1. Economic Indicators Gross Domestic Product (GDP) Housing Starts
Retail Sales
Unemployment Rate
Consumer Price Index (CPI)
Interest Rate
Trade Balance
Exchange Rate
Why do we measure the health of the economy?

2. What is gross domestic product (GDP)?
Currency value (such as U.S. dollar) of all final goods and services produced within a country in a given period
Measure of a nation’s economic growth from one period to the next

3. What’s included in GDP? Consumption by households
Goods: groceries, clothes, iPods
Services: haircuts, oil changes
Consumption (C) is the expenditure by households on consumption goods and services. It includes durables (goods lasting three or more years), nondurables, and services.

4. What’s included in GDP? Investment by businesses assets for production
New machinery, supplies
Investment (I) is the purchase of new capital goods (tools, instruments, machines, buildings, and other constructions) and additions to inventories. In other words, it is spending by firms, including final purchases on machinery, equipment and tools, all construction of new houses, buildings, and apartments, and additions to inventory.

5. What’s included in GDP?
Government expenditures by local, state, and federal government
Roads and schools
Government buildings
Government purchases of goods and services (G) are purchases of goods and services by all levels of government. It excludes transfer payments (welfare spending and unemployment compensation) because those payments do not represent new products or services; rather, they are transfers of income.

6. What’s included in GDP? Net exports (F [foreign sector])
Value of a country’s exports to other nations, minus its imports from other nations
X – M (X = exports, M = imports)
Net exports of goods and services (X-IM or NX) is the value of exports of goods and services minus the value of imports of goods and services. In the United States, it is the value by which American spending on foreign goods and services exceeds foreign spending on American goods and services.

7. What’s included in GDP?
GDP = Consumption (consumer spending)+ Investment (business spending)+ Government spending + Net exports (F) (X - M)
GDP = C + I + G + F
GDP is equal to all of the spending by households, businesses, government, and the international sector on final goods. It is also the dollar value of the nation’s goods and services produced in a given period within the nation’s borders.

8. What are the components of GDP?
Personal Consumption Expenditures
(C)
Investment
(I)
Government
(G)
Net Exports
(F)
Fixed Investment
Inventories
Exports
Imports
Expenditures on final goods and services are divided into four types: consumption, investment, government purchases, and net exports (exports – imports) of goods and services.
GDP = C + I + G + F

9. What’s not included in GDP?
Intermediate goods
Used goods
Underground production (black market)
Financial transactions
Household production
Transfer payments
Intermediate goods. Only the final goods and services purchased for final use and not for resale or further processing and manufacturing are included in GDP. Intermediate goods are not counted in GDP. Intermediate goods are goods and services that are used for further processing and manufacturing or resale, for example, the lead that will eventually go in a pencil. This process avoids double-counting and therefore exaggerating GDP. Goods produced but not sold do go into GDP in the form of inventory investment. After that, they are not included in the GDP of the year in which they are sold.
Second-hand sales/used goods. Expenditure on used goods is not part of GDP because these goods were part of GDP in the period in which they were produced and during which time they were new goods. Buying a house that is not new is not part of GDP. Also, bartered goods are not included in GDP.
The black market/underground production. Illegal drugs, illegal goods, and illegal services in the underground economy are not part of GDP. The hidden part of the economy in which people trade in illegal goods and services and try to avoid taxes and regulations cannot be correctly ascertained.
Financial transactions. When households buy financial assets such as bonds and stocks, they are making loans, not buying goods and services. Nothing new has been produced.
Transfer payments. Transfer payments are payments from the government, including education grants, Social Security payments, welfare checks, and unemployment checks. They do alter household income, but they do not reflect the economy’s production.

10. What % of GDP is each component?
Average Percent of GDP since 2003
Component % of GDP
Government %
Investment %
Consumption %
The chart shows the average percent since 2003 of GDP for each component of GDP. Consumption is the highest proportion of GDP, at 70%. Government spending accounts for 19% of GDP on average, and investment, 16%. Net exports have averaged -5%. Since imports have exceeded exports, net exports has been a drag on GDP. Changes to components of real GDP will change the overall level of real GDP.
Calculated using data from the Bureau of Economic Analysis (BEA):
Net Exports %
GDP %
Source: Bureau of Economic Analysis

11. What is a good rate of growth?
For a developed economy like the United States, a desirable rate of growth is approximately 3 % to 3.5%. The U.S. economy has grown at about a 3% average rate since 1980.

12. Real and nominal GDP
When GDP is computed in the current year’s prices, rising prices (inflation) can make it difficult to determine if a change in GDP from one year to the next is due to the country’s production of more goods and services or to increases in the price level.
Nominal GDP: GDP that is not adjusted for inflation. The value of goods and services in current prices.
Real GDP: The dollar price of GDP in a base year’s price, used to compare changes in GDP from one year to the next. An increase in real GDP is an increase in economic growth.
Nominal GDP measures the total spending on goods and services in all markets in the economy. If total spending rises from one year to the next, one of two things must be true: The economy is producing a larger output of goods and services, and/or goods and services are being sold at higher prices.
To obtain a measure of the amount produced that is not affected by changes in prices, we use real GDP, the production of goods and services valued at constant prices. We calculate real GDP by choosing one year as a base year to express the prices in. Real GDP uses constant base-year prices to place a value on the economy’s production of goods and services.

