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LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 267 LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS INTRODUCTION On any given day, citizens reading a newspaper or watching a newscast are likely to read or hear reports about the state of the U.S. economy. Often these reports discuss economic indicators. An economic indicator is a statistic that indicates something about the current performance of the U.S. economy. The three most commonly reported indicators are real gross domestic product (GDP), the inflation rate, and the unemployment rate. Economic indicators serve people in several ways. Investors use economic indicators to make decisions about how to invest. Consumers use economic indicators to make decisions about buying a home. Business owners use economic indicators to make decisions about how many workers to employ. And citizens may use economic indicators to make decisions about which representatives to vote for and which public policies to support. These and other uses of economic indicators will be important to students as they move toward adult participation in the economy. LESSON DESCRIPTION This lesson introduces students to three basic economic indicators: real GDP, the inflation rate, and the unemployment rate. The students work in small groups to develop an economic forecast, using the three basic economic indicators. They participate in a simulation activity involving a fictional economic forecasting firm. The firm has taken on a client who wishes to start a new business and wants to know whether this is a good idea, given the current economic climate. To advise the client, the students produce a report based on research they conduct about the state of the economy, according to the three economic indicators. CONCEPTS • Economic forecasting 268 FOCUS: UNDERSTANDING ECONOMICS IN • Gross domestic product (GDP) • Inflation • Unemployment OBJECTIVES Students will be able to: 1. Define real gross domestic product, inflation, and unemployment rate. 2. Locate current data for real gross domestic product, inflation, and the unemployment rate. 3. Examine 12-month trend data for gross domestic product, inflation, and the unemployment rate. 4. Use economic data to produce a report that describes the current state of economic activity and provides an economic forecast to a fictional client. CONTENT STANDARDS Economics (CEE Standards) • A nation’s overall levels of income, employment, and prices are determined by the interaction of spending and production decisions made by all households, firms, government agencies, and others in the economy. (Standard 18) • Unemployment imposes costs on individuals and nations. Unexpected inflation imposes costs on many people and benefits some others because it arbitrarily redistributes purchasing power. Inflation can reduce the rate of growth of national living standards because individuals and organizations use resources to protect themselves against the uncertainty of future prices. (Standard 19) • Federal government budgetary policy and the Federal Reserve System’s monetary policy influence the overall levels of employment, output, and prices. (Standard 20) CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY ECONOMIC INDICATORS Civics and Government (NSCG Standards, Grades 9-12) • Students should be able to evaluate, take, and defend positions on issues regarding the major responsibilities of the national government for domestic and foreign policy. (Standard III.B.2) • Students should be able to evaluate, take, and defend positions about the effects of significant economic, technological, and cultural developments in the United States and other nations. (Standard IV.C.3) TIME REQUIRED 60-90 minutes MATERIALS • A transparency of Visuals 18.1 and 18.2 • A copy for each student of Activity 18.1 and 18.2 • Online sources: See Procedure 3 below PROCEDURE 1. Tell the students that this lesson will focus on some key indicators that are used to measure the health of the nation’s economic system. Ask the students if they are familiar with any TV shows set in emergency rooms. Prompt them to think of the important medical information (the vital signs) that emergency room doctors use to determine the health of the patient (e.g., pulse, blood pressure, respiration, etc.). Explain that, much like an emergency room patient, the United States economy has important “vital signs” as well. These vital signs can be thought of as economic indicators. 2. To move toward an introduction of the lesson’s main concepts, ask the students whether they have ever heard or read a news story about the “health” of the U.S. economy. If anybody has, ask whether the news item mentioned inflation, unemployment, or gross domestic product. (Discuss responses briefly.) Explain that these FOCUS: UNDERSTANDING ECONOMICS IN FOR INFORMED CITIZENS LESSON 18 concepts refer to three important economic indicators—vital signs that can tell us a great deal about the “health” of the economy. Display and briefly discuss Visual 18.1, explaining that today the students will be learning about all three of these indicators. 