Economic Goals 1 economic freedom 2 economic efficiency 3 economic equity 4 economic security 5 economic stability 6 economic growth

Congress condensed these to: a growing economy with stable prices and full employment

Economic Measurements To see if we’re meeting these goals we have to measure the economy and make comparisons to previous measurements. The most commonly used measurements are:

Gross Domestic Product GDP is the sum total of all finished goods and services produced during a year. GDP = C + I + G + EX - IM

To get the GDP we use the market value of the products as expressed in dollars. If that dollar value increases, then we have a growing economy – maybe. What about inflation? GDP has to be adjusted for inflation using a formula called a deflator. This new GDP is called real GDP and best indicates if we have growth or not.

Consumer Price Index (CPI) Measures changes in buying power of the dollar It is used to measure inflation and deflation

Calculating CPI A market basket of some 400 everyday purchases (housing, clothing, health care, entertainment) is used and compared on a monthly basis Market basket current year CPI current year = X 100 Market basket base year The index is expressed as a number using as the base years with index set at 100

Calculating Inflation Inflation is the percent change in the CPI New CPI – Old CPI X 100 Old CPI So, if our basket cost $100 in 1984 (CPI = 100) and in 2000 the same basket cost $150 (CPI = 150), we have a 50% rate of inflation over the past 16 years.

The CPI measures at the retail level. We can do the same for producers by measuring changes at the wholesale level.

Unemployment Compares the number of people in the labor force to the number looking for work The unemployment rate is the percentage of those in the labor force, over the age of 16, actively seeking work but unable to find jobs One criticism is that it doesn’t include the “discouraged worker”

Frictional Unemployment Workers who have lost their jobs because of changing market conditions (demand) and have transferable skills

Structural Unemployment Same as frictional except no transferable skills

Natural Unemployment The sum of frictional and structural

Cyclical Unemployment The difference between official unemployment and natural unemployment This is the type of unemployment we can do something about

Full employment: Doesn’t mean there is no unemployment. There is a natural rate because there will always be some frictional and structural unemployment

Implications of Unemployment Idle factors of production meaning the nation is not using its resources effectively Also, workers lose their income. The rest of society must decide on what to do, if anything, to support and help people not earning an income