MEP - Measuring Economic Performance Module Overview

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Measuring Economic Performance

Introduction

One way in which economists measure the performance of an economy is by looking at a widely used measure of total output called gross domestic product (GDP). It is important to identify and examine the key measures of economic performance: gross domestic product, employment, and price stability.

Watch the video below to learn how we measure economic growth.

 

Module Lessons Preview

In this module, we will study the following topics:

Gross Domestic Product: In studying the concept of gross domestic product, it is also important to learn how gross domestic product is measured, have a clear understanding of its components, and be able to distinguish between real and nominal gross domestic product.

Business Cycles: From a conceptual perspective, the business cycle is the upward and downward movements of levels of GDP (gross domestic product) and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around a long-term growth trend.

Unemployment: Let's examine the nature and causes of unemployment, the costs of unemployment, and how the unemployment rate is measured, including the criticisms associated with the measurement of the unemployment rate. It is also important to understand the concept of the natural rate of unemployment and the factors that affect it.

Inflation and its Effects: Let's examine inflation and how it is measured. In this section, we will look at the costs of inflation; the main price indices, such as the consumer price index (CPI) and the gross domestic product deflator. We will also learn how these indices are constructed and used to convert nominal values into real values, as well as to convert dollar values in the past to dollar values in the present. It is also important to highlight the differences between the two price indices as a measure of inflation, as well as the problems associated with each measure.

Policies to Promote Economic Growth: A country experiences economic growth if it has increased its long-run ability to produce goods and services, no matter the current short-run phase of the nation’s business cycle.

 

Key Terms

Income- rent, profits to the entrepreneur, interest, wages/ earnings from working

Gross Domestic Product (GDP)- the total market value of all final goods and services produced in the economy in one period or year.

Unemployment- the percentage of the Labor Force that cannot find a job.

Inflation- a general rise of prices across an entire economy.

Intermediate Goods-goods that are in the midst of production, unfinished.

GDP Expenditure Formula- Personal Consumption (C) +Gross Private Domestic Investment (I) + Government Spending (G) +Net Exports (Exports-Imports) (Xn) C+I+G+Xn

Nominal GDP- GDP expressed in the dollar value of a given year. Ex. 2017 GDP in 2017 dollars.

Real GDP- GDP for one year expressed in the dollar of another, base year Ex:2010 GDP in 2005 dollars

Price Index- A price index is a number that tells us how much prices have changed (%) since a base year.

Civilian Labor Force- over 16 years old, not institutionalized, and must be working or seeking work.

Unemployment Rate Calculation- number of unemployed/ labor force

4 Types of Unemployment –

  • Frictional - Workers are in between jobs. Most common during expansions
  • Structural - Workers have been replaced by machines, or their job skills are no longer needed
  • Cyclical - Workers are laid off because of a general slump in business
  • Seasonal - Workers are unemployed because their job is out of season

Natural Rate of Unemployment (NRU)- 3.5- 4%

Full Employment – does not equal 0% unemployment. There will always be a natural rate of unemployment of 3.5- 4%.

Consumer Price Index (CPI)- measures price changes for consumer products.

GDP Deflator- the broadest measure of price changes.

Demand Pull Inflation- when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods".

Cost Push Inflation- inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods.

Deflation- reduction of the general level of prices in an economy.

Hyperinflation- when a country experiences very high and usually accelerating rates of inflation, rapidly eroding the real value of the local currency, and causing the population to minimize their holdings of local money.

Infrastructure- the basic physical systems of a business or nation; transportation, communication, sewage, water and electric systems are all examples of infrastructure. These systems tend to be high-cost investments; however, they are vital to a country's economic development and prosperity.

Business Cycle- Fluctuations in Real GDP are referred to as Business Cycles.The duration and intensity of each phase of the Business Cycle are not always clear.

Expansion, Contraction/Recession, Peak, Trough, Depression- stages in a business cycle.

Expansion: periods of increasing Real GDP.Unemployment decreases, businesses expand, and Personal Consumption increases. As expansions continue, there tend to be upward pressures on prices (inflation) and interest rates.

Contraction: A Contraction is a period of declining Real GDP.Consumer spending decreases, and unemployment increases as businesses layoff workers and shorten work hours. Interest rates and prices level off, and often decline during long contractions.

Recession: Six months of declining real GDP

Peak: A peak is a period when the economy starts to level off. Businesses postpone new investments, and consumer saving tends to increase.

Trough: A Trough is the bottom of a Contraction.Lower interest rates and prices bring customers back to markets.

Depression: Twelve months of declining Real GDP coupled with at least 15% unemployment.

Real VS Nominal Wage Rate- need to know difference. Real accounts for inflation and removes it.

Real VS Nominal Interest Rate- need to know difference. Real accounts for and removed inflation.

Transfer Payments- a redistribution of income and wealth (payment) made without goods or services being received in return. These payments are considered to be non-exhaustive because they do not directly absorb resources or create output.

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