Economic Indicators How do we know what direction the economy is going?

Economic Indicators

How do we know what direction the economy is going?

Economic Indicators

• Def: Trends in the economy which tell economists where the business cycle is going and where it has been.

• Can prepare for the future

Three Types of Indicators

• Leading Indicators (where the cycle is going)

• Coincident Indicators (where the cycle is now)

• Lagging Indicators (where the cycle has been)

Leading Indicators

• Def: economic activity that happens prior to (before) a change in the economic cycle

• Theses are predictors of where the economy is going next—Expansion or contraction

Leading Economic Indicators

Indicator • Average weekly initial

claims of unemployment

• Stock prices

Significance• Reflect layoffs and new

hires (more unemployment=contraction and less unem.=expansion)

• Reflect investors attitudes (rise=expansion, fall = contraction)

Indicator• Interest Rates

• Index of consumer confidence

Significance• Rates are lowered

recession coming, raised=expansion

• Reflects changes in consumer attitudes about the future

Coincident Indicators

• Def: Information that is used to measure economic change as it happens

1. Total industrial production2. Total industrial sales3. Personal income4. Number of employees on industrial payroll

Lagging Indicators

• Def: Economic activity that change after the business cycle expands or contracts

1. Interest rates banks charge on loans2. Amount of money owed

Recessions in U.S. History

• Please answer the following questions for each recession (6) in the readings:

• 1) Describe what happened• 2)What was the peak unemployment rate (%)• 3) Describe what the Real GDP was during that

time • 4) The length and severity of the recession• 5) How did it end?• 6) Any other interesting facts

Unemployment

• 16+ in age, not institutionalized, temporarily laid off and looking for work.

• Unemployment Rate- The percentage of the labor force unemployed and actively looking for work.

• (Don’t count people not looking for work “hidden unemployment”)

Types of Unemployment

• Frictional Unemployment• Cyclical Unemployment• Seasonal Unemployment• Structural Unemployment

Frictional Unemployment

• Def: People who are between jobs or just entering the workforce.

• Ex: High School/College students, changing careers

• This is a normal kind of unemployment.

Cyclical Unemployment

• Def: Unemployment caused by changes in the business cycle during a contraction phase

• Business layoff workers and the rate of unemployment increases.

• This is a normal form of unemployment

Seasonal Unemployment

• Def: Unemployment caused by natural changes in weather/season.

• Ex Farmers, Darien Lake, landscapers, construction

• Will get jobs back when season changes • This is a normal form of unemployment

Structural Unemployment

• Def: Changes in the economy that makes certain workers obsolete. Their skills are no longer needed.

• Ex: Business owners move business to different country (Outsourcing) or robots replacing workers on assembly line.

• This is a bad form of unemployment= Workers will have a hard time finding a new job. They will need to be re-trained

Inflation

• Def: A general rise in prices due to a decrease in value of money.

• Ex 5 years ago a can of pop from a machine costs $1.00 and today $2.00.

• When inflation happens too quickly, it has dangerous effects on the economy. (lowers purchasing power)

Causes of Inflation

• Demand-Pull Inflation: Demand side- When the demand for products exceeds the

supply, prices rise. Too many dollars, too few goods. Happens as a result of expansion of the Business Cycle.

• Cost- Push Inflation: supply side- When scarcity causes the cost of production to

increase, prices rise. Ex: gas prices increase the cost of fuel for planes= ticket prices increase

Effects of Inflation

1. Price of goods rise2. Money buys less3. Standard of living declines 4. Fixed incomes-does not increase5. People who save money are hurt (if inflation

is higher than investment returns=losing money)

Market Basket and CPI

• Market Basket- A representation of commonly purchased goods and services, around 300( ex toothpaste/ car wash)

• Consumer Price Index-index used to measure price changes for a market basket of frequently used consumer items.

• Aggregate demand (AD) is the total demand for final goods and services in the economy at a given time and price level. It specifies the amounts of goods and services that will be purchased at all possible price levels

• Aggregate supply is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing to sell at a given price level in an economy