Chapter 12 – Measuring Economic Performance

1. For the class final project, the measurement will be: Percent increase in GDP Chapter 12 – Measuring Economic Performance

2. When is an economic indicator a true measure, and when is it misleading? • Sometimes economic measures can be misleading (i.e., indicate economic “bubbles”), such as the stock market in 2000:

3. National Income Accounting A system that collects macroeconomic statistics on production, income, investment and savings. There are various ways to measure: • GDP (value of all goods and services produced in an economy). • Gross National Product (GNP) is similar, also measuring goods and services produced. But GNP represents ownership of companies making production rather than physical location of the plant (Think Toyota making trucks in Kentucky) and doesn't count depreciation of tools. GNP is not ordinarily used any more in national measures.

4. National Income Accounting cont'd • Stock market indexes: Dow Jones, NASDAQ, S&P500, etc. • Manufacturing jobs • Unemployment level • Poverty level or “Living wage” • Technological progress: (more inventions, medical cures, etc.) • etc.

5. Consumer goods • Durable goods: Goods that are purchased and last for years, such as a house, car, television, etc. • Undurable goods: Goods that are purchased to be consumed quickly, such as good, gasoline, concert tickets, etc. Orders for more durable goods might also mean more industrial tools have been ordered for more factories to open, leading to more jobs and economic growth, but the U.S. economy is based upon mostly consumer spending.

6. Measuring GDP • Nominal GDP: The current dollar value of GDP • Real GDP: The value of GDP expressed in constant dollar values, as measured against a constant such as the Consumer Price Index. • Real GDP Per Capita: Living standards can still fall if Real GDP is rising, if population growth is faster than Real GDP is rising. In the U.S., population is growing at 1 percent per year.

7. Macroeconomic terms • Macroeconomics: The study of how economies work as a whole, not just single markets (which is called Microeconomics). • Aggregate Supply: The total supply of goods and services available in an economy. • Aggregate Demand: The total demand for goods and services in an economy. • Price level: The average of all prices in an economy. Some price aggregates are measured in the Consumer Price Index (which doesn't measure all prices, just regular consumer goods)

8. More terms • AG/AS Equilibrium: The theory that any changes in aggregate supply or aggregate demand will have an impact on GDP.

9. Business cycles • Business cycle: The idea that economies undergo periodic expansion and contractions (Keynesians say government needs to intervene to smooth out the troughs, while Austrians blame severe recessions on government-created bubbles before the bust) • The book says that there have been 31 business cycles between 1854 and 1991 (and several since then), excluding war-time, and they average about 48 months.

10. Business Cycle Terms • Expansion: A long-term increase in economic growth, usually as measured in Real GDP growth. • Peak: The height of an economic expansion, just before the crash. • Contraction: A reduction in the GDP, negative Real GDP growth. • Recession: Two consecutive quarters of negative Real GDP growth. • Depression: A very long recession (but otherwise undefined) • Stagflation: A decline in GDP with an large increases in prices (U.S. in the 1970s_

11. What causes business cycles? It depends on your perspective: • Business investment: Businesses that invest more expect to expand, while businesses that cut investment expect lower demand for their products. • Consumer expectations: This is key for Keynesians. If consumers are fearful, they will cut demand, and create a “liquidity trap” of lowered GDP cycles. Austrians agree this will happen, but only to a limited extent because of bargain hunters.

12. What causes business cycles? • Interest rates and credit: This one is big for both Austrian and Keynesian economists. Keynesians say low interest rates and easy credit induce higher demand as consumers buy more, and producers make more to meet rising demand. Austrians say that government-lowered interest rates and easy credit creates investment bubbles that are not backed up by market forces. (Think about the movieOverdose: The Next Financial Crisis)

13. What causes business cycles? • External Shocks: With a global economy, what happens in other countries often impacts what happens in the United States, just as the Greek crisis has brought much of Europe into recession. (This especially happened in the Great Depression of 1929-1941)

14. Leading indicators • This is the term used for the best predictors for economic contractions and low economic growth.

15. Capital Deepening • Defined: The process of increasing the amount of capital per worker (think: “Education Effect” in labor terms) • Saving: Income not used for consumption, which is key to the process of capital deepening • Savings Rate: The rate at which a nation saves, as opposed to consumes. (Austrians think this should generally be higher for more growth)