UNIT CECONOMIC FOUNDATIONS AND FINANCING

5.02 Explain the relationship between economic measurements and economic growth.

The Goals of a Healthy Economy

•Increase productivity.•Decrease

unemployment.•Maintain stable prices.

The relationship between economic measurements and

economic growth

•Productivity•Gross domestic product (GDP)•Gross national product (GNP)

•Standard of living•Inflation

•Unemployment rate•The Conference Board

Productivity

The output per worker hour that is measured over a defined period time, such as a week, a month, or a year.

Ways to increase productivity

•Invest in new equipment or facilities so that employees can work more efficiently.

•Provide additional training or financial incentives to boost staff productivity.

•Reduce the workforce and increase responsibilities for the workers who remain.

Productivity (cont.)

Ways to increase productivity (cont.)

•Specialization and division of laborWork can be completed faster and more

efficiently when people specialize in performing a particular task.

Example: Assembly line production in which each part of a finished product is completed by a person specializing in one aspect of the product’s manufacturing

**HIGHER PRODUCTIVITY IMPROVES PROFIT.

Gross domestic product (GDP)

The output of goods and services produced by labor and property located within a country.

•Principal way of measuring output in the U.S.

•The U.S. Bureau of Economic Analysis reported that in 2003 the GDP grew 3.1 percent, which was the highest growth since 2000. The total output in 2003 was $11 trillion, which was $1 trillion more than in 2001.

GDP (cont.)

Factors used in determining GDP

•Private investment

Spending by businesses for items such as equipment and software

Home construction

Business spending is critical to the overall health of the economy.

GDP (cont.)

Factors used in determining GDP (cont.)

•Government spending

Money spent by local, state, and federal governments

Entitlements such as Social Security, Medicare, and veterans’ benefits

Defense spending (military)

Discretionary spending such as NASA and the National Park Service

Interest payments on the national debt (the deficit)

GDP (cont.)

Factors used in determining GDP (cont.)

•Personal spending

All consumer expenditures for goods and services

The foundation of the U.S. economy

Confident consumers spend more money

•Net exports of goods and services

GDP (cont.)

Factors used in determining GDP (cont.)

•Changes in business inventories

Expanding inventories indicate that businesses are producing goods and storing them in warehouses. This increases the GDP.

Shrinking inventories indicate that consumers are buying more than is actually being produced. This decreases the GDP.

GDP (cont.)

Add private investment+ government spending+ personal spending+ trade surplus

(or subtract a trade deficit)+ expanding inventories

(or subtract shrinking inventories)

To calculate GDP:

Gross national product (GNP)

The total dollar value of goods and services produced by a nation, including goods and services produced abroad by U.S. citizens and companies.

•The primary measurement of productivity in the U.S. prior to 1991

Standard of livingA measurement of the amount and quality of goods and services that a nation’s people have.

•Reflects the quality of life of a country

•To calculate, divide GNP or GDP of a country by its population. The result is the per capita (per person) GDP or GNP.

•Industrialized nations have a high standard of living due to high levels of production.

Standard of living (cont.)

•Other factors often considered by other countries when determining standard of living

Social services provided by the government

Number of households with durable goods such as automobiles, washing machines, refrigerators, and dishwashers

Inflation

The rate at which prices are rising.

•A low inflation rate (one to five percent per year) shows that an economy is stable.

Inflation (cont.)

•A high inflation rate (double digits – 10 percent or higher) is very detrimental to an economy.

Money has less value when inflation is high.

From the mid-1960s to the early 1980s, the inflation rate was high. Prices tripled in the U.S. during this time.

People on a fixed income are especially hurt by high inflation.

When the inflation rate is rising, governments often raise interest rates to discourage consumers from borrowing money. This slows down economic growth, which helps bring inflation rates down.

Inflation (cont.)

•Measures of inflation

Consumer price index (CPI): A measurement of the change in price over a period of time for approximately 400 specific retail goods and services used by the average U.S. household; sometimes referred to as the cost of living index.

Producer price index (PPI): A measurement of wholesale price levels in the economy.

A rise in producer prices generally results in a rise in consumer prices.

A drop in producer prices generally results in a drop in consumer prices.

Unemployment rate

• Monitored by all nations

• When the unemployment rate is high, the economy will generally slow down.

The percentage of people who are willing and able to work but cannot find a job.

Unemployment rate (cont.)

•When the unemployment rate is low, there is a greater chance for economic expansion.

People spend more money and pay more taxes.

Businesses and government take in more money.

Government does not have to provide as many social services.

The Conference Board

•A private research organization made up of businesses and individuals working together to assess the state of the economy

The Conference Board (cont.)

Conference Board economic indicators

•Consumer Confidence Index

Measures how optimistic or pessimistic consumers are with respect to the economy in the near future

Optimistic consumers purchase more goods and services. This increase in spending stimulates economy.

The Conference Board (cont.)

Conference Board economic indicators (cont.)

•Consumer Expectations IndexMeasures the overall consumer attitude toward

the short-term future economic situation

Compiled of data gathered from a survey of 5,000 households on questions regarding expected business and employment conditions as well as anticipated income in the near future

Businesses use the survey to give themselves an idea about current market conditions, which allows them to make more informed business decisions.

The Conference Board (cont.)

Conference Board economic indicators (cont.)

•Jobs index

Wages and new payroll jobs provide information about the strength of the economy at any given point in time.

When everyone is employed, wages should increase due to the shortage of workers.