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Economic Indicators and Measurements
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Chapter 12: Economic Indicators and
Measurements
KEY CONCEPT
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National income accounting uses statistical measures of income,
spending, and output to help people understand what is happening to
a country’s economy.
WHY THE CONCEPT MATTERS
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The economic decisions of millions of individuals determine the fate
of the nation’s economy. Understanding the country’s economy will
help you make better personal economic decisions.
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Gross Domestic Product and
Other Indicators
What is GDP?
KEY CONCEPTS
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Microeconomics examines actions of individuals and single markets
Macroeconomics examines the economy as a whole
Macroeconomists use national income accounting:
– statistical measures that track nation’s income, spending, output
– gross domestic product (GDP) is most important investors
measure
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What is GDP?
The Components of GDP
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GDP—market value of final goods, services produced in set time
period
To be included in GDP, product must fulfill three requirements:
– must be final, not intermediate product
– must be produced during the time period, regardless of when sold
– must be produced within nation’s borders
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What is GDP?
Calculating GDP
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Expenditures approach often used to measure GDP; tracks four
sectors
Consumption—household spending on durable, nondurable goods,
services
Investment—business spending on capital goods, inventory
Government spending—federal, state, local; not transfer payments
Net exports—value of exports minus value of imports
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What is GDP?
Two Types of GDP
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When GDP grows, economy creates more jobs and business
opportunities
Nominal GDP—price levels for the year in which GDP is measured
– states GDP in terms of current value of goods and services
Real GDP—GDP adjusted for changes in prices
– estimate of GDP if prices were to remain constant
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What GDP Does Not Measure
KEY CONCEPTS
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GDP does not measure all output, such as
– nonmarket activities—free services with potential economic value
– underground economy—unreported market activities
GDP also does not measure quality of life
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What GDP Does Not Measure
Nonmarket Activities
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Some productive activities outside of economic markets
Examples: performing own home repairs, volunteer work
Biggest nonmarket activity is homemaking
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What GDP Does Not Measure
Underground Economy
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Illegal activities are unreported
– when goods are rationed or restricted, black market arises
Legal activities paid for in cash not always declared
Estimates suggest underground economy 8 to 10 percent of U.S.
GDP
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What GDP Does Not Measure
Quality of Life
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Countries with high GDPs have high living standards
GDP does not show how goods and services are distributed
GDP does not show what goods are being made or services offered
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Other Economic Performance Measure
KEY CONCEPTS
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Other measures of economic performance derived by adjusting GDP
Gross national product (GNP)—market value of all final goods,
services
– GDP plus products produced abroad; minus domestic products of
foreign nations
Net national product (NNP)—GNP minus depreciation of capital
stock
National income (NI)—total income from production of goods,
services
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Other Economic Performance Measures
KEY CONCEPTS
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Personal income (PI)—income received by people from all sources
Disposable personal income (DPI)—personal income minus income
taxes
– actual income available for consumer spending
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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nominal GDP and real GDP
gross national product and net national product
personal income and disposable personal income
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Business Cycles
What Is the Business Cycle?
KEY CONCEPTS
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Changes in the economy often follow a broad pattern
Business cycle—series of periods of expanding and contracting
activity
– measured by increases or decreases in real GDP
– has four phases: expansion, peak, contraction, trough; length can
vary
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What Is the Business Cycle?
Stage 1: Expansion
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Expansion is period of economic growth—increase in real GDP
– real GDP grows from a low point, or trough
Jobs easier to find; unemployment drops
More resources needed to keep up with spending demand
– as resources become scarce, their prices rise
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What Is the Business Cycle?
Stage 2: Peak
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Peak is point at which real GDP is highest
As prices rise and resources tighten, businesses become less
profitable
– businesses cut back production and real GDP drops
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What Is the Business Cycle?
Stage 3: Contraction
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During contraction, producers cut back and unemployment increases
– resources become less scarce, so prices tend to stabilize or fall
Recession—contraction lasting two or more quarters
Depression—long period of high unemployment, slow business
activity
Stagflation—stagnation in business activity with inflation of prices
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What Is the Business Cycle?
