If you listen to the radio on the way to school in the morning, you've definitely heard a news reporter talk about the Dow Jones Industrial Average, or S&P 500. You might even know that these are two separate stock indexes. These things are such common talking points because they're one of the ways economists judge whether an economy is getting stronger or weaker. We call these economic indicators, and the stock market is just one of them.
This is the fourth video in Unit 8, Economics. Take a look at this breakdown, which shows you how often this unit comes up on district, state, and international exams for each of the different clusters. Hello and welcome.
This is Lesson 8.4 Economic Indicators, and let's get to work, team. In this video, we'll be discussing two major topics. First, we'll define economic indicators as a whole, then we'll go in-depth on each of the five main economic indicators.
Get ready, because there's a lot of information to cover. An indicator shows the condition of something, and an economic indicator shows the condition of the economy. This is important because people, businesses, and the government base their economic decisions on the state of the economy. For example...
Let's say a business wants to launch a new luxury watch. That kind of product might sell well in a strong economy, but not in a weak economy since people tend not to buy expensive accessories when times are tight. Now there are five main economic indicators, which are gross domestic product, or GDP for short, per capita GDP, inflation rate, unemployment rate, and the stock market.
The first economic indicator is GDP, which is also known as economic output. GDP refers to the market value of all final products produced in a time frame in a given country. In the United States, the Bureau of Economic Analysis, or BEA, keeps track of the U.S.
GDP. The White House and Congress use GDP to prepare the federal budget. Large companies use it to prepare sales forecasts and decide when to launch products.
And financial institutions use it to monitor interest rates. While it's common to look at GDP as the market value of all final products produced, you can also imagine it as the total amount of money spent in an economy to buy goods and services. The higher the GDP, the more consumers are buying food, clothing, cars, medical care, and more. In fact, the U.S. economy is called a consumer economy because consumer spending makes up 70% of GDP.
But at the same time, businesses buy computers, bulldozers, warehouses, and so on, which is called investment spending. GDP also includes government spending, which is money spent on roads, national defense, school lunch programs, and more. Knowing GDP is cool and all, but what economists actually care about is how GDP changes over time, which is also known as the economic growth rate. For example, the United States'GDP growth rate averages around 6 or 7%. 7%.
A high growth rate is an indicator of a strong economy and vice versa. Here is the formula for the growth rate of an economy. It's the formula for percent change, the final GDP minus initial GDP divided by initial GDP times 100. The second economic indicator is per capita GDP, which takes the GDP and divides it by the nation's population. This metric represents the economic output for each person in a country.
High per capita GDP indicates a high standard of living. In the Congo, per capita GDP is $200, but in Luxembourg, it's $110,000. This number shows that people in Luxembourg enjoy a much higher... higher standard of living than those in the Congo. The third economic indicator is inflation, which refers to the general rise in prices in an economy.
Over time, inflation reduces how much stuff you can buy for a dollar. And there are two types of inflation, demand pull and cost push. Demand pull inflation is when consumer demand for a product increases, causing prices to rise. You saw this in the last video where we talked about market forces. Cost push inflation is when business costs increase, causing the price of a product to increase.
Inflation between 1 and 4% per year is okay for an economy. But above that, people start having problems, especially those on low or fixed incomes. Plus, wages don't match the rise of inflation, which can lead to even more financial problems for people.
Now, there are a few ways to measure inflation, but the most widely used is something called the Consumer Price Index. This indicator measures the difference between prices paid for goods and services over time. So an example would be the cost of a burger. It might have been a dollar in 1972, but the same burger today would cost you five bucks.
The organization responsible for calculating consumer price indices is called the US Bureau of Labor Statistics or BLS. The BLS chooses a group of common consumer goods and services called the market basket and tracks how the prices change for those items. But to compare how prices change you need a baseline price. For example, you can see that it's hot outside today, but to know that it's gotten warmer you need to have a temperature to compare it to.
Likewise, we need a baseline price when we talk about inflation. So between 1982 and 1984, the BLS compiled the prices for their market basket and set the consumer price index to 100 for those items. Over time, the prices for that same market basket has been calculated, and the change in prices is used to set the new index. For example, the CPI for 2011 was 225, meaning prices in 2011 were 125% higher than they were back in the 80s. So if you bought a bike for $100 back in 1983, it would cost you $225 for the same bike in 2011. When people in the news talk about inflation, they'll usually talk about the percent change in price instead of CPI.
