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Understanding Economic Stability: Indicators, Calculations, and Policies

This chapter discusses the concept of economic stability, including the two types of instability (recession and inflation), major indicators (GDP), ways to calculate GDP (expenditure and income approaches), unemployment, and fiscal and monetary policies. It provides a comprehensive overview of measuring and determining the current condition of an economy.

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Understanding Economic Stability: Indicators, Calculations, and Policies

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  1. Chapter 14 Economic Stability

  2. Economic Stability- anything that helps to measure & determine the current condition or health of our economy • There are 2 types of instability… • 1. Recession- 6 straight months of a negative GDP-the economy • 2. Inflation- rapid increases in the general price level. The economy is running too fast

  3. Major Indicators • GDP- Gross domestic Product-total market value of all final goods & services produced WITHIN the U.S. in a given year • 1. When GDP rises the economy is doing well • 2. When GDP falls, less goods & services are being produced

  4. Just the facts • 1. includes only final goods & services • 2. includes only things produced in the U.S. • 3. Includes things that may be deemed as harmful • 4. Does not account for changes in product quality • 5. excludes business done in the black market • 6. excludes non-market transactions i.e. a carpenter who builds his own deck • 7. inflation can distort the real growth ofGDP

  5. GDP • There are two ways to calculate GDP • 1) The expenditure approach-tabulates the way money is spent in the economy • A) consumer spending • B) Gross investment • C) Government Spending • D) Net Exports • C + Ig + G + Xn = GDP

  6. GDP • Income approach • A) wages & salaries • B) profits • C) rents • D) interest • E) taxes • F) Depreciation • All of these added = GDP

  7. Unemployment • Unemployment is the percentage of those people in the “Labor Force” unable to find jobs. • How do we define the labor force? • 1. be at least 16 years old • 2. be actively seeking work • 3. can’t be institutionalized

  8. Frictional • Temporary • A. often referred to as wait unemployment • B. actually considered healthy for the economy • C. Example Seasonal unemployment

  9. Structural Unemployment • people lose their jobs because they are replaced with new technology, or they live in the wrong place • Sometimes thought of as technological or geographic unemployment

  10. Cyclical Unemployment • People lose jobs because of a recession • This is the greatest concern to the government • My Unemployment Resource

  11. Employment • Full employment occurs when you have 95% of people working • Frictionally unemployed are not included

  12. Fiscal Policy • Governments use of taxation or spending to fight inflation and recession • Can cut taxes in a recession • May raise taxes during inflation

  13. Monetary Policy • The Fed • Discount Rate • Reserve Ratio • Open market Operations • YouTube - The Goldsmiths Tale

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