Measures of Economic Performance

There are many different measures of economic performance, but the three primary measures of economic performance correspond to the three most important macroeconomic goals for our country.

Measures of Economic Performance
Macroeconomic Goal	Economic Indicators
Economic Growth	GDP, real GDP
Price Stability	Inflation Rate, Consumer Price Index (CPI)
Full Employment	Unemployment Rate

Economic Growth

Economic growth is best measured by gross domestic product. Gross domestic product (GDP) measures all of the new production in an economy during a given time period. GDP is the sum of all new, finished, or final goods and services produced within a country's borders in a given time period. GDP is a good measure of how an economy is doing because it looks at production right there in the country. The more they produce, the more jobs they have and the more wages people earn; this means more money to spend.

Economists use real GDP to compare GDP from year to year. Real GDP uses constant prices to account for inflation, or rising prices. Economists consider real GDP per capita (real GDP divided by the population) to be the best way to measure the standard of living in a country, as real GDP per capita measures the value of goods and services produced per household.

A chart illustrating quarter to quarter growth in real GDP

Image from www.bea.gov

The most common way to calculate GDP is to add up all of the spending in a country. Under this approach, we add up consumption spending (by households), investment spending (by businesses), government spending, and net exports (exports minus imports), or C + I + G + X_n = GDP. To determine if a good or service counts toward the U.S. GDP, consider these questions. Was it produced in the U.S.? Is it a new good? Is it a final good? Is it legal or taxable? Was anything produced? If the answer is yes to all of those questions, the good or service counts. If the good is made in another country, a used good, an intermediate good (an input used to produce another good), illegal, unreported to the government, etc., that good or service does not count.

GDP Practice

Price Stability

Price stability is measured by the inflation rate. Inflation is a rise in general or average price level. Typically the consumer price index (CPI) is used to measure inflation. The CPI compares the prices of a market basket of typical goods bought by a typical consumer. If the CPI is higher this month or this year, inflation has occurred. During times of economic growth, we may experience some inflation, but this type of inflation is usually not a problem because we want our economy to grow. What we do not want is runaway inflation or hyperinflation. When the economy slows down or goes into recession, prices may go down or into deflation. If the prices go too low, businesses may not be able to sell their products at prices high enough to meet their expenses. Price stability with economic growth is the desired condition for our economy.

Inflation Practice

Full Employment

The third macroeconomic goal for our country is full employment. Full employment does not mean zero unemployment. Rather, it refers to zero cyclical unemployment, which is one of the four types of unemployment. There will always be frictional unemployment (1), or workers who quit or are fired. Seasonal unemployment (2) occurs every year, as people lose jobs based on the weather, holidays, etc. A growing economy will always have some structural unemployment (3), or workers who do not have skills matching those needed by the current economy. Cyclical unemployment (4) occurs during economic contraction and means less jobs exist than workers; people who have been laid off are cyclically unemployed. Recently, economists considered full employment to be an unemployment rate between 4-6%. The unemployment rate is calculated by dividing the number of unemployed people by the entire labor force. The labor force is the number of people that are both employed and unemployed.

Types of Unemployment Practice

Economic Indicators Vocabulary Practice

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