Stage 4: Trough
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Trough is point at which real GDP and employment stop declining
A business cycle is complete when it has gone through all four
phases
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Aggregate Demand and Supply
KEY CONCEPTS
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Business cycles can be explained through concept of supply and
demand
– apply concept to the economy as a whole
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Aggregate Demand and Supply
Aggregate Demand
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Aggregate demand—total amount of products that might be bought
at every level
– includes all goods and services, all purchasers
Aggregate demand curve is downward sloping
– vertical axis shows average price of all goods and services
– horizontal axis shows the economy’s total output
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Aggregate Demand and Supply
Aggregate Supply
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Aggregate supply—sum of all goods and services that might be
provided at every price level
Aggregate supply curve almost horizontal when real GDP is low
– businesses do not raise prices when economy is weak
Curve slopes upward as prices increase with rise in real GDP
Curve almost vertical with inflation—no rise in real GDP
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Aggregate Demand and Supply
Macroeconomic Equilibrium
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Macroeconomic equilibrium—aggregate demand equals aggregate
supply
– aggregate demand curve intersects aggregate supply curve
Figures 12.9, 12.10: P1 is equilibrium price level; Q1 equilibrium real
GDP
– increase in aggregate demand shifts AD curve to right
– decrease in aggregate supply shifts AS curve to left
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Why Do Business Cycles Occur?
KEY CONCEPTS
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Four major factors that affect the business cycle:
– decisions made by businesses
– changes in interest rates
– expectations of consumers
– external shocks to the economy
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Why Do Business Cycles Occur?
Factor 1: Business Decisions
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Decisions by businesses affect suppliers, related businesses
– if enough make similar decisions, can affect economy and
business cycle
Demand slump can lead to decreased production, lay offs—
contraction
New technology can raise productivity, demand, employment—
expansion
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Why Do Business Cycles Occur?
Factor 2: Changes in Interest Rates
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Rising interest rates make borrowing costly, lower aggregate demand
– decrease household purchases, business investment in capital
goods
– promote contraction
Low rates increase home sales—more people qualify for mortgage
– related economic activities increase and economy expands
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Why Do Business Cycles Occur?
Factor 3: Consumer Expectations
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Consumers’ ideas on prices, business activity, jobs influence choices
– consumers’ choices can change aggregate demand
– confident consumers tend to consume more, raising aggregate
demand
Consumer Confidence Survey report published monthly
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Why Do Business Cycles Occur?
Factor 4: External Issues
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A nation’s economy can be influenced by events beyond its control
Natural disasters can damage capital, infrastructure
– example: damage of hurricanes Katrina and Rita to Gulf Coast in
2005
Conflicts overseas and political decisions made by other countries
– example: OPEC decision to reduce amount of oil supplied to West
in 1973
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Predicting Business Cycles
KEY CONCEPTS
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Economic indicators—measures for predicting changes in business
cycle
– help businesses and government make informed choices
Leading indicators—measures that usually change before real GDP
Coincident indicators—measures that usually change at same time
as real GDP
Lagging indicators—measures that usually change after real GDP
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Business Cycles in U.S. History
KEY CONCEPTS
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National Bureau of Economic Research (NBER)
– tracks economic indicators and business cycles
Identified 20 recessions in U.S. in 20th century
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Business Cycles in U.S. History
The Great Depression
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Began with stock market crash of 1929, lasted over a decade
worldwide
– U.S. did not fully recover until entered World War II in 1941
In U.S. from 1929 to 1933
– real GDP declined by one third
– sales dropped and one in four people left jobless
– many businesses and banks failed
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Business Cycles in U.S. History
The New Deal
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President Franklin D. Roosevelt enacted New Deal programs
– focused on federal spending to revive economy; government
employed many
– federal spending tripled from the 1920s to the mid-1930s
– placed economy under closer government regulation
Debate over New Deal and economic growth; WWII reduced
unemployment
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Business Cycles in U.S. History
Business Cycles Since the Great Depression
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Since Depression, U.S. has had about a dozen contractions,
expansions
Recessions have been less severe than before 1930s
1970s contraction triggered in part by OPEC Oil Embargo of 1973
– unemployment rose to 7.4 percent; prices rose, creating stagflation
1990s great expansion, partly from growth of information technology
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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contraction and expansion
aggregate demand and aggregate supply
leading indicators and lagging indicators
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Stimulating Economic Growth
What Is Economic Growth?
