Indicators of economic efficiency

1. Indicators of economic efficiency

INDICATORS OF
ECONOMIC EFFICIENCY
How do we measure the health of our
economy?

2.

3.

Gross Domestic
Product
market value of all final
goods and services
produced within a
country in a year
Final goods are
purchased by the last
user and will not be
resold or used to
produce anything else

4. NOT Counted in GDP

NOT COUNTED IN GDP
Intermediate goods
Resources of any kind
Used goods
Ex: Used cars, purchase of an older home, thrift store clothing,
Craigslist, Ebay
Illegal goods/services
Ex: Drugs, theft etc.
Purely financial transactions
Ex: Investment in stocks or savings
Transfer Payments
Ex: Social Security, Food Stamps
Barter
Ex: Babysitting for yardwork

5. 4 Components of GDP

4 COMPONENTS OF GDP
C: consumer spending
Daily spending on goods and services
I: business investment spending
Machinery, factories, equipment etc.

6.

G: government spending
Spending by all levels of government - military, school, highways,
supplies etc.
NX: net export spending
Purchases of U.S. goods and services by foreign buyers (exports)
minus purchases of foreign goods and services by U.S. consumers
(imports)

7. GDP= C+I+G+NX

Example:
In 2000, estimates in trillions of
dollars
GPP = C +
I +
G
+
$10.04 = $6.81 + $1.87 + $1.75 + ($1.13-$1.52)
NX

8.

Unemployment Rate
Percentage of labor force who is not
working
Labor Force: everyone 16 – 65 who is
working or actively looking for work
3 types of unemployment

9. Frictional

FRICTIONAL
People are out of work temporarily
Seasonal work
Changing jobs
Looking for 1 st job
This is acceptable unemployment

10. Structural

STRUCTURAL
Unemployment because your job skills
are no longer needed
Ex. Technology replaces workers so people
are laid off
People can go back to school and learn
new skills

11. Cyclical

CYCLICAL
People are unemployed due
to fluctuations in the
business cycle
As the economy declines,
people lose their jobs
Worst kind of
unemployment, can not
easily fix. Economy must
recover first.

12.

Consumer Price Index
Index of all goods and services produced in a country
Measured by a market “basket” of all goods and
services that are commonly bought year after year by
the typical urban household

13. Effects of Changing CPI

EFFECTS OF CHANGING CPI
Inflation
Rising price levels
purchasing power of the dollar falls
Dollar buys less
Deflation
Falling price levels
purchasing power of the dollar rises
Dollar buys more

14.

Hyperinflation: rapid inflation
ex. Germany after WWII
Stagflation: rising prices with
falling GDP and rising
unemployment

15. Relationship between GDP, Unemployment and CPI

RELATIONSHIP BETWEEN GDP,
UNEMPLOYMENT AND CPI
As GDP rises, unemployment rates fall and prices
begin to rise
As GDP falls, unemployment rises and prices begin
to decline

16. 4 Stages of the Business Cycle

4 STAGES OF THE BUSINESS CYCLE
The 1st stage: when the
economy has economic
growth
GDP is rising

17. Business Cycle

BUSINESS
CYCLE
2nd stage: GDP is
at it’s maximum

18. Business Cycle

BUSINESS
CYCLE
6 months
or more of
a
contraction
is called a
recession
If the
recession
3rd stage:is
bad
enough,
it
GDP
is falling
is a
depression

19. Business Cycle

BUSINESS
CYCLE
The bottom of the
contraction where
GDP stops falling

20. Business Cycle – 4 stages

BUSINESS CYCLE – 4 STAGES

21.

Aggregate means “total”
Total demand for ALL FINAL goods
and services in the economy
from all people in the economy
for all prices levels

22. Components

COMPONENTS
Aggregate demand consists of:
consumer spending (C)
investment spending (I)
government spending (G)
net export spending (NX).
If any component increases, GDP increases, AD curve shifts
right.
If any component decreases, GDP decreases, AD curve
shifts left

23. THE CURVE

High price level leads to lower quantity of aggregate demand
P stands for price levels in the
economy
AD is aggregate demand – total
demand for all final goods and
services in the economy
Q is real GDP (output) of all final
goods and services

24. Aggregate Supply

AGGREGATE SUPPLY
Total production of ALL FINAL goods
and services in the economy
from all poducers in the economy
for all prices levels