Basics of EconomicsBasics of EconomicsKey terms and ideasKey terms and ideas

Economic Indicators

❖The strength or weakness of an economy is often measured by “economic indicators” –

❖pieces of data that relate whether the economy is expanding or contracting

Gross Domestic Product

❖ The market value of the all goods and services produced in a country in a given period of time

❖ “per capita” = “for each head” = per person

❖ Is an indicator of a country’s standard of living

❖ What is good? What is bad?

❖ Generally expect 3% rise in GDP each year

❖ If it decreases for 6 months or 2 consecutive qtrs. = ….

❖ RECESSION

Examples of GDP

Country Total GDP (in millions of U.S. dollars)

Rank by IMF

GDP per capita (in U.S.

$)

Rank by IMF

United States 14,657,800 1 47,284 9

China 5,878,257 2 4,382 94

Brazil 2,090,314 7 10,816 53

Switzerland 523,772 19 67,246 4

Zimbabwe 5,574 141 594 163

Unemployment Rate❖ According to the U.S.Bureau of Labor Statistics:

Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.

❖ Persons who were not working and were waiting to be recalled to a job from which they had been temporarily laid off are also included as unemployed.

❖ Receiving benefits from the Unemployment Insurance (UI) program has no bearing on whether a person is classified as unemployed.

❖ What if you were unemployed for 2 months. You became frustrated with the job search and you decided to give up and just move in with your parents. Are you counted in unemployment rates?

❖ No,,,,,categorized as discouraged

❖ Example: 100 people in labor force

10 people do not have a job and are looking

10 people are “discouraged”

the unemployment rate is ……..

10%.....

❖ July 2011 - United States: 9.1%

❖ June 2011 - Ohio: 8.8%

UNEMPLOYMENT

❖ So what’s good, what’s bad?

❖ Natural Rate of Unemployment –

❖ Approx. 5%

Inflation❖ Inflation measures the value of a country’s

currency over time

❖ Usually a measure of the RISE in prices for goods or services

❖ CPI : Consumer Price Index

❖ Base Year = 100 (ex yr 2008)

150 (ex yr 2013) Conclude….?

Prices rose 50% in the last 5 years

❖ Let’s try it! Calculate Inflation Rates

Consumer Price Index (CPI)❖ a measure of the average change over time in the

prices paid by urban consumers for a market basket of consumer goods and services.

❖ Whose buying habits does the CPI reflect? The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The all urban consumer group represents about 87 percent of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of people living in rural nonmetropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals. Consumer inflation for all urban consumers is measured by two indexes, namely, the Consumer Price Index for All Urban Consumers (CPI-U) and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). (from www.bls.gov)

❖ Let’s Look at the CPI!

Inflation

❖ So what’s good? Bad?

Generally expect 2% per year

Producer Price Index

❖ What do you think it is?

❖ Why do you think this would be an important indicator?

Interest Rates

❖ An “interest rate” is the percentage at which a loan is repaid to the lender

❖ For example, when people get a mortgage (loan for a house) they pay the bank the total amount borrowed PLUS a percentage of the total mortgage amount

Interest Rates

Also indicates what types of “Returns” you can expect from saving accounts and bonds

So what’s good? What’s bad? Rising, Falling?

Depends on who you ask?

❖ Usually during times of economic growth, interest rates begin to rise…….but if they are rising and you want to borrow money……? Good? Bad?

❖ If you are the bank……? Good? Bad?

❖ If you are saving money……..?

❖ Usually during times of economic recession, interest rates begin to fall………if they are falling and you want to borrow money….? Good? Bad?

❖ If you are the bank……? Good? Bad?

❖ If you are saving money……?

Housing Data❖ 1) foreclosure rates

❖ Rising/falling…good/bad?

❖ 2) new construction

❖ Rising/falling…good/bad?

❖ 3) real estate transfers

❖ Rising/falling…good/bad?

Stock Markets

❖ S+P 500, CAC 40, DAX, FTSE, Hang Seng, Shang Hai Composite, DOW, Nikkei

❖ Rising = “Bull” good/bad? Why?

❖ Indicates companies are making money and spending money …leads to more growth and employment

❖ Falling = “Bear” good/bad? Why?

❖ Indicates companies are losing money and not spending money….leads to less growth and less employment