Ways that Economists Measure the Health of the Economy Economic Indicators

 The dollar value of all final goods and services produced within a country’s borders in a given year.  About $15 trillion per year in the United States Gross Domestic Product (GDP)

 The dollar value of all final goods and services produced within a country’s borders in a given year, but NOT adjusted for inflation  Assumes $1 in 1900 is same as $1 in 2000 Nominal GDP

 GDP adjusted for inflation (value of dollar is adjusted to reflect how purchasing power of the dollar has changed over time).  More useful than nominal GDP (because you can compare different time periods) Real GDP

 You want to find out what the GDP was during the Great Depression.  You find a scanned image of the business section of a 1935 newspaper.  It reports the GDP is (was) $352 billion in  Is this number Real GDP or Nominal GDP? SITUATION

 1933 $600 Billion  1945 $1.6 Trillion  1990 $5.74 Trillion  1997 $ 8.1 Trillion  2007 $13.3 Trillion  2012 $13.7 Trillion Real GDP

 Probably the most important statistic derived from GDP, shows how much more or less a country is producing than in previous years or quarters.  The most commonly used measure of how the economy is doing.  Shows what part of the business cycle we are in. GDP Growth Rate

 Divides GDP by number of people in the country.  Measures the average amount each person PRODUCES in a year.  Roughly shows how productive a nation is.  Good for comparing economies of different countries. GDP per Capita

 The percentage of the nation’s labor force that is actively looking for work.  Computed by the Bureau of Labor Statistics polls a sample of about 50,000 families. (Which branch?)  Who isn’t counted? A: People who aren’t actively looking for work.  Examples of those NOT counted: college students; people who have given up and aren’t looking Unemployment Rate NORMAL RATE: 4-6% Considered “healthy” CURRENT RATE: 6.7%

 %September %  May %March % Unemployment Rate

 A measure of consumer attitude toward current economic conditions.  Adjusted monthly on the basis of a survey of about 5,000 households.  The index considers consumer opinion on both current conditions (40% of the index) and future expectations (the other 60%).  Normal consumer confidence: Based on a 100 score (based on 1985 data when the business cycle was not in a peak or a trough) Consumer Confidence INDEX (CCI)

Last year’s CCI = 71.8 Current CCI = 82.3

 A measure of inflation  Determined by measuring the price of a standard group of goods meant to represent the typical “market basket” of a typical urban consumer.  Expressed in percentage (what % MORE consumers are paying relative to the last measure)  Computed each month by the Bureau of Labor Statistics (BLS). Which branch? Consumer Price Index (CPI)

Typical “Market Basket” CategoryExamples Food and drinksCereals, coffee, chicken, milk, restaurant meals HousingRent, homeowner’s costs, fuel oil Apparel and upkeepMen’s shirts, women’s dresses, jewelry TransportationAirfares, new and used cars, gasoline, auto insurance Medical carePrescription medicines, eye care, physicians’ services EntertainmentNewspapers, toys, musical instruments Other goods and servicesHaircuts, cosmetics, bank fees

CURRENT CPI = 2.0% higher than last year

Purchasing Power The number of goods and services that can be purchased with a unit of currency. As prices go up (or wages go down), your purchasing power goes down

 Rate of interest that the Federal Reserve charges to loan money to other banks  Federal Reserve (the “Fed”) = the government bank that controls the supply of money  Affects how cheap or expensive it is to borrow money  Excessively high OR excessively low is BAD Discount Rate

 The Fed can’t decide whether the government spends money. That’s the job of Congress, but…  The more money in circulation, the less the money is worth so prices seem higher (inflation). The FED can decrease the money supply to prevent inflation  The lower the interest rates, the more people will borrow. The FED can lower the discount rate to try to stimulate the economy. Actions the Fed Can Take

Discount Rate (Affects All Interest Rates)

 The percentage of people in America who live in households with income below the official poverty line (insufficient income to support a family) Poverty Rate

Persons in Family Maximum total family income 1 $10,400 2 $14,000 3 $17,600 4 $21,200 5 $24,800 6 $28,400  For each additional person, add $3,600 SOURCE: Federal Register, Vol. 73, No. 15, January 23, 2008, pp. 3971–3972.Federal Register The “Poverty Threshold”

 The number of new homes being built at any given time New Housing Starts

New Housing Starts (in thousands)

 A measurement of how well the stock of 30 large US companies representing various industries is doing. Dow Jones Industrial Average (DOW)

 The gap between the rich and poor Income Inequality