Lesson 8.4 Economic Indicators

Introduction

• Economic indicators: Metrics used to assess the strength of an economy.
• Common examples: Dow Jones Industrial Average, S&P 500.
• Importance: Economists, businesses, and governments use them to make informed economic decisions.

Key Economic Indicators

1. Gross Domestic Product (GDP)

• Definition: Market value of all final products produced in a country within a timeframe.
• Importance:
  • Used by the White House and Congress for federal budget planning.
  • Used by companies for sales forecasts.
  • Used by financial institutions to monitor interest rates.
• Components:
  • Consumer spending (70% of GDP in the U.S.).
  • Investment spending by businesses.
  • Government spending.
• Economic Growth Rate: Change in GDP over time.
  • Formula: (Final GDP - Initial GDP) / Initial GDP * 100.

2. Per Capita GDP

• Definition: GDP divided by the population of a country.
• Significance: Indicator of the standard of living.
• Examples: Congo ($200), Luxembourg ($110,000).

3. Inflation Rate

• Definition: General rise in prices over time.
• Types:
  • Demand Pull: Caused by increased consumer demand.
  • Cost Push: Caused by increased business costs.
• Measurement: Consumer Price Index (CPI).
  • Tracks price changes in a market basket of goods and services.
  • Example: A burger cost $1 in 1972, $5 today.
• Levels of Inflation:
  • Low to moderate (1-4%): Healthy for the economy.
  • Severe (>10%): Problematic, leads to financial issues.
  • Hyperinflation: Rapid and out of control.
• Impact on GDP: Distinguishes between nominal and real GDP.
  • Nominal GDP: Not adjusted for inflation.
  • Real GDP: Adjusted for inflation.

4. Unemployment Rate

• Definition: Percentage of unemployed individuals in the civilian labor force.
• Formula: (Number of Unemployed / Total Labor Force) * 100.
• Full Employment: Around 4-5% unemployment rate; still considered strong.
• Correlation with Inflation: Low unemployment can lead to wage increases and higher inflation.

5. Stock Market

• Function: Buying and selling of company stocks.
• Indicators:
  • Rising market: Strong economy.
  • Falling market: Weak economy.
• Limitations: Often peaks before an economic downturn.

Major Stock Markets and Indices

• New York Stock Exchange and Nasdaq: Major U.S. stock markets.
• Indices:
  • Dow Jones Industrial Average.
  • Standard & Poor’s 500 (S&P 500).

Conclusion

• Final understanding: GDP considers only final products to avoid double counting.
• Sources and further information provided for deeper exploration.

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This concludes Lesson 8.4 Economic Indicators. Review the sources if there are any uncertainties.