Lesson 6 S2-Economic Barometers

First, define gross domestic product (GDP).

GDP (gross domestic product) is the total dollar value of all final goods and services produced in a nation in a single year.

inflation vs. deflation

Inflation is the prolonged rise in the general price level of final goods and services. Deflation is the prolonged decline in the general price level of goods and services.

What cautions must be applied when comparing a nation's GDP from one year to another?

The purchasing power of money varies in different proportion for different goods, inflationary changes must be taken out to make it a real GDP, and nominal growth versus real growth should be taken into account.

For each of the following statements, tell why each is an example of inflationary conditions.

i. decrease in the value of the dollar- When inflation occurs, the purchasing power of the dower goes down, meaning a dollar cannot buy the same amount as it did before the inflation occurred. ii. increase in the prices of goods and services- When inflation occurs, the prices of goods and services rises for a prolonged period of time. iii. government is more likely to increase taxes in order to curb spending- By doing this, the government is trying to stimulate the economy and reduce inflation. iv. decline in the standard of living for persons living on a fixed income- Higher income tax and/or lower government spending, will reduce aggregate demand, leading to lower growth and less demand pull inflation.

Is GDP a reliable economic predictor? Why or why not?

GDP ignores volunteer work, does not take into account the black market or bartering, and child rearing and housekeeping have no value. For cross-border comparisons one should especially regard whether the GDP is calculated by the purchasing power parity (PPP) method or the current exchange rate method. For example, oil producing countries may sustain high GDPs without industrializing. However, this high level will not be sustainable when the oil runs out.

Explain how inflation would affect your economic decisions?

Inflation would affect my economic decisions in many ways. First, I would cut back on my spending habits. Then, I would research which products were affected by inflation the most. I would then decide which products I need to keep buying and which products I want to keep buying. I would definitely cut back on buying products that I want but would not need. Similarly, if I was about to make a big purchase such as a new car or new home, I might decide to wait for a period of time to see if the inflation stops before buying the big ticket item.

Economic indicators are used in forecasting a nation's future economic performance. What is the difference between leading indicators, coincident indicators, and lagging indicators

Leading indicators are statistics that point to what will happen in the economy. These indicators seem to lead to a change in overall business activity-whether it is an upward or downward trend. Coincident indicators are economic indicators that usually change at the same time as changes in overall business activity take place. When these indicators begin a downswing, they indicate that a contraction in the business cycle has begun, but if they upswing, they indicate that the economy is picking up and recovery in under way. Lagging indicators are indicators that seem to lag behind changes in overall business activity. Lagging indicators give economists clues as to the duration of the phases of the business cycle.

micro vs. macro

Microeconomics is the part of economics concerned with single factors and the effects of individual decisions while macroeconomics is the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.

Why is GDP used to measure a nation's health

The (GDP) is one of 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. This means that GDP measures the nation's economic performance, which is viewed as the nation's health.

Write a short paragraph describing the phase of the business cycle that you feel best characterizes the U.S. economy today. Give specific examples to illustrate your answer

The business cycle is the natural rise and fall of economic growth that occurs over time and is managed by the government. The business cycle is made up of four phases: expansion or recovery, peak or boom, contraction or recession, and trough. I feel that the phase of expansion best characterizes the U.S. economy today. The economy has been since in the expansion phase since June of 2009. Historically, expansion phases last only about five years, but the current expansion stage has lasted over eight years. In addition to being a long expansion, the current expansion is much slower than usual. For example, since 2009, the average GDP growth is only 2.1% while previous expansions saw growth closer to 3%. Slow growth has made this economy very stable and kept inflation at bay, but it has also left investors feeling less than thrilled about their returns. The economy has not peaked because there has not been inflation, a typical warning sign that expansion is heading toward an end. However, the economy has asset bubbles, such as the U.S. dollar.

Identify the four major causes of fluctuations in the business cycle. Then select one event from United States history. In which category of causes does this event belong? Explain the change in the business cycle caused by this historical event.

The four major causes of fluctuations in the business cycle are business investments, government activity, external factors, and psychological factors. The event of World War II falls under the category of external factors. Quite naturally, the economic expansion during World War II has caused many to believe that war is beneficial to the economy. The total national output of goods and services increased during the war, leading to economic expansion and growth. The United States economy grew rapidly during World War II. There were 17 million new jobs created and farmers shared in the prosperity as crop prices doubled between 1940 and 1945. However, much of this output went to the war effort-bombs, planes, and guns-rather than consumer goods. This meant that the average American's true standard of loving did not rise by much until the late 1940s.

What is the relationship between the purchasing power of the dollar and the rate of inflation?

When inflation occurs, the purchasing power of the dower goes down. A dollars purchasing power is the real goods and services that it can buy. In other words, if there is inflation, a dollar cannot buy the same amount as it did before the inflation occurred.

Below are examples of some leading economic indicators. Explain how upward or downward movement of these indicators might be interpreted as positive or negative economic signs

a. new orders for consumer goods- This could be considered positive because new orders for consumer goods (upward) means that the consumers are buying the product and the factory needs to make more goods. This could be considered negative if the new orders are to decrease (downward) the production of the goods due to low demand. b. building permits issued for private housing units- An increase (up) in building permits issued would be positive because it would mean that more people are buying houses because the economy is doing well. A decrease (down) in building permits issued would be negative because it would mean that less people are buying houses due to a poor economy. c. stock market prices- The stock market prices rising (upward) would be positive because it would show that their value in the economy is rising. The stock market prices lowering (downward) would be negative because would show that their economic value is lowering. d. layoff rate in manufacturing- The layoff rate decreasing (downward) would be positive because it would mean that the manufacture's product is doing well in the economy. The layoff rate increasing (upward) would be negative because it would mean that the manufacture's product is not doing well in the economy and the manufacture must cut costs by laying off workers. e. number of new businesses formed- The number of new businesses increasing (upward) would be positive because it would show that the economy is doing well and profits can be made. The number of new businesses decreasing (downward) would be negative because it would show that the economy is not suitable for businesses to make a profit.