How is the Economy Doing? We can look at 3 things to measure the economy: 1. GDP and the Business Cycle 2. Standard of Living 3. Inflation and CPI 1

Gross Domestic Product GDP Gross Domestic Product total value, in dollars, of all the final goods and services produced in a country in a single year

If a contraction lasts longer than 6 months it is a Peak/Boom: expansion stops and the economy reaches its lowest point; business is good and jobs are plentiful, profits are high Contraction: the economy slows down, and demand for goods and services lessens; real GDP levels off and begins to fall If a contraction lasts longer than 6 months it is a Recession: businesses fail, profits fall, and unemployment rises Depression: extremely bad recession Trough/Bust: economy reaches its lowest point; period of less demand for goods and services and high unemployment; real GDP stops going down Expansion/Recovery: GDP increases, most people have jobs, and businesses are doing well

What can the government do about a bad economy and high unemployment? When the government steps in, it uses fiscal policy, which is changes in government spending or tax policies. How would the government spending money (subsidy or stimulus check) affect the economy and unemployment? How would increasing or decreasing taxes affect the economy and unemployment? 5

higher the GDP = the higher the standard of living the quality of life measured on how the possession of necessities and luxuries are satisfied higher the GDP = the higher the standard of living

Inflation continued increase of prices Government can do little to control or prevent inflation. What does inflation do to the value of the dollar? Inflation decreases the value of the dollar. It takes more money to buy the same goods and services. 8

History of United States Postage Rates (Rate for first-class postage for a one-ounce letter) Date Rate July 6, 1932 3 cents February 3, 1991 29 cents August 1, 1958 4 cents January 1, 1995 32 cents January 7, 1963 5 cents January 10, 1999 33 cents January 7, 1968 6 cents January 7, 2001 34 cents May 16, 1971 8 cents June 30, 2002 37 cents March 2, 1974 10 cents January 8, 2006 39 cents December 31, 1975 13 cents May 14, 2007 41 cents May 29, 1978 15 cents May 12, 2008 42 cents March 22, 1981 18 cents May 11, 2009 44 cents November 1, 1981 20 cents January 22, 2012 45 cents February 17, 1985 22 cents January 27, 2013 46 cents April 3, 1988 25 cents January 26, 2014 49 cents

Put the following 8 people into the appropriate category. WORSE OFF SAME BETTER OFF Put the following 8 people into the appropriate category.

How Does Inflation Affect the Following Individuals? Henry received a 1 percent pay increase last year, a 10 percent pay increase this year, and no other increases in his wages. Over that time, the inflation rate averaged 3 percent per year. With inflation, is Henry financially better off, worse off, or the same? Kayla is 75 years old and has a savings account to use in her retirement years. Each month she’s pleased to see the interest added to her savings account balance. The account pays an annual percentage rate of 2 percent. The current annual inflation rate is 4 percent. With inflation, is Kayla financially better off, worse off, or the same? Kasean has worked at the same job for five years. During that time, he received a 1 percent pay increase one year, a 3 percent increase in another year, and no other increases in his wages. Over the same time, the inflation rate has averaged 3 percent per year. With inflation, is Kasean financially better off, worse off, or the same?

Robert thinks he has a good retirement plan because he can count on an annual increase that matches the inflation rate. With inflation, is Robert financially better off, worse off, or the same? Stephanie’s retirement income is fixed at $24,000 per year. She feels financially secure knowing exactly how much her income will be each month and that her purchasing power will remain fixed. She is not planning to change her spending patterns. The current inflation rate is 3 percent. With inflation, is Stephanie financially better off, worse off, or the same? Reanna borrowed $1,000 from her sister two years ago. Today she wrote her sister a check for $1,010—$1,000 for the loan and $10 for interest. The inflation rate has averaged 3 percent each year since she borrowed the money. With inflation, is Joann financially better off, worse off, or the same?

Jenishia loaned her friend $5,000 last year and was paid back $5,020 at the end of this year. Jenishia thought her friend was generous to add an extra $20 for interest. The inflation rate for the two years averaged 2 percent per year. With inflation, is Jenishia financially better off, worse off, or the same? Ben has saved money for four years to pay for a new car. He has carefully tucked away part of his earnings each week in a cookie jar. During this four-year period, inflation has caused the price of new cars to increase about 3 percent each year. With inflation, is Ben financially better off, worse off, or the same?

WORSE OFF BETTER OFF Jenishia Henry Robert Kayla Reanna Ben Kasean SAME BETTER OFF Jenishia Henry Robert Kayla Reanna Ben Kasean Stephanie

To keep track of inflation, the government samples prices every month of 400 products commonly used by consumers this makes the Consumer Price Index (CPI).

What’s included in the CPI? The CPI is divided into 8 categories of goods: Food and beverages Housing Apparel Transportation Medical care Recreation Education and communication Other goods and services

The Eight Major Groups of the CPI Food and beverages Housing Apparel Transportation Medical care Recreation Education and communication  Other goods and services Examples Breakfast cereal Milk Coffee Chicken Wine Full-service meals Snacks

The Eight Major Groups of the CPI Food and beverage Housing Apparel Transportation Medical care Recreation Education and communication  Other goods and services Examples Rent of primary residence Owners' equivalent rent Fuel oil Bedroom furniture

The Eight Major Groups of the CPI Food and beverage Housing Apparel Transportation Medical care Recreation Education and communication  Other goods and services Examples Men’s shirts Women’s sweaters Women’s dresses Jewelry

The Eight Major Groups of the CPI Food and beverage Housing Apparel Transportation Medical care Recreation Education and communication  Other goods and services Examples New vehicles Airline fares Gasoline Motor vehicles Insurance

The Eight Major Groups of the CPI Food and beverage Housing Apparel Transportation Medical care Recreation Education and communication  Other goods and services Examples Prescription drugs Medical supplies Eyeglasses Eye care Hospital services

The Eight Major Groups of the CPI Food and beverage Housing Apparel Transportation Medical care Recreation Education and communication  Other goods and services Examples Televisions Toys Pets and pet products Sports equipment Admissions

The Eight Major Groups of the CPI Food and beverage Housing Apparel Transportation Medical care Recreation Education and communication  Other goods and services Examples College tuition Postage Telephone services Computer software Computer accessories

The Eight Major Groups of the CPI Food and beverage Housing Apparel Transportation Medical care Recreation Education and communication  Other goods and services Examples Tobacco Smoking products Haircuts Manicures Funeral expenses

Services Inflation CPI BLS Consumer Inflation rate Goods Actions that satisfy consumers’ wants Agency that collects economic data Percentage change in the average price level Person who uses goods and services Measures the change in the price level from one time period to another Objects that satisfy consumers’ wants A general rise in prices