{"id":33,"date":"2015-04-21T17:32:36","date_gmt":"2015-04-21T17:32:36","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterybusiness1xngcxmaster\/?post_type=chapter&p=33"},"modified":"2015-10-02T20:51:33","modified_gmt":"2015-10-02T20:51:33","slug":"reading-measuring-the-health-of-the-economy","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wmintrobusinessx51xmaster\/chapter\/reading-measuring-the-health-of-the-economy\/","title":{"raw":"Reading: Measuring the Health of the Economy","rendered":"Reading: Measuring the Health of the Economy"},"content":{"raw":"

Measuring the Health of the Economy<\/h2>\r\nEvery day, we're bombarded with economic news. We're told that the economy is struggling, unemployment is high, home prices are low, and consumer confidence is down. As a student learning about business, and later, as a business manager, you need to understand the nature of the U.S. economy and the terminology used to describe it. It's important to have some idea of where the economy is heading and know something about the government's role in influencing its direction.\r\n

Economic Indicators<\/h2>\r\nAn\u00a0economic indicator<\/span> is a statistic that provides valuable information about the economy. The majority of economic indicators are collected and released by government and\/or non-profit groups. In the U.S., Department of Commerce and the Department of Labor track and publish key indicators such as the unemployment rate and GDP. There is no shortage of economic indicators, and trying to follow them all would be an overwhelming task. Thus, economists and businesspeople typically track only a select few that are most pertinent to their professional, financial and economic interests.\r\n

Economic Goals<\/h2>\r\nAll the world's economies share the following three main goals:\r\n
    \r\n\t
  1. Growth<\/li>\r\n\t
  2. High employment<\/li>\r\n\t
  3. Price stability<\/li>\r\n<\/ol>\r\nEconomic indicators provide information about how an economy is performing relative to these goals. Let's take a closer look at each of these goals, both to find out what they mean and to show how we determine whether they're being met.\r\n

    Growth<\/h3>\r\nOne purpose of an economy is to provide people with goods and services\u2014cars, computers, video games, houses, rock concerts, fast food, amusement parks. One way in which economists measure the performance of an economy is by looking at a widely used measure of total output called\u00a0gross domestic product (GDP)<\/span>. GDP is defined as the market value of all goods and services produced by the economy in a given year. In the United States, it's calculated by the Department of Commerce. GDP includes only those goods and services produced domestically; goods produced outside the country are excluded. GDP also includes only those goods and services that are produced for the final user; intermediate products are excluded. For example, the silicon chip that goes into a computer (an intermediate product) would not count, even though the finished computer would.\r\n\r\nBy itself, GDP doesn't necessarily tell us much about the state of the economy. But\u00a0change<\/em> in GDP does. If GDP (after adjusting for inflation) goes up, the economy is growing. If it goes down, the economy is contracting.\r\n

    High\u00a0Employment<\/h3>\r\nTo keep the economy going strong, people must spend money on goods and services. A reduction in personal expenditures for things like food, clothing, appliances, automobiles, housing, and medical care could severely reduce GDP and weaken the economy. Because most people earn their spending money by working, an important goal of all economies is making jobs available to everyone who wants one. In principle,\u00a0full employment<\/span> occurs when everyone who wants to work has a job. In practice, we say that we have \"full employment\" when about 95 percent of those wanting to work are employed.\r\n

    The Unemployment Rate<\/h4>\r\nThe U.S. Department of Labor tracks unemployment and reports the\u00a0unemployment rate<\/span>: the percentage of the labor force that's unemployed and actively seeking work. The unemployment rate is an important measure of economic health. It goes up during periods of economic decline because companies are reluctant to hire workers when demand for goods and services is low. Conversely, it goes down when the economy is expanding and there is high demand for products and workers to supply them.\r\n\r\nFigure 1 below traces the U.S. unemployment rate between 1970 and 2010. If you want to know the current unemployment rate, go to\u00a0CNNMoney<\/a>,\u00a0click on \"Economy,\" and then on \"Job Growth.\"\r\n\r\n[caption id=\"\" align=\"aligncenter\" width=\"500\"]\"Graph<\/a> Figure 1. The U.S. Unemployment Rate, 1970\u20132010[\/caption]\r\n

    Price Stability<\/h3>\r\nA third major goal of all economies is maintaining\u00a0price stability<\/span>. Price stability occurs when the average of the prices for goods and services either doesn't change or changes very little. Rising prices are troublesome for both individuals and businesses. For individuals, rising prices mean you have to pay more for the things you need. For businesses, rising prices mean higher costs, and, at least in the short run, businesses might have trouble passing on higher costs to consumers. When the overall price level goes up, we have inflation<\/span>. Figure 2 below shows inflationary trends in the U.S. economy since 1960. When the price level goes down (which rarely happens), we have deflation<\/span>.\r\n\r\n[caption id=\"\" align=\"aligncenter\" width=\"500\"]\"Graph<\/a> Figure 2. The U.S. Inflation Rate, 1960\u20132010[\/caption]\r\n