3. Introduce the simulation activity: in order to learn about the economic indicators, the students will play the role of a partner in a fictional economic forecasting firm. Distribute Activity 18.1. Note: If you have access to a computer lab, the students should read the most recent EconEdLink Case Studies on the inflation rate, the unemployment rate, and real gross domestic product: • Case Study: The Inflation Rate http://econedlink.org/lessons/index.php? lesson=EM760&page=teacher • Case Study: The Unemployment Rate http://econedlink.org/lessons/index.php? lesson=EM770&page=teacher • Case Study: Real Gross Domestic Product http://econedlink.org/lessons/index.php? lesson=EM775&page=teacher Students will also need access to current economic data. The following are sources for current economic data: • White House Economics Briefing Room: http://www.whitehouse.gov/fsbr/esbr.html • Bureau of Labor Statistics: http://www.bls.gov/eag/eag.us.htm • Bureau of Economic Analysis: http://www.bea.gov/ • EconEdLink Data Links: http://econedlink.org/datalinks/ 4. This lesson uses a form of cooperative group learning. Explain to the students that they will be assigned to two groups. First, they will be assigned to a Home Group that represents their economic forecasting firm, Economic Forecasters, CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 269 LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS Inc. (or EFI). Each EFI group will have at least three members. The second group is an Expert Group. Within this group the students will learn about one economic indicator, and complete the appropriate Study Guide. Then they will return to their EFI groups to report what they have learned. Each student will have a data retrieval chart (see Table 18.1) in which to enter relevant information. Sample responses to Study Guides: Study Guide Answers: Unemployment Rate 1. All people without a job are considered unemployed. (circle one) TRUE / FALSE 2. The unemployment rate measures__. (The percentage of the U.S. labor force that is unemployed.) 3. The unemployment rate is calculated by______. (It is calculated by dividing the number of unemployed individuals [U] by the number of people in the labor force, which is the sum of the number of people unemployed [U] and the number of people employed [E]. The result is then multiplied by 100 to turn the unemployment rate into a percentage; unemployment rate = [U/U+E] x 100.) 7. Current unemployment rate: ________. (Answer will depend on current information; see www.bls.gov.) 8. Unemployment rate trend over the last year: ______. (Answer will depend on current information; see www.bls.gov.) Study Guide Answers: Inflation Rate 1. The Consumer Price Index (CPI) is_____. (A measure of the average level of prices paid for goods and services by households.) 2. The Consumer Price Index measures_____. (The cost of purchasing a fixed market basket of goods and services.) 3. The inflation rate is calculated by_____. (Determining the percentage change in the CPI from one month to the next or from one year to another.) 4. Calculate the inflation rate if: CPI (September 2007) = 208.5 CPI (September 2008) = 218.8 _________ (4.9%) 5. Two causes of inflation: a. Demand-pull. 4. Calculate the unemployment rate if: U = 7,000,000 __________ (4.8%) E = 145,000,000 b. Cost-push. 6. Costs when the inflation rate increases faster than expected: 5. Costs of an increasing unemployment rate: • Workers do not have the income to support themselves. • GDP is lower. • Average standards of living are lower as a result of unemployment. 5. Three types of unemployment: 270 • Frictional unemployment. • Structural unemployment. • Cyclical unemployment. FOCUS: UNDERSTANDING ECONOMICS IN a. People on fixed incomes are worse off. b. Interest rates increase. c. Business investment decreases. d. Purchasing power decreases. 7. Current (12-month) inflation rate: ____. (Answer will depend on current information; see www.bls.gov.) 8. Inflation rate trend over the last three years: _____. (Answer will depend on current and historical information; see www.bls.gov.) CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY ECONOMIC INDICATORS Study Guide Answers: Real Gross Domestic Product (GDP) 1. The gross domestic product (GDP) is____. (The output of final goods and services produced in the U.S. in one year.) 2. Real GDP is______. (Output adjusted for inflation.) 3. The components of GDP are: _____ consumer spending. _____ investment spending. _____ government purchases of goods and services. _____ net exports (exports – imports). Complete the formula: GDP = + Xn [net exports]) (C + I + G 4. GDP is an important measure of the nation’s economic health because ________. (Output is crucial to employment, earnings, income, spending, and other key measures of overall economic well-being.) FOR INFORMED CITIZENS LESSON 18 5. Assign the students to their EFI groups. (Note: It is possible that an EFI group may have more than three members if the number of students in the class is not divisible by three). At the same time, assign the students to one of the three Expert Groups (Inflation, Unemployment, real GDP). Note that each EFI group is required to have one expert in each of the three categories of unemployment, inflation, and real GDP. This means that students must be evenly distributed across expert groups. Once these groups have formed, display Visual 18.2. Announce that the groups will now break up into their assigned expert groups. 