Economic Measurements

The Strength of a Nation

• Soon you will be voting and you may also decide to invest in the stock market.

• These decisions can impact your financial well being, so it is essential that you understand how an economy is measured and what factors contribute to a strong or weak economy.

• It is important to know how you, businesses, and the government influence the economy. That way you will know how to invest your money and cast your ballots.

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It is the goal of all economies to:

Increase Productivity

Decrease Unemployment

Maintain Stable Prices

When is an Economy Successful?

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Nations routinely use at least six different measurements to determine their economic strength.

1.GDP

2.Standard of Living

3. Inflation Rate

4.Unemployment Rate

5.GNP

6.Productivity

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1. Gross Domestic Product

The total MARKET VALUE of goods and services produced in this country during a given time. (GDP) Example: Selling price of a pair of Blue Jeans

It does not include items produced that are used to create other things.

For example: The GDP does not include the cost of denim, thread, labor, and other resources to make jeans. Their value is already included in the final price of the jeans.

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Shortcomings of the GDP

Does not accurately measure the well-being of a population.

Ignores most goods and services that people produce but do not sell.

Does not measure the value of leisure time. Does not accurately measure changes in

production unless adjusted for inflation. It assigns equal value to “goods” such as

medicine and “bads” such as cigarettes.

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GDP Per Capita

GDP per capita (GDP/population) is often used to compare the economies of countries and the well-being of their citizens.

GDP per capita shows the approximate amount of goods and services each person in a country would be able to buy in a year if incomes were divided equally.

It does not show how evenly a country’s income is distributed.

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What do you think the GDP was in the United States in 2004?

$11.75 TRILLION!

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2. Standard of Living

Refers to the quality and quantity of goods and services available to people.

It reflects the quality of life. It is generally measured by real (i.e. inflation

adjusted) income per person, Sometimes other measures may be used:

Access to certain goods (such as

number of refrigerators per 1000 people)Measures of health such as life expectancy.

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3. Inflation Rate

Inflation refers to a period of rising prices when the purchasing power of the dollar is falling.

A low inflation rate (1-5%) is good because it shows that an economy is stable.

Double-digit inflation (10% or higher) devastates the economy.

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Inflation Rate 1970-2004

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Controlling inflation is one of a

government's major goals.

The United States measures inflation in

two ways:

1.Consumer Price Index (CPI)

2.Producer Price Index (PPI)

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The Consumer Price Index (CPI), also called the cost-of-living index, measures the change in price of some 400 retail goods and services used by the average urban household, such as food, housing, utilities, transportation, and medical care.

The Core CPI excludes food and energy prices, which tend to be unpredictable.

Inflation Rate: Consumer Price Index

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The Producer Price Index (PPI) measures wholesale price levels in the economy. Wholesale price increases often get passed along to the consumer.

The Core PPI excludes food and energy prices, which tend to be volatile. When there is a drop in the PPI, it is generally followed by a drop in the CPI.

Inflation Rate: Producer Price Index

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CPI and PPI are barometers for inflation. The Core CPI and Core PPI take out the volatile food and energy prices from the indexes. Based on these three charts, how would you describe inflation in the United States for the latter part of the 1990s?

Inflation Barometers

Source: Labor Department

Source: Labor Department

Source: Labor Department

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4. Unemployment Rate

The higher the unemployment rate, the greater the chances of an economic shutdown. The lower the rate, the greater chance of an economic

expansion. When more people work, there are more people

spending and being taxed. Business and government both pull in more money; the

government doesn’t have to provide as many social services such as food stamps.

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Unemployment Rate 1990-2002

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One of the goals of an economy is low unemployment. After viewing this chart on the jobless rate, what can be said about the United States' attempt to reach that goal?

Jobless Rate

Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics

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The Consumer Confidence Index (CCI) measures consumer confidence about personal finance, economic conditions, and buying conditions. Retail sales are studied to see if market actions match the CCI. Housing starts, and truck and auto sales are reviewed. These expenditures tend to be affected by the economy and interest rates.

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Consumer confidence is another economic indicator that provides a view of how consumers feel about their economic prospects (employment, spending). What conclusions can be drawn from a review of these three charts? What trend is apparent? Why should marketers be concerned with changes in consumer confidence?

Consumer Confidence

Source: The Conference Board Source: The Conference BoardSource: The Conference Board

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5. Gross National Product (GNP)

Everything produced by U.S. citizens here or abroad.

It is not where the production takes place, but who is responsible for it.

A Ford plant located in England would be included in the U.S. GNP, but not in the US. GDP.

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6. ProductivityProductivity is output per worker hour. It is

usually measured over a defined period of time, such as a week, month, or year.

Businesses can increase their productivity by investing in new equipment or facilities that increase efficiency, providing additional training, and providing financial incentives.

Labor Productivity – The amount the work force can produce in a given time. (1000 widgets per hour.)

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Productivity is a crucial factor in a country's standard of living. What would you surmise about the United States' standard of living for the last five years depicted on this chart? Why do you think employee productivity is increasing?

Productivity and Standard of Living

Source: Bureau of Economic Analysis, Bureau of Labor Statistics

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Sometimes an economy grows, and at other times it slows down. These recurring changes are called the business cycle. The business cycle has four phases:

The Business Cycle

Prosperity

Recession

Depression

Recovery

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A period of economic growth and expansion. Nationwide there is low unemployment, an increase in the output of goods and services, and high consumer spending.

Prosperity

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A period of economic slowdown. Unemployment begins to rise, fewer goods and services are produced, and consumer spending decreases. Recessions can end relatively quickly or last for a long period of time.

Recession

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A period of prolonged recession. Consumer spending is very low, unemployment is very high, and production of goods and services is down significantly. Poverty results because many people are out of work and cannot afford to buy food, clothing, or shelter. The Great Depression of the early 1930s best illustrates a depression.

Depression

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A period of renewed economic growth following a recession or depression. Recovery is characterized by reduced unemployment, increased consumer spending, and moderate expansion by businesses. Periods of recovery differ in length and strength.

Recovery

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A government influences business cycles through its policies and programs. When taxes are raised, businesses and consumers have less money with which to fuel the economy.

The government may reduce interest rates, cut taxes, or institute federally funded programs to spark a depressed economy.

Factors that Affect the Business Cycles

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The federal funds rate (rate banks charge each other for overnight loans) and the discount rate (rate the U.S. Federal Reserve charges banks that borrow money from it) are used to speed up or slow down an economy. From this chart, what do you think the motivation of the Federal Reserve Board was in 1991? In 1999? Would you prefer to start a new business when interest rates are high or low?

Managing the Economy

Source: Federal Reserve, Labor Department

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A global economy makes possible a global recession, because economies of different countries depend on economic stability in other countries and imports or exports from other countries.

The Global Economy

Example: Thailand devalued its currency in 1997, causing the collapse of other Asian economies and a huge drop in the U.S. stock market.

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"I've called the family together to announce that, because of inflation, I'm going to have to let two

of you go."

 

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