help you
  make better personal economic decisions.

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Chapter 12

• KEY CONCEPTS
• Microeconomics examines actions of individuals
  and single markets
• Macroeconomics examines the economy as a whole
• Macroeconomists use national income accounting
• statistical measures that track nations income,
  spending, output
• gross domestic product (GDP) is most important
  investors measure

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What is GDP?

• The Components of GDP
• GDPmarket value of final goods, services
  produced in set time period
• To be included in GDP, product must fulfill three
  requirements
• must be final, not intermediate product
• must be produced during the time period,
  regardless of when sold
• must be produced within nations borders
• HOW CAN WE ACCURATELY MEASURE THIS?

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What is GDP?

• GDP is calculated using the expenditure model
• GDP C I G (X IM)
• C Consumption Spending (households)
• I Investment Spending (companies)
• G Government Spending
• X Exports
• IM Imports

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What is GDP?

• Two Types of GDP
• When GDP grows, economy creates more jobs and
  business opportunities
• Nominal GDPprice levels for the year in which
  GDP is measured
• states GDP in terms of current value of goods and
  services
• Real GDPGDP adjusted for changes in prices
• estimate of GDP if prices were to remain constant

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What GDP Does Not Measure

• GDP does not measure all output, such as
• nonmarket activitiesfree services with
  potential economic value
• underground economyunreported market activities
• GDP also does not measure quality of life

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What GDP Does Not Measure

• GDP and the meaning of life
• Rich is better
• Money matters less as you grow richer
• Money isnt everything

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Business Cycle

• Changes in the economy often follow a broad
  pattern
• Business cycleseries of periods of expanding
  and contracting activity
• measured by increases or decreases in real GDP
• has four phases expansion, peak, contraction,
  trough length can vary

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What Is the Business Cycle?

• Stage 1 Expansion
• Expansion is period of economic growthincrease
  in real GDP
• real GDP grows from a low point, or trough
• Jobs easier to find unemployment drops
• More resources needed to keep up with spending
  demand
• as resources become scarce, their prices rise

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What Is the Business Cycle?

• Stage 2 Peak
• Peak is point at which real GDP is highest
• As prices rise and resources tighten, businesses
  become less profitable
• businesses cut back production and real GDP drops

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What Is the Business Cycle?

• Stage 3 Contraction
• During contraction, producers cut back and
  unemployment increases
• resources become less scarce, so prices tend to
  stabilize or fall

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What Is the Business Cycle?

• Stage 4 Trough
• Trough is point at which real GDP and employment
  stop declining
• A business cycle is complete when it has gone
  through all four phases

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Aggregate Demand and Supply

• Aggregate Demand
• Aggregate demandtotal amount of products that
  might be bought at every level
• includes all goods and services, all purchasers
• Aggregate demand curve is downward sloping
• vertical axis shows average price of all goods
  and services
• horizontal axis shows the economys total output

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Aggregate Demand and Supply

• Aggregate Supply
• Aggregate supplysum of all goods and services
  that might be provided at every price level
• Aggregate supply curve almost horizontal when
  real GDP is low
• businesses do not raise prices when economy is
  weak
• Curve slopes upward as prices increase with rise
  in real GDP
• Curve almost vertical with inflationno rise in
  real GDP

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Aggregate Demand and Supply

• Macroeconomic Equilibrium
• Macroeconomic equilibriumaggregate demand
  equals aggregate supply
• aggregate demand curve intersects aggregate
  supply curve
• Figures 12.9, 12.10 P1 is equilibrium price
  level Q1 equilibrium real GDP
• increase in aggregate demand shifts AD curve to
  right
• decrease in aggregate supply shifts AS curve to
  left

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What Is Economic Growth?

• Population and Economic Growth
• Population influences economic growth
• if population grows faster than real GDP, growth
  may mean more workers
• Real GDP per capitareal GDP divided by total
  population
• Real GDP per capita is measure of standard of
  living
• everyone does not actually have that amount does
  not measure quality of life

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What Determines Economic Growth?

• KEY CONCEPTS
• Four factors influence economic growth
• natural resources, human resources, capital,
  technology and innovation

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What Determines Economic Growth?

• Factor 1 Natural Resources
• Access to natural resources is important
• arable land, water, forests, oil, mineral
  resources
• Resources not enough also need free market,
  effective government
• Nigeria has oil but low GDP per capita,
  widespread poverty
• Japan has few resources but high GDP per capita
  from industry and trade

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What Determines Economic Growth?

• Factor 2 Human Resources
• Labor inputsize of labor force multiplied by
  length of work week
• Population growth made up for shorter work week
  since early 1900s
• More important than size of labor force is its
  level of human capital

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What Determines Economic Growth?

• Factor 3 Capital
• More and better capital goods increase output
• more and better machines can produce more goods
• Capital deepeningincrease in the capital to
  labor ratio
• providing more and better equipment to each
  worker increases production

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What Determines Economic Growth?

• Factor 4 Technology and Innovation
• Technology, innovation make efficient use of
  resources, raise output
• Innovations can increase economic growth
• examples reduce time needed to complete task
  improve customer service
• Information technology has had strong impact on
  economic growth
• advances in production lower prices, make capital
  deepening cheaper

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Productivity and Economic Growth

• KEY CONCEPTS
• Productivityamount of output produced from a
  set amount of inputs
• labor productivity amount of goods and services
  produced by one worker in an hour
• capital productivity amount produced by set
  amount of equipment and materials

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Productivity and Economic Growth

• How Is Productivity Measured?
• For a business, compare amount of capital, work
  hours to total output
• Multifactor productivityapplies to an industry
  or business sector
• ratio between economic output and labor and
  capital inputs used
• Multifactor productivity data compiled for major
  industries, sectors
• used to estimate productivity of entire economy

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Productivity and Economic Growth

• What Contributes to Productivity?
• Quality of laboreducated, healthy workforce is
  more productive
• Technological innovationnew technology helps
  increase output
• Energy costscheaper power lowers cost of using
  tools
• Financial marketsbanks, stock markets flow funds
  where needed

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Productivity and Economic Growth

• How Are Productivity and Growth Related?
• Economic growth is a measure of a change in
  production
• Productivity is a measure of efficiency
• Economy can grow
• by increasing quantity of resources, labor,
  capital, or technology
• by increasing productivity

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Thomas Robert Malthus The Population Problem

• A Natural Limit to Economic Growth?
• Malthus called attention to issues of population
  growth, scarcity
• Said population would grow geometrically, food
  supply arithmetically
• An Essay on the Principle of Population
  attacked, but unrefuted
• Malthuss estimates have turned out to be wrong
• population has grown at slower rate food
  production has risen sharply

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Reviewing Key Concepts

• Explain the differences between the terms in each
  of these pairs
• economic growth and real GDP per capita
• capital deepening and labor input

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Poland Economic Freedom and Economic Growth

• Background
• Poland was under Communist rule from 1948 to
  1989. In 1990, it held free elections and began
  moving toward a free market economy. Since then,
  Poland has experienced a surge in economic
  growth. In 2004, it joined the European Union.
• Whats the Issue
• How successful is Polands economy?
• Thinking Economically
• Which economic measurements and indicators are
  evident in documents A and C? Explain what they
  convey about the strengths and weaknesses of
  Polands economy.
• What factors have driven Polands economic
  growth?
• Compare documents A and C, written about six
  months apart. What continued economic trends and
  new economic strengths do they describe?