6. Allow the students 15 minutes to read the description of their indicator, discuss it, and complete the row in Table 18.1 that pertains to their indicator. Note that the students will need access to the Internet in order to complete the section asking for current information and recent trends of their indicator. For sample responses, see Table 18.1. 5. Increasing GDP indicates _______. (Greater output, higher productivity, and/or more employment, higher standard of living, etc.) 6. Decreasing GDP indicates _______. (Less output, lower productivity, and/or less employment, lower standard of living, etc.) 7. Current level and growth rate of real GDP: _______. (Answer will depend on current information; see www.bea.gov.) 8. Trend in the growth of real GDP over the last three years: _______. (Answer will depend on current and historical information; see www.bea.gov.) FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 271 LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS TABLE 18.1 KEY ECONOMIC INDICATORS Indicator Indicator How measures? calculated? An increase in this indicator means…? A decrease in this indicator means…? More output in U.S., more “product” (goods and services) produced; living standards may be higher. Less output in U.S., less “product” (goods and services) produced; living standards may be lower; potential for recession. Answers will depend on current information. An unexpectedly large decrease in the rate of inflation can lead to people having more purchasing power than they expected; people on fixed incomes are relatively better off than they expected; interest rates go down. Answers will depend on current information. Workers are better off; GDP is higher; average living standards may be higher. Answers will depend on current information. Real GDP Growth in U.S. output of final goods and services (adjusted for inflation) in a given year. Sum of all consumption spending, investment spending, and government purchases of goods and services added to net exports (exports –imports). Inflation Rate An unexpectedly large increase in inflation can lead to reduced purchasing power; people on fixed incomes without cost-ofliving adjustments (COLAs) are hurt; {[CPI (Year 2) – interest rates CPI (Year 1)] / go up. CPI (Year 1)} x 100 Percentage change in average level of prices of goods and services purchased by the typical household. The consumer price index (CPI) is the most widely reported measure of the overall price level. Compares the cost of purchasing a fixed market basket of goods and services to its cost in a previous month or year: Unemploy- The percentage Labor force = ment of the United unemployed + Rate States labor employed; force that is unemployed. unemployment rate = {unemployed / (unemployed + employed)} x 100 272 FOCUS: UNDERSTANDING ECONOMICS IN Workers do not have the income to support themselves; GDP is lower; average living standards may be lower. CIVICS AND GOVERNMENT © COUNCIL FOR Current data (and trend) for the indicator? ECONOMIC EDUCATION, NEW YORK, NY ECONOMIC INDICATORS 7. Once the students have completed their respective sections of Table 18.1, have them return to their EFI groups; in the EFI groups they should share what they have learned with other members of the group. Each member should then complete the remaining sections of Table 18.1 based on the reports of the other two members. 8. Once students complete Table 18.1, each EFI group will prepare a report written to the fictional client (“Ms. J. Q. Public”). Each group should use the report template provided at the end of Activity 18.2. CLOSURE Once the reports have been completed, ask the students to share their recommendations. How many recommended opening the new business? Why? (Answers will vary, based on the current performance of the economy.) Quickly review the definitions of each of the economic indicators. Ask the students what the trend was for each indicator. Ask them to explain their recommendations based on these trends. (E.g., if real GDP has fallen for two quarters, EFI might recommend that Ms. Public be cautious about starting a new business.) ASSESSMENT Multiple-Choice Questions 1. Which of the following statements is not true? A. Unemployment can lead to financial and family problems. B. Unemployment leads to higher standards of living. C. The labor force includes those who are working or actively looking for work. FOR INFORMED CITIZENS LESSON 18 2. If the Consumer Price Index (CPI) for one year was 150 and for the next year it was 157.5, the inflation rate from one year to the next is A. 5.0%. B. 7.5%. C. 57.5%. D. 157.5%. 