    The Consumer Price Index<\/h2>\r\nThe most widely publicized measure of inflation is the\u00a0consumer price index (CPI)<\/span>, which is reported monthly by the Bureau of Labor Statistics. The CPI measures the rate of inflation by determining price changes of a hypothetical basket of goods, such as food, housing, clothing, medical care, appliances, automobiles, and so forth, bought by a typical household.\r\n\r\nThe CPI base period is 1982 to 1984, which has been given an average value of 100. The table below \"Selected CPI Values, 1950\u20132010\u2033 gives CPI values computed for selected years. The CPI value for 1950, for instance, is 24. This means that $1 of typical purchases in 1982 through 1984 would have cost $0.24 in 1950. Conversely, you would have needed $2.18 to purchase the same $1 worth of typical goods in 2010. The difference registers the effect of inflation. In fact, that's what an\u00a0inflation rate<\/em> is\u2014the percentage change in a price index<\/em>.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Selected CPI Values, 1950\u20132010<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
    Year<\/th>\r\n1950<\/td>\r\n1960<\/td>\r\n1970<\/td>\r\n1980<\/td>\r\n1990<\/td>\r\n2000<\/td>\r\n2001<\/td>\r\n2002<\/td>\r\n<\/tr>\r\n
    CPI<\/th>\r\n24.1<\/td>\r\n29.1<\/td>\r\n38.8<\/td>\r\n82.4<\/td>\r\n130.7<\/td>\r\n172.2<\/td>\r\n177.1<\/td>\r\n179.9<\/td>\r\n<\/tr>\r\n
    Year<\/th>\r\n2003<\/td>\r\n2004<\/td>\r\n2005<\/td>\r\n2006<\/td>\r\n2007<\/td>\r\n2008<\/td>\r\n2009<\/td>\r\n2010<\/td>\r\n<\/tr>\r\n
    CPI<\/th>\r\n184.0<\/td>\r\n188.9<\/td>\r\n195.3<\/td>\r\n201.6<\/td>\r\n207.3<\/td>\r\n215.3<\/td>\r\n214.15<\/td>\r\n218.1<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n
    \r\n

    LINK IT UP<\/h3>\r\nYou can find out the current CPI by going to\u00a0CNNMoney<\/a>.\u00a0 Click on \"Economy\" and then on \"Inflation (CPI).\"\r\n\r\n<\/div>\r\n

    Consumer Confidence Index<\/h2>\r\nA private research firm called the\u00a0Conference Board publishes a\u00a0consumer confidence index\u00a0<\/span>based on results of a monthly survey of five thousand U.S. households. The survey gathers consumers' opinions on the health of the economy and their plans for future purchases. It's often a good indicator of consumers' future buying intent. When consumers are confident, they tend to spend more money and increase economic activity. When consumers are less confident, they typically spend less money and economic activity declines.\r\n
    \r\n

    LINK IT UP<\/h3>\r\nFor information on current consumer confidence, go to the Conference Board<\/a>\u00a0and click on \"consumer confidence.\"\r\n\r\n<\/div>\r\n

    Economic Forecasting<\/h2>\r\nEconomists use a variety of indicators, such as those described above, to assess the performance of the economy at a given time. By looking at changes in GDP, for instance, we can see whether the economy is growing. The CPI allows us to gauge inflation. These measures help us understand where the economy stands today. But what if we want to get a sense of where it's headed in the future? To a certain extent, we can forecast future economic trends by analyzing several leading economic indicators.\r\n

    Lagging and Leading Indicators<\/h2>\r\nStatistics that report the status of the economy a few months in the past are called lagging economic indicators. One such indicator is\u00a0average length of unemployment<\/em>. If unemployed workers have remained out of work for a long time, we may infer that the economy has been slow. Indicators that predict the status of the economy three to twelve months in the future are called leading economic indicators. If such an indicator rises, the economy is likely to expand in the coming year. If it falls, the economy is likely to contract.\r\n\r\nTo predict where the economy is headed, we obviously must examine several leading indicators. It's also helpful to look at indicators from various sectors of the economy\u2014labor, manufacturing, and housing. One useful indicator of the outlook for future jobs is the number of new\u00a0claims for unemployment insurance<\/em>. This measure tells us how many people recently lost their jobs. If it's rising, it signals trouble ahead because unemployed consumers can't buy as many goods and services as they could if they had paychecks.\r\n\r\nTo gauge the level of goods to be produced in the future (which will translate into future sales), economists look at a statistic called\u00a0average weekly manufacturing hours<\/em>. This measure tells us the average number of hours worked per week by production workers in manufacturing industries. If it's on the rise, the economy will probably improve. For assessing the strength of the housing market,\u00a0building permits<\/em> is often a good indicator. An increase in this statistic\u2014which tells us how many new housing units are being built\u2014indicates that the economy is improving. Why? Because increased building brings money into the economy not only through new home sales but also through sales of furniture and appliances to furnish them.\r\n\r\nFinally, if you want a measure that combines all these economic indicators, as well as others, the Conference Board publishes a U.S.\u00a0leading index<\/em>. To get an idea of what leading economic indicators are telling us about the state of the economy today, go to the Conference Board<\/a>\u00a0and click on \"U.S. Indicators\" and then \"leading economic index.\"\r\n
    \r\n

    KEY TAKEAWAYS<\/h3>\r\n