6.02 Understand economic indicators to recognize economic trends and conditions.

6.00 Understand economics trends and communication.

5-170 5-171 DefiningInflation: A persistent increase in the average price level in

the economy.Inflation Rate: The percentage change in the price level

from one period to the next.Deflation: A persistent decrease in the average price level

in the economy.Consumer Price Index: An index of prices of goods and

services typically purchased by urban consumers. Standard of Living: The amount of goods and services

that a nation’s people haveTargeted Inflation Rate: An acceptable rate of increase

that the country attempts to controlPrice Stability: The condition in which the average price

level in the economy changes very slowly, if at all.

InflationDescribe causes of inflation.

◦ Inflation results when the economy has too much demand for available production.

◦ The two causes of inflation: Demand-pull inflation results when economy-wide

shortages are created by increases in aggregate demand.

Cost-push inflation results when an economy-wide shortages are created by decreases in aggregate supply, which are so named because they are more often than not triggered by increases in production cost.

InflationExplain how inflation impacts the

economy.◦Makes products more expense, shifting how

consumers will spendDescribe the relationship between price

stability and inflation.◦Price stability means that inflation rates will be

lowExplain problems associated with

deflation.◦Manufacturers will be earning smaller profits or

losing money as deflation occurs

DeflationExplain problems associated with

deflation. ◦Deflation can haphazardly redistribute

income and wealth. If some prices decrease more than others, then income and wealth is redistributed to the owners of those resources with the smaller price decreases.

◦Deflation creates uncertainty. If prices unexpectedly decline, then consumers and producers alike might be less willing to pursue long-term activities, because they just do not know what will happen to the price level.

InflationDiscuss reasons why the inflation

rate should be above zero.◦Indicates that demand is growing

Explain how businesses can use the Consumer Price Index.◦It provides timely information for

consumers, businesses, and government leaders who make decisions that are sensitive to inflation.

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=inflation

CPIDiscuss the purpose of the Consumer Price

Index (CPI). ◦The CPI is commonly used as: (1) an indicator of the

price level and economic activity, (2) a method of converting nominal economic indicators to real terms, and (3) a means of adjusting wage and income payments for inflation.

Describe how the Consumer Price Index is determined.◦an index of prices of goods and services typically

purchased by urban consumers. This index, compiled and published monthly by the Bureau of Labor Statistics, provides a relatively accurate indication of the average price level in the economy, and thus inflation.

CPI

total expenditures onmarket basket in current period

CPI = total expenditures on x 100

market basket in base period

CPIIdentify the major kinds of

consumer spending that make up the Consumer Price Index.◦measures goods typically purchased

by urban consumers

5-170 5-171Explain how the Consumer Price Index is used

to find the rate of inflation.◦ CPI measures the prices of a fixed market basket

of goods◦ If their price is going up, inflation is occurring

Describe limitations on the use of the Consumer Price Index.◦ CPI excludes goods purchased by rural consumers.

It also excludes capital goods purchased by the business sector and the whole myriad of purchases made only by the government and foreign sectors.

◦ Measures about 60% of the economy and misses 40%

5-172 5-173 DefineGross Domestic Product (GDP):

◦ the market value of the goods and services produced BY a country.

Personal Consumption Expenditures: ◦ measures household consumption expenditures on

gross domestic product. Personal consumption expenditures are far and away the largest and most stable of the four expenditures, averaging about 65 to 70 percent of gross domestic product.

Gross Private Domestic Investment: ◦ measuring capital investment expenditures. Gross

private domestic investment is expenditures on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period

DefineGovernment purchases of goods and services:

◦ Expenditures made by the government sector on final goods and services, or gross domestic product. Government purchases are used to buy the goods and services needed to operate the government (such as administrative salaries) and to provide public goods (including national defense, highway construction).

◦ Government purchases annually account for about 10 to 15 percent of the total or aggregate expenditures on gross domestic product.

Net exports of goods and services: the official government measure of net exports with the foreign sector, the difference between exports and imports.◦ They are positive when exports are greater than imports

and negative when exports are less than imports.

DefineTrade deficit:

◦ importing more than we exportTrade surplus:

◦exporting more than we importUncounted production:

◦production not tracked or counted in economic measurements

Underground economy: “off the books”Double counting:

◦shows up two ways in the measurements

GDP Identify the categories of goods and services that

make up GDP.◦ Consumption – largest component◦ Investment◦ Government◦ Net exports – exports minus importshttp://www.quickmba.com/econ/macro/gdp/

Describe problems encountered in calculating GDP.◦ Getting all production reported

Underground or uncounted Explain the importance of a country's GDP.

◦ one the primary indicators used to gauge the health of a country's economy It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy.http://www.investopedia.com/ask/answers/199.asp#ixzz1hBoT3IGy

5-172 5-173Describe ways to increase GDP.

◦Invest in infrastructure, enforce laws, lower taxes (usually short-term)

Describe how the government responds to changes in GDP.

Describe ways that businesses respond to changes in GDP.

5-174 5-175 DefiningUnemployment rate:Frictional unemployment:Structural unemployment: Cyclical unemployment:Seasonal unemployment:Technological unemployment: Full employment:

5-174 5-175Discuss individual costs of

unemployment.Describe economic benefits of

unemployment.

5-174 5-175Explain theories of the causes of

unemployment.Explain why the unemployment

rate understates employment conditions.

Describe the costs of unemployment for a nation.

5-176 5-177 DefiningInterest rate:Nominal interest rate: Real interest rate:Interest-rate fluctuation: Default risk, liquidity risk: Maturity risk:

5-176 5-177Discuss causes of interest-rate

fluctuations.Explain the impact of interest

rate fluctuations on an economy.Describe the relationship

between interest rates and the demand for money.

5-176 5-177Describe the relationship between

inflation and interest rates.Discuss factors that create differences

in the amount of interest charged on credit transactions (e.g., levels and kinds of risk, borrowers’ and lenders’ rights, and tax considerations).

Describe kinds of risk associated with variances in interest rates (i.e., default, liquidity, and maturity).

5-176 5-177Explain how fiscal policies can

affect interest rates.

5-178 5-182 Definingbusiness cycles, expansion, peak, contraction and trough.

5-178 5-182Identify the phases of a business

cycle.Describe the expansion phase of

a business cycle.Describe the peak phase of a

business cycle. 

5-178 5-182Describe the contraction phase of

a business cycle.Describe the trough phase of a

business cycle.Explain how knowledge of

business cycles benefits businesspeople.

5-178 5-182Describe internal causes of

business cycles.Explain external causes of

business cycles.