3. Gross domestic product is calculated by adding together A. consumer spending, government spending, and all imports. B. consumer spending, government spending, and all investments. C. consumer spending, investment spending, and net exports. D. consumer spending, investment spending, government purchases of goods and services, and net exports. Constructed-Response Question Read the following fictional headline: U.S. output increases for the 10 th consecutive quarter Define the economic indicator used in the headline. Then explain the headline: what does it mean, literally, and what does it suggest about the U.S. economy? (This headline refers to real GDP. The headline means that the U.S. economy has been experiencing an economic expansion for the past 2 1/2 years. Associated with this expansion, there probably has been an improvement in average living standards, increased spending in various sectors of the economy, and, perhaps, a reduction in the unemployment rate.) D. Unemployment is associated with less output in the overall economy. FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 273 LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS VISUAL 18.1 ECONOMIC INDICATORS: THE VITAL SIGNS ECONOMY OF THE U.S. Economic Indicator: A statistic that describes the current performance of the U.S. economy. Three Main Economic Indicators: 1. Real Gross Domestic Product (GDP) This indicator measures the output of the final goods and services produced in the U.S. economy in a given time period (typically, one year). 2. The Inflation Rate This indicator measures how rapidly the overall price level is changing in the U.S. economy. 3. The Unemployment Rate This indicator measures the percentage of the U.S. labor force that wishes to work, but are currently without jobs. 274 FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY ECONOMIC INDICATORS FOR INFORMED CITIZENS LESSON 18 VISUAL 18.2 LETTER FROM A CLIENT From the Desk Of: J. Q. Public, CEO Acme Industries, Inc. November 19, 2008 The Economic Forecasters, Inc. 123 Any Street Muncie, Indiana To Whom It May Concern: I am the CEO of a successful business. My firm manufactures and distributes many consumer products. I would like to have the company open another factory, but our Board of Directors is concerned that the U. S. economy is too weak to support its expansion. Recent economic reports—especially in the popular media—paint a mixed picture. Therefore, I would like to hire your firm to produce a report that describes the current state of the U.S. economy and forecasts the performance of the economy over the next 12 months. I would appreciate a complete report, so please include several charts or graphs that will help me see the trends in the economy. I will then share these results with the Board of Directors. I look forward to receiving your report. Sincerely, Jocelyn Q. Public Chief Executive Officer Acme Industries, Inc. FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 275 LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS ACTIVITY 18.1 INTRODUCTION TO KEY ECONOMIC INDICATORS Directions: Read each of the three descriptions below, paying close attention to the economic indicator you have been assigned in your Expert Group. In your Expert Group, work to complete both the Study Guide and Table 18.1 for that indicator. Be prepared to share your findings when you return to your EFI group. 1. The Unemployment Rate1 The unemployment rate is the percentage of the United States labor force that is unemployed. It is calculated by dividing the number of unemployed individuals (U) by the sum of the number of people unemployed (U) and the number of people employed (E). This result is then multiplied by 100 to turn the unemployment rate into a percentage: Unemployment Rate = [U/U+E] x 100 The U.S. labor force equals the number of people who are unemployed added to the number of people who are employed. An individual is counted as unemployed if he or she is 16 years old or older and is actively looking for a job, but cannot find one. Students, individuals who choose not to work, and retirees are not in the labor force, and therefore not counted in the unemployment rate. Unemployed workers often do not have sufficient income to support themselves or their families; this can lead to financial challenges, marital problems, and even criminal activity. State and federal governments provide unemployment compensation (insurance) to some unemployed workers. Because most workers pay the taxes that fund the unemployment compensation, some of the cost of unemployment is spread to employed taxpayers as well. Increases in unemployment mean that real GDP is lower than it otherwise could be. If more individuals had been employed, the nation’s economic output would be higher. Average standards of living are lower as a result of unemployment. There are three types of unemployment, each of which describes the particular circumstances of individuals and their employment situations. • Frictional unemployment is temporary unemployment arising from the normal job search process: it may include people who are seeking better or more convenient jobs, or those who are graduating from school and just entering the job market. • Structural unemployment results from changes in the economy caused by technological progress and long-term shifts in the demand for goods and services. With structural unemployment, some jobs in certain sectors of the economy are eliminated and new jobs are created in faster-growing areas. Persons who are structurally unemployed may lack skills for new types of jobs and may face prolonged periods of unemployment. • Cyclical unemployment is unemployment caused by a general downturn in economic activity. This type of unemployment can hit many different industries during a period of overall economic weakness. 