It's a little easier to understand for the average listener. Here's the formula for inflation, which is also known as the percent change of CPI. As you can see, you subtract the CPI in two time periods, divide the difference by the earlier time period, and multiply that number by 100 to get your answer in percentage form.
Once you get a number for inflation, you need to know what it means. So let's talk about the levels of inflation. There are four levels. Low, moderate, severe or hyperinflation. Note that severe inflation is also known as double digit inflation.
The United States has averaged a yearly inflation of 3% over the last 100 years, which means generally the US economy has been good. Hyperinflation is rapid out of control inflation that destroys an economy. The United States has never faced hyperinflation.
The last thing we need to talk about with inflation is how inflation affects GDP. The problem is that the prices of products and services increase over time, which makes certain economic indicators like GDP unreliable if you compare GDP over time periods. Let's imagine a very small country. This country only produced one bike in 1983, which was sold for $100.
In 2011, this country also only produced one bike, but this time because of inflation it sold for $225. On paper, the GDP increased so it looks like production has gone up, but that's not really the case. In both time periods, only one bicycle was sold, but inflation made it look like production had increased. This kind of GDP that hasn't been adjusted for inflation is called nominal GDP. So the nominal GDP of our imaginary country in 2011 is $225.
But if we account for inflation, we get something called the real GDP. To get that, we'd find the number of goods sold, but use its price in the original base year to account for inflation. Using this system in our bike example, the price from 1983 would be compared against the cost of a bike in 2011. After we see that the GDPs from 1983 and 2011 are both $100, it's clear that production hasn't really gone up.
You might be wondering, is there really that big of a difference? The answer is absolutely yes. From 1929 to 2011, real GDP in the United States grew at an average annual rate of 3.2%.
During that period, nominal GDP grew by 6.4% yearly, which is double the real GDP increase due to... inflation. The fourth economic indicator is the unemployment rate.
In a society, all of the people who are willing and able to work make up the labor force, which is divided between civilian and military personnel. Within the civilian labor force, there are two categories, the employed and the unemployed. The employed are everyone working, while the unemployed are those who do not have a job, but are currently looking for one.
So the unemployment rate is the percentage of civilians who are unemployed. Here is the formula for the unemployment rate. You take the number of people who are unemployed and divide it by the total number of civilians.
Then you multiply it by 100 to get your percentage. The economy is at full employment when everyone who can work is working. Even if there is full employment, the unemployment rate will still be around 4%, because there are always people who just enter the workforce or are in between jobs. Unemployment of around 4-5% indicates a strong economy. Rising unemployment indicates a weak economy because businesses are not hiring.
A lot of economists think that there is a link between inflation and unemployment. When unemployment is low, businesses increase wages to remain competitive, which ultimately increases inflation. On the other hand, when unemployment is high, wages fall and prices drop, which decreases inflation.
The last economic indicator is the stock market, a place where stocks are bought and sold. We could make a whole video about the stock market. But the short version is that stocks are shares of ownership in a company. When you buy stock in Apple, you're buying a small percentage of ownership in Apple.
The stock market represents the value of those shares and thus the value of a business. So a rising stock market indicates a strong economy. A falling stock market means, you guessed it, a weak economy.
The stock market is interesting because it doesn't always reflect the actual state of the economy. This is because stock markets typically peak right before an economic downturn. But no one really knows when the market has actually peaked.
As a result, People are usually surprised when markets fall. Because of that, stock markets are technically a secondary indicator of the economy. There are many different stock markets, and each one has its own indicators. And if different markets are pointing in different directions, determining the state of the overall economy is a difficult task.
Plus, each stock market has multiple highs and lows within one day, so we tend to focus on primary indicators, which demonstrate long-term trends. The major US stock markets are the New York Stock Exchange and Nasdaq. Each stock market has its own stock market index. A stock market index tracks the performance of a group of stocks.
You may have heard of a few. The most popular ones are the Dow Jones Industrial Average and the Standard & Poor's 500, which you may have heard referred to as S&P 500. Now that we've gone over all the content, it's time to test your knowledge with a real DECA question. Pause the video and try to answer.
The answer is C, a customer purchases a sweater. As you know, GDP only includes final products to avoid double counting. The sweater is the only final product here.
The plants will be used to make bouquets, the sugar will be used for baked goods, and the meat will be used for meals at the restaurant. And here are the sources we used for this video. Feel free to check them out if you still have any questions.
However, that pretty much sums up Lesson 8.4, Economic Indicators. Great work, team, and we'll see you in the next video.