UNIT 5Measuring and Monitoring Economic Performance

1. What is a Procyclic Indicator? Procyclic: one that moves in

the same direction as the economy So if the economy is doing

well, this number is usually increasing, whereas if we're in a recession this indicator is decreasing.

2. What is an example of a procyclic indicator? The Gross Domestic

Product (GDP) is an example of a procyclic economic indicator.

What is an Economic Indicator? An economic indicator is

simply any economic statistic, such as the unemployment rate, GDP, or the inflation rate, which indicate how well the economy is doing and how well the economy is going to do in the future.

Investors use all the information at their disposal to make decisions.

3. What is a Countercyclic Indicator? Countercyclic: one

that moves in the opposite direction as the economy. 4. What is an example

of a countercyclic indicator? The unemployment rate

gets larger as the economy gets worse so it is a countercyclic economic indicator

Section 1: Gross Domestic Product and Other Indicators5. What is the

measure of the economy that tracks income, spending, and output of the nation?

6. Define Gross Domestic Product.

To Guide Investment Strategy 7. Why would

watching economic indicators be an important part of an investment strategy?

If a set of economic indicators suggest that the economy is going to do better or worse in the future than they had previously expected, they may decide to change their investing strategy.

Gross Domestic Product: Measuring the Nation’s Output

8. What is GDP? Produced Within a

Country During a Given Period

Domestic Only production that

takes place within a country’s border

Examples Cars produced in

the U.S. by foreign owned companies are counted.

Car produced in Mexico by U.S. owned companies are not counted.

GDP depends on Market Value Calculating GDP for

Burtonia Total production = 4

apples, 6 bananas, and 3 pairs of shoes Price of apples = $0.25 Price of bananas =

$0.50 Price of shoes = $20

Measuring Only Final Goods and Services Getting a heart bypass

Doctor charges $10 for a surgery

Doctor pays his assistant $2

Contribution to GDP = $10

Components of GDP What are the components of GDP? List and identify.

9. Consumption

10. Investment

11. Government Spending

12. Net Exports

13. Which is the largest?

14. What is the Formula for calculating GDP?

GDP = gross domestic product, or output C = consumption expenditure I = investment G = government purchases X-M = foreign - net exports (total exports –

total imports)

Two Types of GDP15. What is Nominal

GDP?

16. What is Real GDP?

17. Figure 12.2 a. Answer? b. Answer? c. Answer?

What GDP Does Not Measure18. It does not measure

____________ , such as home childcare.

19. It does not measure output from ______________, activities not reported for taxation.

20. Countries with high GDPs have high ______ ________.

Real GDP is not the Same as Economic Well-Being

Leisure Time Shorter work week Start working later Retire earlier

21. Why do people work fewer hours today than their great-grandparents did? Hint: Use the concept of

opportunity cost

GDP & Basic Indicators of Well-BeingIndicator

All developing countries

GDP per person 3,530 1,170 25,860(U.S. dollars)

Life expectancy at 64.5 51.7 78.0birth (years)

Infant mortality rate 61 100 6(per 1,000 live births)

Under-5 mortality rate 89 159 6(per 1,000 live births)

Doctors 78 30 252(per 100,000 people)

Incidence of HIV/Aids 1.3 4.3 0.3(% in 15-49 age group)

Undernourished 18 38 Negligiblepeople (%)

Adult literacy rate (%) 72.9 51.7 98.6

Least developed countries

Industrialized countries

22. What does GNP measure?– Measure of National Income

Measures income – not output

Dollar value of all final goods, services, produced in one year with labor and property of a country’s residents

May be inside or outside the country

Relationship between GDP and GNP The columns measure the output of

the factors of production of the US or the UK.

The rows measure the output of factors that are located geographically within the US or UK.

For example, the upper left (100) cell of the table tells the value of output produced by US factors of production (ie: US labor or capital) that are located within the US.

The upper right cell (5) measures the value of output produced by UK factors of production (ie: UK labor or capital) that is located within the US.

Why a Gap in GNP? There are several

periods of time in which the economy of the US was booming and actual output was greater than potential.

23. In the figure, what is shown as areas falling below zero?

Other Economic Performance Measures Identify the explain:

24. Gross national product

25. Net national product

26. National Income

27. Personal Income

28. Disposable personal income

29. What is the Marginal Propensity to Save?

Fraction of each additional dollar earned that is saved

Consumer Price Index30. What indicator

measures the average of the prices paid by urban consumers for a fixed market basket of consumer goods and services?

Base period is 100 Currently fixed at 1982-

1984 8,000 goods from 8

categories of spending

Section 2 - Business Cycles31. What is a business cycle?32. What are the four stages of the

business cycle? C. During a contraction:

33. What is the term if this phase lasts 2 or more quarters?

34. If it becomes an extended downturn?

35. What is the term for the contraction phase if the prices and unemployment stay high?

If Inflation goes to a party If Inflation goes to a party alonealone- is that Stagflation?- is that Stagflation?

Time of Occurrence Matters! 36. What are Leading

indicators? Leading economic indicators

are indicators which change before the economy changes.

Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession.

Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.

What is Aggregate Demand?

37. What is the total amount of goods and services households, businesses, government and foreign purchasers will buy at each and every price level?

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Aggregate Supply38. What is aggregate supply?39. Figures 12.7 / 12.8

a. Answer?b. Answer?

40. What two components are equal in Macroeconomic equilibrium?

41. Figures 12.9 / 12.10a. Answer?b. Answer?

Why Do Business Cycles Occur? Identify the factors that contribute to business cycles and

cite an example of each.

42. Factor 1: a. Demand Slump

b. New technology

43. Factor 2: 44.

45. Factor 3: 46.

47. Factor 4: 48.

Lagging Indicators 49. What is a Lagging

indicator? Does not change direction

until a few quarters after the economy does.

The unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve.

Unemployment Rate Since 1990

Unemployment with Wage Above Equilibrium

Labordemand

Laborsupply

Minimumwage

Surplus of laborWAGE

Quantity Of Labor

50. What are Coincident Indicators? Coincident: A

coincident economic indicator is one that simply moves at the same time the economy does. The Gross Domestic

Product is a coincident indicator.

Section 3 Stimulating Economic Growth?51. Why are some nations growing at a faster pace than

others? Identify four factors which influence rate of

economic growth and cite an example of each.

52. 53. 54. 55.

Productivity and Economic Growth56. What is productivity?

57. How is productivity measured?

58. What contributes to productivity?

59. How can a nation experience economic growth without increasing its productivity?

Causes and Consequences of Inflation ( p. 396)

60. What are the 2 characteristics of inflation?

61. What is the Consumer Price Index?

62. Figure 13.7 – Answer?63. What is the measure of

changes in wholesale prices?

64. What is the rate of change in prices over a period of time?

Types of Inflation Describe each of the

types of inflation.

Creeping Galloping Hyperinflation Deflation

65. 66. 67. 68.

Are You A Little Hoarse?

69. What is demand-pull Inflation?In demand-pull inflation,

total _____ rises faster than the ______ of goods and services creating a ______ that drives up prices.

70. What is the main reason for demand-pull inflation?

71. What government office is responsible for controlling the money supply?

72. What is cost-push inflation?In cost-push inflation, prices

are pushed _____ by rising ______ costs. When these costs increase, _____ make less of a _____. If consumer _____ is strong, producers may raise their _____ in order to maintain their ______.

“Are you going to ask that question with shades on? For the viewers There’s no sun.”

Causes of Cost-Push Inflation

73. What is often a cause of cost-push inflation? Identify and define.

74. What else may lead to this inflation?

75. What is the wage-price spiral?

What is the Impact of Inflation?76. Decreasing value of the

________

77. Increasing ______ ________.

78. Decreasing Real ___________ on Savings

79. What is the Phillips Curve? A curve showing an inverse

relationship between inflation rate and unemployment rate in the short run

Inflation

Unemployment

International TradePg. 51080. A nation’s economic

patterns are based on the UNIQUE combinations of the FOP. One more time: What are the FOP?

81. What is the system which allows a nation to produce only what is the most efficient use of their resources?

82. What is an example of specialization in education?

Who Has the Advantage?

International trade is based on resources or products which one country needs and another can provide.

83. Therefore, countries specialize in the goods they can produce most efficiently. Specialization leads to dependence on other nations. What do we call this?

The United States markets wheat and farm tractors, not items it cannot produce such as coffee or diamonds.

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Theory of Comparative Advantage1817 and David Ricardo

84. What is the Law of Comparative Advantage? The country with the

lowest opportunity cost of producing a particular good should specialize in producing that good.

85. Who has the Advantage? Cocoa

a. Ghana uses 10 resources to produce a ton of Cocoa;

b. Korea uses 40 resources to produce a ton of Cocoa;

Ricea. Ghana uses 15 resources to

produce a ton of rice;

b. Korea uses 20 resources to produce a ton of rice.

86. When does a nation have a Comparative Advantage?

A country has a comparative advantage in the product that it can produce most efficiently given all of the products it could choose to produce.

Production of this product requires the lowest opportunity cost

Absolute Advantage A country has

an absolute advantage when it can produce more of a given product than other countries using a given amount of resources.

Who has the advantage here?

Absolute

Advantage

England Portugal

1 barrel of wine

1 man day 2 man days

1 bolt of cloth

1 man day 3 man days

International Trade Affects the National Economy Imports provide an

INCENTIVE for domestic producers to increase their productivity.

Trade Affects Employment87. As nations specialize they

lost jobs in some areas to gain jobs in others.

88. What type of goods are the major exports of the US today?

89. What is our major import today?

Trading Partners90. Who are our four most

important trading partners?

91. THINK: When the US dollar is strong what effect does that have on EXPORTS?

92. THINK: When the US dollar is weak, what effect does THAT have on EXPORTS?

Exchange Rates 93. How is this discrepancy between nations reflected?

Currency rates translate the cost of an import into domestic prices

Example: If the demand for Japanese

goods increases in the US, the demand for the Yen will increase

If the demand for the Yen goes up, its price in terms of US dollars will also increase