Economic Goals

1   economic freedom

2  economic efficiency

3   economic equity

4   economic security

5   economic stability

6   economic growth

• Congress condensed these to: a growing economy with stable prices and full employment

Economic Measurements

• To see if we’re meeting these goals we have to measure the economy and make comparisons to previous measurements. The most commonly used measurements are:

Gross Domestic Product

• GDP is the sum total of all finished goods and services produced during a year.

• GDP = C + I + G + EX - IM

• To get the GDP we use the market value of the products as expressed in dollars.

• If that dollar value increases, then we have a growing economy – maybe.

• What about inflation? GDP has to be adjusted for inflation using a formula called a deflator. This new GDP is called real GDP and best indicates if we have growth or not.

Consumer Price Index (CPI)

• Measures changes in buying power of the dollar

• It is used to measure inflation and deflation

Calculating CPI

• A market basket of some 400 everyday purchases (housing, clothing, health care, entertainment) is used and compared on a monthly basis

Market basket current year

CPIcurrent year = ------------------------------------------ X 100

Market basket base year

• The index is expressed as a number using 1982-1984 as the base years with index set at 100

Calculating Inflation

• Inflation is the percent change in the CPI

New CPI – Old CPI---------------------------- X 100 Old CPI

• So, if our basket cost $100 in 1984 (CPI = 100) and in 2000 the same basket cost $150 (CPI = 150), we have a 50% rate of inflation over the past 16 years.

• The CPI measures at the retail level. We can do the same for producers by measuring changes at the wholesale level.

Unemployment

• Compares the number of people in the labor force to the number looking for work

• The unemployment rate is the percentage of those in the labor force, over the age of 16, actively seeking work but unable to find jobs

• One criticism is that it doesn’t include the “discouraged worker”

Frictional Unemployment

• Workers who have lost their jobs because of changing market conditions (demand) and have transferable skills

Structural Unemployment

• Same as frictional except no transferable skills

Natural Unemployment

• The sum of frictional and structural

Cyclical Unemployment

• The difference between official unemployment and natural unemployment

• This is the type of unemployment we can do something about

• Full employment: Doesn’t mean there is no unemployment. There is a natural rate because there will always be some frictional and structural unemployment

Implications of Unemployment

• Idle factors of production meaning the nation is not using its resources effectively

• Also, workers lose their income. The rest of society must decide on what to do, if anything, to support and help people not earning an income