Measurement of Economic Performance
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Table of Contents
This section covers the following topics:
- The business cycle
- Gross domestic product (GDP)
- Adjusting for inflation
- Measuring inflation
- The cost of inflation
- Types of unemployment
- Unemployment and the economy
Section Summary
Macroeconomics is the study of the economy as a whole. At this level, we can never assume that “all else is constant,” because one change creates another and so on. We begin with the business cycle, or the progression from economic expansions (GDP increases) to recessions (GDP falls) to expansion again. Despite this crazy rollercoaster ride, the secular growth trend (the long-run average rate of GDP growth) shows that GDP is steadily increasing.
But what is this “GDP” in the first place? Gross Domestic Product (GDP) is a measure of all the purchases made over the course of a year. GDP has four components: consumption, investment, government spending and net exports. GDP can be measured either by adding up the price of all final goods or summing the value added at each stage of the production process.
Nominal GDP is gross domestic product in terms of current prices, while real GDP adjusts for inflation. Economists also watch net domestic product (GDP – deflation) and gross national product (GDP + foreign factor income).
Inflation is a sustained rise in the price level, while deflation is the opposite. Inflation is measured using various indices, such as the GDP deflator or consumer price index. Since prices are rising, inflation makes the money in your pocket less valuable and redistributes income from those who can’t raise prices to people who can. Inflation also reduces the real interest rate people pay to borrow money. If inflation is unexpected, people will simply react, but it they come to expect inflation then automatic price increases will cement the very inflation they sought to avoid.
The unemployment rate is the number of people who are willing and able to work but don’t have... Sign up to continue reading Measurement of Economic Performance >
