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Macroeconomic Indicators That Measure Economic Performance July 6, 2009

Posted by petrarcanomics in Role of Government.
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Unemployment

There are four types of unemployment: structural, cyclical, frictional, and seasonal.

  • Structural unemployment involves mismatches  between job seekers and job openings. Unemployed workers who lack skills or have poor education relative to the next best resource alternative.
  • Cyclical unemployment happens as a result of too little spending in the economy as would happen in a recession.
  • Frictional unemployment includes people who are temporarily between jobs, have quit one job to find another, or they could be waiting for the best job opportunity after graduating from high school or college.
  • Seasonal unemployment involves workers who are unemployed because their job doesn’t exist during certain parts of the year due to changes in the weather.

Unemployment rate = # of people seeking work / # of people in the labor force (both employed and unemployed) X 100

The natural rate of unemployment, or full employment, in the US economy is considered to be an unemployment rate of approximately five percent.

For more information on employment, see Reffonomics.

Inflation

Inflation’s best measure in our economy is the consumer price index (CPI). The definition of inflation is the overall rising price levels in the economy. A healthy rate of inflation in the American economy is considered to be between +1 and +3 percent.

Deflation is a decrease in overall prices in the economy which is considered unhealthy to a growing economy because the declining prices usually lead to rising unemployment.

High inflation over 4% is considered unhealthy because of the many groups in society that are  hurt as a result of this level of rising prices.

The calculation of CPI is done by compiling the prices of a market basket of goods that consumers typically purchase. These market baskets establish an index which can be used to measure the trend of overall prices in an economy. The percentage growth in CPI is measured by the current year index being divided by a base year index times 100. % Growth CPI = current year index / base year index X 100

For more information see these pages on Reffonomics: Inflation and Price Level, Inflation Calculator, Price Level and CPI.

Gross Domestic Product

Gross domestic product is the best measure of all final goods and services produced in an economy. The percentage change in the growth of GDP is the best measure of economic activity to gauge the health of an economy. The total of goods and services for the current year can be divided by the goods and services produced in a base year divided by a price index and a population index to get the best measure of economic growth which is real GDP per capital.

There are also nominal economic measures which give you the hard dollar amount of production. There are also real measures which factor in inflation in economic indicators. For example, if nominal wages were to increase by 8% and if inflation as measured by CPI were to grow by 5%, then real wages would actually have increased  by only 3%. So real measures of the economy factor inflation to get a true picture of what has occurred in the economy.

Components of Spending

Gross domestic product has four components: consumption, investment, government, and net exports.

  • Consumption is the spending on final goods and services by consumers in the economy.
  • Investment by the business sector on resources such as land, labor, capital, and entrepreneurship.
  • Government spending
  • Net exports which is the difference between exports (positive to net exports) and imports (positive to net exports).

Business Cycles

Economies go through business cycles.

  • Expansionary phases are marked  by positive real GDP growth.
  • Peaks are achieved at the end of an expansionary phase.
  • Contractionary phases occur as the economy realizes negative real GDP growth after a peak.
  • A trough phase occurs at the bottom of a contractionary phase.
  • An expansionary recovery phase generally begins the next business cycle.

Market economies, while they are the most productive and efficient types of economies, go through the swings of business cycles.

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