UNDERSTANDING THE U.S.ECONOMIC SYSTERM.

Key Economic Indicators:

There are three main indicators of economic conditions including: (1) the gross
domestic product (GDP), (2) the unemployment rate, and (3) price indexes. Another
important statistic is the increase or decrease in productivity.
Gross Domestic Product (GDP): the total value of final goods and services produced in
a country in a given year.
Both domestic and foreign-owned companies can produce the goods and services
included in GDP, as long as the companies are located within the countrys boundaries.
For example, production values from Japanese automaker Hondas factory in Ohio
are included in U.S. GDP. Revenue generated by Fords factory in Mexico is included
in Mexicos GDP, even though Ford is a U.S.company.
An major influence on the growth of GDP is the productivity of the workfoce-that is
how much output workers create with a given amount of input.
The Unemployment Rate: the number of civillians at least 16 years old who are
unemployed and tried to find a job with the prior four weeks. In 2000, the U.S
unemployment rate reached its lowest point in over 30 years, falling as low as 3,9
percent, but by 2009 the rate had risen to about 9 percent and was estimated to be
climbing higher. ( we can see Figure 2.5 in book).
Figure 2.6 describes the four types of unemployment:
- Frictional unemployment.
- Structural unemployment.
- Cyclical unemployment.
- Seasonal unemployment.
Inflation and Price Indexes: Price indexes help gauge the health of the economy by
measuring the levels of inflation, disinflation, deflation and stageflation.
Inflation: A general rise in the prices of goods and services over time. Rapid inflation
is scary. If the prices of goods and services go up by just 7 percent a year, they will
double in about 10 years. Think of how much fear was generated by the rapid increase
in the price of gasoline in 2008.
Disinflation: a situation in which price increases are slowing (the inflation rate is
declining).That was the situation in the United States throughout the 1990s.

Deflation: a situation in which prices are declining. It occurs when countries produce
so many goods that people cannot afford to buy them all (two few dollars are chasing
too many goods).
Stagflation: a situation when the economy is slowing but prices are going up anyhow.
Some economists fear the US may face stagflation in the near future.
The consumer price index (CPI): Monthly statistics that measure the pace of inflation
or deflation. The CPI is an important figure because some wages and salaries, rents
and leases, tax brackets, government benefits, and interest rates are based on it. You
may see the term core inflation. That means the CPI minus food and energy costs.
Since food and energy have been going up rapidly, the core inflation figure is lower
than the CPI.
The government created a new index called the chained consumer price index (C-CPI).
The CPI failed to take into account that consumers would shift their purchase as prices
go up or down.
For example, if the price of beef goes up, consumers may switch to chicken, which is
less expensive. The C-CPI factors in such decisions; thus, it is usually a lower figure.
The producer price index (PPI): an index that measures prices at the wholesale level.
Other indicators of the economys condition include housing starts, retail sales, and
changes in personal income.