1 Description created using S. Buckles (2006), “A Case Study: The Unemployment Rate,” EconEdLink. Accessed at http://econedlink.org/lessons/index.cfm?lesson=EM219&page=teacher on April 20, 2007. 276 FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY ECONOMIC INDICATORS FOR INFORMED CITIZENS LESSON 18 ACTIVITY 18.1, CONTINUED INTRODUCTION TO KEY ECONOMIC INDICATORS Study Guide: The Unemployment Rate (fill out the Study Guide in your Expert Group; you will share this information with your EFI group). 1. All people without a job are considered unemployed. (circle one) TRUE / FALSE 2. The unemployment rate measures___________________________________________. 3. The unemployment rate is calculated by_______________________________________. 4. Calculate the unemployment rate if: U = 7,000,000 E = 145,000,000 _________________________________________________________. 5. Costs of an increasing unemployment rate: • • • 6. Three types of unemployment: • • • 7. Current unemployment rate:_______________. 8. Unemployment rate trend over the last year:________________________________. FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 277 LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS ACTIVITY 18.1, CONTINUED INTRODUCTION TO KEY ECONOMIC INDICATORS 2. Inflation: The Consumer Price Index (CPI)2 Inflation is a rise in the average prices of all goods and services. The consumer price index (CPI) is the most widely reported measure of inflation. The CPI compares the prices of a fixed set of goods and services (called a “market basket of goods and services”) to the prices of those same goods and services in a previous month or year. Any increase in the cost of purchasing this market basket of goods and services means an overall increase in the average level of prices paid by consumers, and thus inflation is said to be present. The inflation rate is calculated by determining the percentage change in the CPI from one month to the next or from one year to another. For example, the CPI for November 2005 was 199.2 The CPI in November 2006 was 201.7. Therefore, the percent change in the CPI was: [(201.7 – 199.2) / 199.2] x 100 = [2.5 / 199.2] x 100 = = 1.3% The inflation rate from November 2005 to November 2006 was 1.3%. In other words, the average price of the market basket of goods and services rose 1.3% during that one- year period. Over short periods of time, inflation can be caused by increases in costs or increases in spending. Demand-pull inflation occurs when overall increases in demand pull up the average level of prices. If spending increases faster than the economy’s capacity to produce more goods and services, there will be upward pressure on prices. Cost-push inflation is caused by increases in costs of major inputs used throughout the economy. Increases in costs push up the average level of prices. For example, throughout much of 2007 and 2008, inflation rates increased largely because of increases in the price of oil. Because oil is an important input for many goods and services, an increase in its price leads to price increases for many other things. In the long run, inflation can also be caused by excessive growth of the money supply. Costs of Inflation. Inflation that is greater than people expected reduces the purchasing power of money. Because prices rise over time, consumers require a larger income to purchase the goods and services necessary to maintain a constant standard of living. People on fixed incomes such as pensioners or workers without cost-of-living adjustments (COLAs) are especially hurt by unexpected inflation. High inflation makes it difficult for businesses and consumers to predict the future and can discourage long-term saving and investment. High inflation leads to high interest rates. Lenders receive higher interest payments, part of which is compensation for the decrease in the value of the money lent (due to inflation). Borrowers have to pay higher interest rates and lose any advantage they may have from repaying loans with money that is not worth as much as it was prior to the inflation. 2 Description created using S. Buckles (2006), “A Case Study: The Inflation Rate,” EconEdLink. Accessed at http://econedlink.org/lessons/index.cfm?lesson=EM222&page=teacher on April 23, 2007. 278 FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY ECONOMIC INDICATORS FOR INFORMED CITIZENS LESSON 18 ACTIVITY 18.1, CONTINUED INTRODUCTION TO KEY ECONOMIC INDICATORS Study Guide: The Inflation Rate. Fill out the study guide in your expert group; you will share this information with your EFI group. 1. The Consumer Price Index (CPI) is_____________________________________. 2. The Consumer Price Index measures______________________________________._ 3. The inflation rate is calculated by_________________________________________. 4. Calculate the inflation rate if: CPI (September 2007) = 208.5 CPI (September 2008) = 218.8 __________________________________________________________ 5. Two causes of inflation: a. b. 6. Costs when the inflation rate increases faster than expected: a. b. c. d. 7. Current (12-month) inflation rate: _______________. 