Measuring the Health of the Economy…

Normal Economy Notes I. Three characteristics of a normal, healthy economy: A. Full employment Most people have a job Most people have a job B. Low inflation Prices are not going up too quickly Prices are not going up too quickly C. Economic growth We are making more goods and services not less. We are making more goods and services not less. D. As we shall see, each characteristic is measured with a different economic indicator

II. 1 st Characteristic: Full Employment A. Full Employment Most people who want a job have a job Most people who want a job have a job B. Economic Indicator: The Unemployment Rate – The Unemployment Rate – 1. The percentage of individuals 16 years old or older who want a job but do not have a job. a. Full Unemployment: a. Full Unemployment: Unemployment rate of 5% or a bit less Unemployment rate of 5% or a bit less b. High Unemployment: b. High Unemployment: Unemployment rate Greater than 5% Unemployment rate Greater than 5%

C. Full Employment: A healthy unemployment Rate of 5 % or lower.

III. 2 nd Characteristic: Low Inflation A. Inflation: An increase in prices in general (although prices for a few things may be going down) B. Economic Indicator for inflation: B. Economic Indicator for inflation: The Inflation Rate – How quickly prices are rising every year. The Inflation Rate – How quickly prices are rising every year. 1. Low (Normal) inflation: 1. Low (Normal) inflation: An inflation rate of 4% a year or less. An inflation rate of 4% a year or less. If something that cost $1.00 last year now costs $1.03 or $1.04, that’s ok. If something that cost $1.00 last year now costs $1.03 or $1.04, that’s ok. 2. High Inflation: An inflation rate greater than 4% a year If something cost $1.00 last year and now it costs $1.10, prices are rising too quickly. If something cost $1.00 last year and now it costs $1.10, prices are rising too quickly.

III. 2 nd Characteristic: Low Inflation (continued) C. How do we know what the inflation rate is? We look at something called The Consumer Price Index (CPI) – We look at something called The Consumer Price Index (CPI) – 1. It is the average price of about 400 commonly purchased goods and services. 1. It is the average price of about 400 commonly purchased goods and services. 2. If the CPI goes up, that means that prices have gone up, that means there has been inflation. 2. If the CPI goes up, that means that prices have gone up, that means there has been inflation. 3. If the CPI has gone up 10% over a year, then the inflation rate = 10%. 3. If the CPI has gone up 10% over a year, then the inflation rate = 10%. For example: If the CPI was 100 last year and now its 110, we say that the inflation rate was 10%. For example: If the CPI was 100 last year and now its 110, we say that the inflation rate was 10%. 4. That means everything is about 10% more expensive. 4. That means everything is about 10% more expensive.

D. Normal Inflation: An Inflation rate of 4% or lower

IV. 3 rd Characteristic: Economic growth A. Economic Growth When the economy is producing more goods and services than it did before. B. Economic Indicator: Gross Domestic Product (GDP) – How many dollars worth of goods and services were made in America over time. 1. Example: If America made $1,000 worth of food, $1,000 worth of clothes, and $2,000 worth of houses in a year and nothing else, GDP for the year would be? $4,000 for the year. 2. U.S. GDP for 2013 was over 16 trillion dollars.

IV. 3 rd Characteristic: Economic growth (Continued) 3. Economic Growth 3. Economic Growth GDP increasing rather than decreasing GDP increasing rather than decreasing In other words, we’re making more goods and services not less In other words, we’re making more goods and services not less 4. Recession (A shrinking economy) 4. Recession (A shrinking economy) GDP decreasing rather than increasing over time GDP decreasing rather than increasing over time In other words, we’re making fewer goods and services, not more. In other words, we’re making fewer goods and services, not more.

C. Normal Economic Growth - GDP that increases over time, the greater the increase the better.

Measuring the Health of the Economy: An Unhealthy economy: How to recognize one V. Three types of unhealthy Economies Recession (stagnation) Recession (stagnation) High inflation High inflation Stagflation Stagflation

-A. Recession (Also called “Stagnation”) – A “shrinking” economy producing fewer goods and services than before. Indicated by: Decreasing GDP and / or a high unemployment rate (> 5%) Indicated by: Decreasing GDP and / or a high unemployment rate (> 5%)

Shrinking GDP & High unemployment = Recession Shrinking GDP High unemployment

-B. High Inflation - Prices are rising too rapidly -B. High Inflation - Prices are rising too rapidly Indicated by: high inflation rate (>4%) Indicated by: high inflation rate (>4%)

Overall prices rising faster than 4% = Inflation Prices rising too quickly

Stagflation C. Stagflation – C. Stagflation – Recession and Inflation together Recession and Inflation together Everything is going wrong Everything is going wrong - Indicated by - Indicated by 1. Decreasing GDP 1. Decreasing GDP 2. high unemployment rate (> 5%) 2. high unemployment rate (> 5%) 3. high inflation rate (> 4%) 3. high inflation rate (> 4%)

Shrinking GDP &/or high unemployment AND inflation = Stagflation + &/or