Download Economic Systems: Key Terms

Warm-Up:
What do you think the term
“Economic Indicator” means?
Economic Indicators : Key Terms
Economic Indicators
Definition-is a statistic about the economy.
Economic indicators allow analysis of economic
performance and predictions of future
performance.
Examples:
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CPI (Consumer Price Index)
Unemployment
Housing Sales
Consumer Spending
Investment
Inflation
Credit Availability
Gross Domestic Product (GDP)
The total dollar value of all goods and
services produced in a particular
economy in a given year.
Formula to Calculate GDP
GDP = C + I + G + X
Four Components of GDP:
C = Personal Consumption Expenditures
I = Gross Private Domestic Investment
G = Government Consumption Expenditures
X = Net Exports (Exports minus Imports)
Real GDP vs. Nominal GDP
Real GDP: gross domestic product
expressed in in constant, or
unchanging prices.
Nominal GDP: gross domestic
product measured in current
prices.
Limitations of GDP
1. Non-market Activities: does
not measure things people
make themselves, I.e. watch
children, mow the lawn. It
does rise when they pay
others for this service though
Limitations of GDP
2. Underground Economy:
economic activity which, although
income is generated, never
reported to the government.
Examples include black market
transactions and "under the table"
wages.
Limitations of GDP
4. Quality of Life: Measures output and
income, not quality of life. Does not
take into account leisure time,
surroundings, etc.
http://www.cnn.com/video/#/video/politics/2009/10/30/sot.biden.economy.cnn
Negative Externalities
3. Unintended economic side
effects have a monetary value
that is often not reflected in GDP.
Inflation
A general increase in prices.
Inflation
Inflation
Consumer Price Index (CPI)
Measure of the changes in prices of
goods and services over a give time
period.
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Based on a “market basket” of goods and
services.
Consumer Price Index (CPI)
Producer Price Index (PPI)
A comprehensive index of price
changes at the wholesale level.
Because wholesale price changes
eventually find their way into
consumer prices, the producer price
index is closely watched as an early
indicator of future retail price
changes. Formerly called wholesale
price index.
Inflation: Purchasing Power,
Income, & Interest Rates
Purchasing Power: Is the ability to
purchase goods and services. As prices rise,
the purchasing power of money declines.
Income (fixed): As income remains the
same, and prices rise, the less purchasing
power an individual has.
Interest Rates: the greater the difference
in percentage between one’s interest rate
and the inflation rate equals greater
monetary gains & vice versa.
What Is a Business Cycle?
A macroeconomic period of expansion
followed by a period of contraction.
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A modern industrial economy experiences
cycles of goods times, then bad times,
then good times again.
There are four main phases of the business
cycle: expansion, peak, contraction, and
trough.
The Business Cycle
Phases of the Business Cycle
Expansion
An expansion is a period of economic growth
as measured by a rise in real GDP. Economic
growth is a steady, long-term rise in real
GDP.
Peak
When real GDP stops rising, the economy has
reached its peak, the height of its economic
expansion.
Phases of the Business Cycle
Contraction
Following its peak, the economy enters a period of
contraction, an economic decline marked by a fall in
real GDP. A recession is a prolonged economic
contraction. An especially long or severe recession
may be called a depression.
Trough
The trough is the lowest point of economic decline,
when real GDP stops falling.
Recession
a period of reduced economic activity
during which the level of unemployment
rises, GDP falls, and general prosperity
lags.
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Usually lasts 6 to 18 months.
Recession
http://www.cnn.com/video/#/video/politics/2009/10/31/obama.weekly.address.10.31.cnn
Depression
A recession that is especially long
and severe.
Stagflation
A decline in real GDP combined
with a rise in the price level.