8. Inflation rate trend over the last three years:________________________________. FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 279 LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS ACTIVITY 18.1, CONTINUED INTRODUCTION TO KEY ECONOMIC INDICATORS 3. Economic Output: Real Gross Domestic Product (GDP)3 Real gross domestic product (real GDP) is a measure of economic output. It is defined as the market value of final goods and services produced in the United States in a year, adjusted for inflation. Real GDP is total output adjusted for inflation by holding prices constant. • Gross measurement includes the total amount of goods and services produced, some of which replace goods that have depreciated or have worn out. • Domestic production includes only goods and services produced within the United States. • Current production is measured during the year in question. • It is a measurement of the final goods and services produced because it does not separately include the value of an intermediate good that is part of a transaction between parties that do not involve the final customer. We count only the final sale. Changes in real GDP from one year to the next reflect changes in the market value of the output of goods and services holding the prices of goods and services constant. Therefore, any changes in real GDP can only arise from a change in the quantities of goods and services produced. Prices are held constant in constructing real GDP measures. Real GDP per capita is the real GDP per person in the economy and is commonly thought of as the best measure of overall economic wellbeing in a country. The GDP is calculated by totaling up consumption spending, investment spending, government purchases of goods and services, and spending on U.S. exports. To arrive at the amount actually produced in the United States (that is, U.S. Gross Domestic Product), our spending on imports is subtracted from those other amounts of spending. Thus, GDP = Consumption spending + investment spending + government purchases of goods and services + (export spending – import spending) Consumption spending consists of household spending on final goods and services. These purchases can account for 60 to 70 percent of GDP and include goods such as new cars, furniture, food, and clothing; and services such as rent paid on apartments, airplane tickets, legal advice, and entertainment. Services are the largest and fastest growing component of consumption spending. Investment spending accounts for approximately 15 percent of GDP and can fluctuate a lot over time. It includes the production of tools, equipment, new business structures, machinery, etc., that are used in the production of other goods and services. These items are expected to yield a stream of returns over time, which is why expenditures in this category are referred to as economic 3 Description created using S. Buckles (2006), “A Case Study: Gross Domestic Product,” EconEdLink. Accessed at http://econedlink.org/lessons/index.cfm?lesson=EM225&page=teacher on April 23, 2007. 280 FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY ECONOMIC INDICATORS FOR INFORMED CITIZENS LESSON 18 ACTIVITY 18.1, CONTINUED INTRODUCTION TO KEY ECONOMIC INDICATORS investment. GDP does not include financial investment such as purchases of stocks and bonds The investment category of GDP also includes the building of a new homes or apartments. Inventory changes are also found in investment expenditures. Government purchases of goods and services includes federal, state, and local government spending on goods and services such as research, roads, defense, schools, and police and fire departments. This spending (approximately 20 percent of GDP) does not include transfer payments such as Social Security, unemployment compensation, and welfare payments, which do not represent production of goods and services. National defense spending now accounts for approximately 5 percent of GDP. State and local government spending on goods and services accounts for about 12 percent of GDP, while federal government purchases of goods and services are about 8 percent of GDP. Exports are goods and services produced in the United States and purchased by foreigners. Currently exports account for about 10 percent of GDP. Imports are items produced by foreigners and purchased by U.S. consumers; they account for about 16 percent of GDP. Net exports (exports minus imports) have consistently been negative over the past three decades and are now about negative 6 percent of GDP. Real GDP per capita is a measure of the claim on final goods and services of the average member of the U.S. population. This is the best measure of overall material standards of living and is commonly used in making comparisons of living standards across countries and over time. While there are several measures of overall economic performance (such as inflation, unemployment, personal income, etc.), none is a more important indicator of our economy’s health than rates of change in real GDP. When our real GDP increases, we are producing more “product” as a nation, and we are usually better off. Changes in real GDP are discussed in the press and on the nightly news after every announcement of the latest