Transcript Ch. 23 Section 1

Ch. 23
Section 1
Measuring the Economy
Measuring Growth
 When the economy grows, businesses are
producing more goods and services and more
workers are hired.
 Remember, GDP is one measure of the economy’s
growth ($ value of all final goods and services
produced in a country in a single year.
 When prices increase, GDP would go up even if the
economy was not growing.
Measuring Growth (cont.)
 To avoid this false impression, economists
use Real GDP – shows an economy’s
production after the distortions of price
increases have been removed.
Business Cycle
 The economy goes through alternating periods of
growth and decline called the business cycle.
Business Cycle (cont.)
 There are four phases:
1. Expansion
 The economy is improving and business
activity increases. Real GDP is going up
 Businesses produce more and hire more
employees.
 Consumers buy more.
 Largest recent expansion lasted from March
1991-March 2001 (10 years)
Business Cycle (cont.)
2. Peak
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
Economic activity (expansion) is at its peak.
Businesses are working at full capacity.
Stores are selling at record amounts.
Peak: Highest point of the Boom cycle.
Business Cycle (cont.)
3. Decline/Contraction
 The economy slows down.
 Production is cut down.
 Workers are laid off.
 Keep this in mind, expansions are twice as
long as contractions
Business Cycle (cont.)
4. Recession
 Lowest period for production; Decline for 6
straight months or more.
 Unemployment is high.
 People do not buy as much.
 Trough: Lowest point of a recession.
 Depression: A severe recession.
Unemployment
 Another way to measure the economy is to
look at employment
 Civilian Labor Force – includes all
civilians 16 years old and older who are
either working or looking for work.
 Unemployment rate – the % of people in
the civilian labor force who are not working
but are looking for jobs
Unemployment (cont.)
 Unemployment rate reflects the health of the
economy.
 Tends to rise sharply during recessions, and then
slowly declines
 Unemployment affects the income of the economy
as a whole and of individuals
 Basically, people lose their jobs; cut back on their
purchases
Fiscal Policy
 To reduce high unemployment, the government
uses fiscal policy – the changes to the way it
taxes or spends.
 Government might cut taxes to give people more
money to spend. Hopes that people’s increased
purchases will cause businesses to hire more
workers to boost production.
 Sometimes government increases its own spending
for goods and services to convince businesses to
hire more workers to boost production.
Fiscal Policy (cont.)
 Political differences often prevent the
effective use of fiscal policy.
 Bickering in Washington D.C. among
politicians about which method to use gets
in the way of implementation
 Economic Automatic Stabilizers help us with
this problem
Price Stability
 Another indicator of the economy’s
performance is inflation – a sustained
increase in the general level of prices.
 Inflation hurts the economy because it
reduces the purchasing power of the people
and may alter the economic decisions that
people make.
 To track inflation, economists use CPI
Price Stability (cont.)
 The government samples prices every
month for about 400 products commonly
used by consumers; these prices make up
the consumer price index (CPI); a
measure of the price level
 The rate of inflation is the change in the
average level of prices as measured by the
CPI
Price Stability (cont.)
 If the price of an item doubles, you would need
twice as many dollars to buy the item; the
purchasing power of your dollar has fallen
Ex. Ice cream cones
 Harder on people with fixed incomes
 Reduces the value of money in a savings account;
money will buy less than before.
 Prices act as signals which help us make economic
decisions. High inflation distorts this process; we
begin to speculate rather than invest thus the
economy suffers
Stocks and Stock Markets
 Investors will want to buy stock in a company if
they think they will make money on it
 Profits can be earned in two ways: dividends and
capital gains
 Dividends – share of a corporation’s profits that
are distributed to stockholders
 Capital gains – when stock is sold for more than it
was originally bought.
Stocks and Stock Markets
 Supply and demand determine the price of
a company’s stock.
 Factors such as changes in sales or profits
or news of a technological breakthrough
can change demand for a company’s stock
and thus its price.
Stock Indexes
 Stock indexes are statistical measures that track
stock prices over time; this is how you follow the
performance of your stock and gives us an idea of
the well-being of the whole stock market
 The Dow Jones Industrial Average (DJIA) tracks
prices of 30 representative stocks.
 Standard and Poor’s (S&P 500) tracks the prices of
500 large stocks
Stock Exchanges

Most stocks in the U.S. are traded on the New York Stock
Exchange (NYSE) or NASDAQ (usually through a
stockbroker)

Computers today allow investors to trade major stocks
around the clock from anywhere in the world.

Stock indexes reveal investors’ expectations about the
future. If investors expect economic growth, high profits,
and low unemployment stock prices begin to rise (“BULL
MARKET”)

If pessimistic, stock prices tend to fall (“BEAR MARKET”)