13. Gross Domestic Product
Gross Domestic Product (GDP): the dollar value of all final goods and services produced within the nation’s borders in a year
 2011 U.S. GDP: $14,991,300,000,000
,685,000,000,000
,965,000,000,000
,711,000,000,000
2013 Per capita GDP: $53,042 (World Bank)
Avg. increase in U.S. GDP since 1947: 3.23%
(economic growth rate)

14. Total GDP 2015 (USD$) United States 17,946,996,000,000
China 10,866,444,000,000
Japan 4,123,258,000,000
Germany 3,355,772,000,000
United Kingdom 2,848,755,000,000
France 2,241,682,000,000
India 2,073,543,000,000
Italy 1,814,763,000,000
Brazil 1,774,725,000,000
Canada 1,550,537,000,000

15. Per Capita GDP (USD$) Qatar 132,870 Luxembourg 99,506 Singapore 85,382
Brunei ,508
Kuwait ,542
Norway ,591
United Arab Emirates 67,217
Ireland ,806
San Marino 62,938
Switzerland 58,647

16. Per Capita GDP (USD$) 10. Madagascar 1,466 9. Eritrea 1,300
8. Guinea 1,238
7. Mozambique 1,192
6. Malawi 1,126
5. Niger 1,077
4. Liberia
3. Burundi
2. Congo
1. Central African Republic 628

17. GDP-Output Expenditure Model
Output Expenditure model—a way of calculating GDP
C + G + I + F = GDP   
C = consumer expenditures (spending)
G = government expenditures (spending)
I = private investment (business spending on capital goods)
F = foreign spending or net exports (exports minus imports)
What is the total GDP? (numbers are in trillions)
Consumer expenditures: $9936.6
Private investment:
Exports:
Imports:
Government spending:
Tax Revenue

18. GDP answer
(C) (G) (I) (F) ( – ) =
GDP = $ T

19. Unemployment
The unemployment rate reflects the number of people who want to be working but are not.
Types of unemployment
Frictional: short term, seasonal, etc.
Structural: when jobs in the economy change long term—not coming back in the same form
Cyclical: due to fluctuations in the business cycle, demand is down for goods—leads to layoffs

21. Unemployment Rate How is the unemployment rate determined?
The unemployment rate shows how many people are in the civilian labor force but who cannot find a job.
Not everyone in the country is automatically a part of the civilian labor force. Children under 16, retired persons, members of the military, persons in prison or other institutions, and people who are not working by choice are not counted as part of the civilian labor force. Only those who either have a job or who are actively looking for a job are counted in the civilian labor force.

22. Unemployment Rate Ga.: 9.2% (3/12) U.S. 8.3% (3/12)
8.7% (3/13) % (3/13)
8.7% (10/13) % (10/13)
7.3% (1/14) % (3/14)
7.9% (9/14) % (9/14)
6.4% (3/15) % (2/15)
5.5% (12/15) % (12/15)

23. Unemployment http://www.youtube.com/watch?v=Nw2MQt0dSvE

24. Unemployment Rate
Economists use the following formula to calculate the labor force and the unemployment rate:
Total Civilian Labor Force =
Employed persons + unemployed persons
Unemployment Rate =
# of unemployed workers ÷ total civilian labor force
(see handout with unemployment rate problems)

25. Inflation What is inflation? What causes inflation?
A general increase in prices of goods and services over time
What causes inflation?
Demand pull: during an economic expansion, consumer demand for goods and services will exceed the current supply of goods, driving prices up.
Cost push: the costs of production rise and businesses must raise prices to cover the costs.

26. Inflation What is a wage-price spiral?
This occurs when workers ask for wage increases, then spend the additional wages which creates greater demand for goods/services, which causes businesses to raise prices, which then causes workers to ask for wage increases, etc. A spiral!
Nominal dollars: face value--$20 is $20
Real dollars: dollars that have been adjusted for inflation and reflect their “real” value—what they can buy—purchasing power

27. Inflation What are the effects of inflation?
The value of a dollar goes down as a result of inflation, therefore…..
Savers and creditors can be hurt by inflation while debtors can be helped. Why?
A COLA can help offset the effects of inflation. What is a COLA?

28. Inflation How is inflation measured? The CPI—the Consumer Price Index
This measures the change in the prices that an average consumer pays for a predefined “market basket of goods and services.”
See handout with inflation problems

29. The Business Cycle What is the business cycle?
Consecutive phases of expansion and contraction that the economy moves through on a regular basis
What causes business cycles?
The tendency of consumers to vary the amount of income they put back into the economy with the amount they put away for future consumption—spending vs. saving

30. Phases of the Business Cycle
Expansion—confidence in the economy leads to increased spending, which leads businesses to produce more, which means they need more workers, who with their earned income, spend more in the economy. This increase in demand leads to higher prices.
Low unemployment, but higher prices

31. Phases of the Business Cycle
Peak—as prices rise, consumers start to slow their spending and the economy starts to level off. Businesses, who have been producing at a very fast pace, can now coast for awhile on their inventory.
This leads to businesses no longer needing as many workers, which leads to layoffs, and as unemployment rises, spending really slows down—a contraction, or possibly a recession.
High unemployment, decreased spending—characteristics of a contractionary phase

32. Phases of the Business Cycle
Once prices start to level off and stop decreasing (trough), spending starts to pick back up a little.
When businesses become low on inventory, they need to start producing again and need more employees, so they start to hire again. So, unemployment starts to go down. As people go back to work, they start to spend money again and demand for goods and services goes up—back to an expansionary phase.
It goes in a CYCLE!

33. Phases of the Business Cycle
Recession: Sometimes a contractionary phase of the business cycle is known as a recession due to the length of time the contractionary phase lasts—usually 6 months or more.

34. Business Cycle