Economic Indicators

Macro-Economic Goals Economic Growth Price Stability Full Employment

Major Indicators 1. Gross Domestic Product (GDP): $ value of all final goods/services within a nation 2. Housing Starts: Construction sector activity 3. Retail Sales: Value of goods bought in retail outlets 4. Unemployment Rate: % of workers without jobs (seeking)

Major Indicators 5. Consumer Price Index (CPI): Current cost of a “market basket” of goods--> relative to cost in other years (INFLATION) How has value changed? INFLATION: general rise in prices (reduces purchasing power) 1. Hyper- severe 500%/yr (rare) 2. Galloping %/yr 3. Creeping- 1-3% (common) Ex: If in 1913 I purchased an item for.25 cents then in 2010 that same item would cost $5.50. The rate of inflation change would be $2098.3% Ex: If in 2000 I purchased an item for.25 cents then in 2010 same item would cost.32 cents. The rate of inflation change would be 26.4% Ex:

Major Indicators 6. Interest Rates: Cost of borrowing money for investments 7. Trade Balance: Trade Balance = X - M 8. Exchange Rate: Value of American money against other nations

GDP Elaboration Gross Domestic Product:  Total production or output of final goods and services Intermediate Goods: Used to make final goods

Final vs. Intermediate Goods Final Goods and Services  Manicures  Bread  Cruise missile  New factory  Dresses  Increase in automobile inventory Intermediate Goods  Window glass in new automobiles  Lumber in a new house  Screws used in a cruise missile  Flour for making bread  Cloth for making dresses DON’T COPY

GDP Only measures market production  Need to be paid Ex: Not washing car or cooking dinner at home  Excludes illegal activity  Does NOT include 2nd hand sales Ex: Used cars “double counting”

Y= C+G+I+(X-M) Y = GDP C = Consumption G = Government Expenditures I = Investments X = Exports M = Imports

Computing GDP Most market prices increase over time (inflation) Nominal GDP:  Measure using prices in current year NOT adjusted for inflation Actual prices consumers pay Real GDP:  Measure using a common level of prices set in a designated “base year” Real GDPNominal GDP Year 1100 Bushels x $1.00 $ Year 2110 Bushels x $1.20 $ % Real Increase in Production 32% Nominal Increase in Production

Gross National Product (GNP) Measures total value of production for all businesses owned by citizens  EX: Japanese plant in Iowa GDP not GNP