Measuring the Health of the Economy
Read this section to understand more about economic growth. Looking at GDP alone does not give much of an indication of the health of an economy. It is the change in GDP that is relevant. If GDP goes up, the economy is growing. This positive movement is what we want as we leave behind the most recent recession. Complete the exercises at the end of the section.
- All economies share three goals: growth, high employment, and price stability.
- Growth. An economy provides people with goods and services, and economists measure its performance by studying the gross domestic product (GDP) – the market value of all goods and services produced by the economy in a given year.
- If GDP goes up, the economy is growing; if it goes down, the economy is contracting.
- High employment. Because most people earn their money by working, a goal of all economies is making jobs available to everyone who wants one.
- The U.S. government reports an unemployment rate – the percentage of the labor force that's unemployed and actively seeking work.
- The unemployment rate goes up during recessionary periods and down when the economy is expanding.
- Price stability. When the average prices of products either don't change or change very little, price stability occurs.
- When overall prices go up, we have inflation; when they go down, we have deflation.
- The consumer price index (CPI) measures inflation by determining the change in prices of a hypothetical basket of goods bought by a typical household.
- To get a sense of where the economy is headed in the future, we use statistics called economic indicators.
- Indicators that, like average length of unemployment, report the status of the economy a few months in the past are lagging economic indicators.
- Those, like new claims for unemployment insurance, that predict the status of the economy three to twelve months in the future are leading economic indicators.