Measuring the Economy 23.2,

Vocab unit 2 part 2 Business Cycle Real GDP Unemployment Rate Fiscal Policy Inflation Consumer Price Index (CPI) Central Bank Federal Open Market Committee (FOMC) Monetary Policy Discount Rate Reserve

Measuring Growth When the economy grows, businesses are producing more goods and services and more workers are hired. Remember, GDP is one measure of the economy’s growth ($ value of all final goods and services produced in a country in a single year. When prices increase, GDP would go up even if the economy was not growing. To avoid this false impression, economists use Real GDP – shows an economy’s production after the distortions of price increases have been removed – Just because prices went up doesn’t mean output increased

The Business Cycle The Business Cycle (AKA The Economic Rollercoaster) The ups and downs of the economy Alternating periods of growth & decline in the economy

Business Cycle Peak Real/Implicit GDP Trough Boom Expansion/ Prosperity Decline/ Contraction Recovery/ Prosperity Recession

1. Expansion - Prosperity 4 Economic Phases 1. Expansion - Prosperity Economy is improving Consumers buy more Business activity is increasing – production and employees Real GDP is going up Largest recent expansion – March 1991 – March 2001 3. Contraction – Decline Economy slows down Production cut Workers laid off Tend to be ½ as long as expansions 2. Boom Economic activity peaks Businesses work at full capacity Stores sell at record amounts *Peak – highest point of boom. Economy cannot get any better 4. Recession Lowest period for production – economic decline for 6 straight months or more High unemployment Low consumer spending *Trough – lowest point of a recession *Depression – severe recession

Business Cycle

What is the highest point in the business cycle? Boom Trough Expansion Peak

Unemployment Another way to measure the economy is to look at employment Civilian Labor Force – includes all civilians 16 years old and older who are either working or looking for work. Unemployment rate – the % of people in the civilian labor force who are not working but are looking for jobs

Unemployment rate reflects the health of the economy. Tends to rise sharply during recessions, and then slowly declines Unemployment affects the income of individuals as well as the economy as a whole People lose their jobs; cut back on their purchases

Fiscal Policy The way the government taxes and spends money to reduce high unemployment In a recession: The government spends more money on public works projects in order to provide jobs. This keeps companies running and workers employed. Provides money to people and increases demand. Producers will then increase supply. Tax cuts: Gives people more money to spend. The government will control expansions by Increasing taxes. Often political differences prevent the effective use of fiscal policy Automatic stabilizers help

Price Stability Inflation - A decline in the value on money. Sustained increase in the level of prices Decreases purchasing power: Amount a dollar can buy. Therefore altering economic decisions people make Inflation is measured by the Consumer Price Index Consumer Price Index (CPI) - Change in price over time of a specific group of goods and services the average household uses. Gov’t samples prices every month for about 400 commonly used products The rate of inflation is the change in the average level of prices as measured by the CPI This tells us the change in the standard of living.

If the price of an item doubles, you would need twice as many dollars to buy the item; the purchasing power of your dollar has fallen Ex. Ice cream cones Harder on people with fixed incomes – Why? Prices act as signals which help us make economic decisions. High inflation distorts this process; we begin to speculate rather than invest thus the economy suffers

Answer the following using complete sentences – Do you think it is the government’s responsibility to try to balance the ups and downs of the business cycle? Why or why not? Make sure to tie in what we have learned in class – business cycle, economic systems…..

Stocks Corporations sell stock to raise financial capital Investors/People buy stocks to make money – Individual ownership in a corporation. Shareholder receives voting rights and dividends. Profits can be earned in 2 ways - Dividends – a share of a corporation’s profits distributed to stockholders Capital Gains – when stock is sold for more than it originally cost Rule: Buy low, sell high

Stocks Supply and demand determine the price of a company’s stock Other factors such as - Change in profits, Rumors (externalities), News – will also change stock prices Stock Indexes Statistical measures that track stock prices over time Ex: Dow Jones Industrial Average (DJIA) or Standard & Poor’s (S&P)

Stock Exchanges Stock market – where stock is bought & sold Ex: NYSE – largest & most prestigious, NASDAQ – 2nd largest Stock indexes reveal investors’ expectations about the future Bull Market Investors expect growth, profits high & unemployment low Prices tend to rise Bear Market Investors are pessimistic, profits drop & unemployment rises Prices fall