quarter’s newly released or revised data. Any change in the growth of real GDP will be discussed in news reports as an indicator of the health of the national economy. Real GDP trends are prominently included in discussions of potential slowdowns and economic booms. Economic commentators use decreases in real GDP as indicators of recessions. For example, the most popular (although technically inaccurate) definition of a recession is at least two consecutive quarters of declining real GDP. FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 281 LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS ACTIVITY 18.1, CONTINUED INTRODUCTION TO KEY ECONOMIC INDICATORS Study Guide: Real Gross Domestic Product (GDP). (Fill out the study guide in your expert group; you will share this information with your EFI group.) 1. The gross domestic product (GDP) is______________________________________. 2. Real GDP is_________________________________________________________. 3. The components of GDP are a. __________________________________________. b. __________________________________________. c. __________________________________________. d. __________________________________________. Complete the formula: GDP = 4. GDP is an important measure of the nation’s economic health because _______________________________________________________________. 5. Increasing GDP indicates _____________________________________________________________________. 6. Decreasing GDP indicates _____________________________________________________________________. 7. Current level and growth rate of real GDP: _____________________________________________________. 8. Trend in the growth of real GDP over the last three years:______________________________________. 282 FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY ECONOMIC INDICATORS FOR INFORMED CITIZENS LESSON 18 ACTIVITY 18.1, CONTINUED TABLE 18.1 KEY ECONOMIC INDICATORS Indicator Indicator How measures? calculated? An increase in this indicator means…? A decrease in this indicator means…? Current data (and trend) for the indicator? Real GDP Inflation Rate Unemployment Rate FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 283 LESSON 18 ECONOMIC INDICATORS FOR INFORMED CITIZENS ACTIVITY 18.2 ECONOMIC FORECAST REPORT Directions: Use the completed Study Guides and Table 18.1 to develop a report to Ms. J. Q. Public. As a group, come to a consensus about your recommendation. Use the template below to prepare your report. Economic Forecasters, Inc. Economic Forecast Report Prepared for Ms. J. Q. Public Output of the United States economy, as measured by __________________ is currently ___________. The trend in output over the last 12 months has been _____________________________________________________________________________________________ ____________________________________________________________________________________________. The overall effect of this trend implies that_____________________________________________________ ____________________________________________________________________________________________. The average level of prices in the U.S., as measured by ________________________________________________________________, is rising at a current rate of ______________________________________________. The trend in the U.S. price level over the last 12 months has been_________________________. ________________________________________________________________________. The overall effect of this trend implies that____________________________________ ________________________________________________________________________. 284 FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY ECONOMIC INDICATORS FOR INFORMED CITIZENS LESSON 18 ACTIVITY 18.2, CONTINUED ECONOMIC FORECAST REPORT The percentage of the U.S. labor force that wishes to work, but is unable to find a job, as measured by _________________________________________________________, is currently _______________________________________________________________. The trend in this percentage over the last 12 months has been___________________ ________________________________________________________________________. The overall effect of this trend implies that____________________________________ ________________________________________________________________________. Given these economic statistics, Economic Forecasters, Inc. (EFI) recommends _____________________________________________________________________________________________ _____________________________________________________________________________________________ _____________________________________________________________________________________________ _____________________________________________________________________________________________ _____________________________________________________________________________________________ _____________________________________________________________________________________________ _____________________________________________________________________________________________ Signed, _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ EFI Economists FOCUS: UNDERSTANDING ECONOMICS IN CIVICS AND GOVERNMENT © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 285