KEY CONCEPTS
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Business cycle is pattern of expansion and contraction in economy
Economic growth can be measured by changes in real GDP
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What Is Economic Growth?
Gauging Economic Growth
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Early theories held that economic growth resulted from:
– collecting high taxes from growing population
– exporting more than importing
Adam Smith argued “wealth of nations” came from productive
capacities
Best measure of growth is increase in real GDP
– rate of real GDP change is good indicator of how well resources
used
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What Is Economic Growth?
Population and Economic Growth
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Population influences economic growth
– if population grows faster than real GDP, growth may mean more
workers
Real GDP per capita—real GDP divided by total population
Real GDP per capita is measure of standard of living
– everyone does not actually have that amount; does not measure
quality of life
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What Determines Economic Growth?
KEY CONCEPTS
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Four factors influence economic growth:
– natural resources, human resources, capital, technology and
innovation
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What Determines Economic Growth?
Factor 1: Natural Resources
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Access to natural resources is important
– arable land, water, forests, oil, mineral resources
Resources not enough; also need free market, effective government
– Nigeria has oil but low GDP per capita, widespread poverty
– Japan has few resources but high GDP per capita from industry
and trade
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What Determines Economic Growth?
Factor 2: Human Resources
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Labor input—size of labor force multiplied by length of work week
Population growth made up for shorter work week since early 1900s
More important than size of labor force is its level of human capital
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What Determines Economic Growth?
Factor 3: Capital
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More and better capital goods increase output
– more and better machines can produce more goods
Capital deepening—increase in the capital to labor ratio
– providing more and better equipment to each worker increases
production
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What Determines Economic Growth?
Factor 4: Technology and Innovation
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Technology, innovation make efficient use of resources, raise output
Innovations can increase economic growth
– examples: reduce time needed to complete task; improve
customer service
Information technology has had strong impact on economic growth
– advances in production lower prices, make capital deepening
cheaper
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Productivity and Economic Growth
KEY CONCEPTS
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Productivity—amount of output produced from a set amount of inputs
labor productivity: amount of goods and services produced by one
worker in an hour
capital productivity: amount produced by set amount of equipment
and materials
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Productivity and Economic Growth
How Is Productivity Measured?
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For a business, compare amount of capital, work hours to total output
Multifactor productivity—applies to an industry or business sector
– ratio between economic output and labor and capital inputs used
Multifactor productivity data compiled for major industries, sectors
– used to estimate productivity of entire economy
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Productivity and Economic Growth
What Contributes to Productivity?
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Quality of labor—educated, healthy workforce is more productive
Technological innovation—new technology helps increase output
Energy costs—cheaper power lowers cost of using tools
Financial markets—banks, stock markets flow funds where needed
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Productivity and Economic Growth
How Are Productivity and Growth Related?
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Economic growth is a measure of a change in production
Productivity is a measure of efficiency
Economy can grow
– by increasing quantity of resources, labor, capital, or technology
– by increasing productivity
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Thomas Robert Malthus: The Population Problem
A Natural Limit to Economic Growth?
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Malthus called attention to issues of population growth, scarcity
Said population would grow geometrically, food supply arithmetically
“An Essay on the Principle of Population” attacked, but unrefuted
Malthus’s estimates have turned out to be wrong
– population has grown at slower rate; food production has risen
sharply
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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economic growth and real GDP per capita
capital deepening and labor input
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Poland: Economic Freedom and Economic Growth
Background
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Poland was under Communist rule from 1948 to 1989. In 1990, it held free
elections and began moving toward a free market economy. Since then,
Poland has experienced a surge in economic growth. In 2004, it joined the
European Union.
What’s the Issue
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How successful is Poland’s economy?
Thinking Economically
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Which economic measurements and indicators are evident in documents A
and C? Explain what they convey about the strengths and weaknesses of
Poland’s economy.
What factors have driven Poland’s economic growth?
Compare documents A and C, written about six months apart. What
continued economic trends and new economic strengths do they describe?
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