1. Chapter 14: Economic Stability
Lesson 9

2. Economic Stability So what does this mean?
We have mentioned previously that one of the responsibilities of government may be to ensure that this occurs
Varying factors and definitions
Since we are dealing in social science, we need to be able to attempt to objectively measure “stability”
Even though we are measuring something that is somewhat subjective, we try to be as scientific as possible

3. How to Measure it? What will happen next?!
Economic Indicators: What’s going on in different parts of the economy?
What will happen next?!

4. The Business Cycle Measures the economic “big picture”
Looks at percentage changes in the Gross National Product (GNP), over time.
GNP- The total market value of all final goods and services produced by American residents.
GNP takes into account even products produced outside the U.S.

5. “Levels” in the Business Cycle
Peak- Business activity is at a maximum
Recession- Decline in the GNP over a period of at least six months time
Trough- The lowest point in a recession. (Rock bottom!)
Recovery- Phase following the trough.
**We can look at a trough as being down by 11 runs in game three of a playoff series in which your team is about to go down 3-0 (Left), a recovery as bouncing back to win game four with a big homerun (middle), and a peak as surprising the country by winning game seven on the road (right).

6. Four (4) Important Indicators
1). Durable Goods Orders
2). Housing Starts
3). Jobless Claims
4). The Index of Leading Economic Indicators

7. 1). Durable Goods A good that is expected to last three years or more
Examples?
Demand for durable goods, in theory= an expanding economy

8. 2). Housing Starts
A house is often the most expensive good someone purchases
If the number of housing permits is going up, this indicates that the economy may be growing stronger
Strong and growing economy= greater demand for new housing.

9. 3). Jobless Claims A way to measure unemployment
These claims are filed often in seeking out insurance after losing a job.
Less claims  Lower unemployment  economy theoretically more stable.

10. 4). Index of Leading Economic Indicators
A group of privately-owned businesses has created this to measure the overall health of the economy.
Three consecutive months of increases are said to indicate growth, three consecutive months of decreases, recession.

11. What do you notice?!

12. The Consumer Price Index
Measures the prices of 300 specific goods that typical consumers purchases.
Considered to be a good measure of inflation since it deals with common goods purchased by consumers.

13. Gross Domestic Product
As opposed to the GNP, the GDP is the value of all the goods and services produced in the United States in a year.
Only the final goods are included
Meaning, the final cost at which the product is purchased, not the costs associated with producing it.

14. GDP Continued
If we were to include costs other than the final one, the GDP can be distorted.
GDP also must be adjusted for inflation and other changes in prices
Constant Dollars: Reflects the changes in purchasing power of the dollar (how much it is worth) from a base year.
This measure can be used in comparing the GDP from year-to-year without distortions due to inflation or deflation.

15. How do we calculate the GDP?
The most common approach is called the Expenditure Approach.
GDP= C+ I+ G+ NX
C= Household Spending for consumption
I= Private Investment
G= Government purchases of goods/services
NX= Net exports. How much are we selling to other countries vs. how much are we buying?
**A lot of information to calculate. Speaks to the complexity of a national economy.

16. Unemployment
Unemployment Rate: Number of people looking for work divided by the number of people in the work force.
Measures those who are over the age of 16 and actively seeking a job while being without one.

17. Unemployment Continued
Can increase even when employment increases, because the number of those in the market for labor may also increase.
Many believe governmental statistics on unemployment are misleading because of “discouraged workers” and those who are unemployed but apathetic about finding new work.

18. Types of Unemployment
Frictional Unemployment: Temporary and unavoidable. After leaving a job, just entering the workforce, after high school, college, etc.
Seasonal Unemployment: Part of the year spent in voluntary unemployment
Structural Unemployment: Changes in the economy make jobs available without individuals to fill them.
Cyclical Unemployment: widespread unemployment caused by economic downturn
Some, due to the particulars of their job, are only
employed in that capacity during a certain time of
the year. A Santa Claus impersonator at a mall
would be an example of a seasonal employee.

19. Full Employment
There is a “natural rate” of unemployment that accounts for frictional and structural unemployment.
Since these are expected, if the “natural rate” (the way it “ought to be”) matches the real rate (the way it is), then we are said to be at “full employment”.

20. Fiscal Policy
President and Congress responsible for regulating fiscal expenditures. (How much will taxes be? How much will we spend?)
When the economy is in a recession, the government can stimulate GDP
How? Lowering taxes while spending the same amount, Increasing spending while keeping taxes the about the same, Increasing spending while reducing taxation.

21. Fiscal Policy Cont.
In theory, when taxes are lowered, people have more money to spend, stimulating the economy. (Expansionary Fiscal Policy)
Conversely, taxes can also be increased to reduce inflation (Contractionary Fiscal Policy)

22. Monetary Policy
These are government policies that affect the quantity of money in circulation
The “Fed”
-Federal Reserve- Regulates interest rates, prints money (and thus, regulates money supply).
-A more hands-off approach, as opposed to the Keynesian approach of managing the economy through government intervention.

23. In Summary
There are many variables that we look to measure in trying to gauge the “health” of the economy
The complex nature of this system makes deciding what to (and what not to) regulate, difficult and controversial.