MANAGING THE ECONOMY
Economic Growth occurs when a country’s output exceeds its population growth. As a result, more goods and services are available for each person.
Ways to Increase Production of Goods and Services to Encourage Economic Growth:
u Increase number of people in the workforce
u Increase productivity of workforce-- improving human capital through education and job training
u Increase the supply of capital goods (more tools and machines) in order to increase productivity of labor and management
u Improve technology by inventing new and better machines and better methods for producing goods and services
u Redesign work processes to improve efficiency
u Increase the sale of goods and services to foreign countries
u Decrease the purchase of goods and services from foreign countries
For Economic Growth to Occur:
u More goods and services have to be consumed
The incentive for producing goods and services in a free enterprise economy is profit
u If goods and services produced are in demand and are profitable, business has the incentive to increase production
u Increased production provides jobs which increases individual well-being of a nation’s citizens (second measure of a nation’s wealth)
Measuring Economic Growth
1. Gross Domestic Product (GDP)
2. Consumer Price Index (CPI)
3. Other Economic Indicators
1. Gross Domestic Product (GDP)
The total market value of all goods produced and services provided in a country in a year
u The federal government records the dollar amount whenever a product or service is purchased
u The first measure of a nation’s economic wealth and economic strength
u Compared from year to year and compared with other countries
u Underground economy--Some transactions are not recorded because they are unlawful or are not reported
u Estimates range between 5% when economy is good and as much as 20% when economy is lagging
One trillion mark was reached by 1970
1993—$6.2 trillion mark
u Nearly equaled the total GDP of 4 major countries combined: Japan, Germany, England, and Brazil
The rate of growth and the current size of the GDP indicate the economic strength of the country
http://www.bos.frb.org/economic/natldata/
2. Consumer Price Index (CPI)
Measure of the average change in prices of consumer goods and services typically purchased by people living in urban areas
u “Market Basket” -- prices for food, gasoline, housing
u Determines Cost of Living by purchasing power of the dollar
u 1983--$1.00
u 1987--$0.90
u 1991--$0.74
u 1993--$0.72 Question 1a and 1b
Measuring Economic Growth
3. Other Economic Indicators:
u In addition to GDP(Commerce Dept.) and CPI (Dept. of Labor), the federal government issues many statistical reports each year to help determine whether the economy is growing or declining
Index of Leading Economic Indicators--measures the economy’s strength for the next 6-9 months (Commerce)
Employment--measures jobless rate and number of jobs available ( Labor)
Retail Sales--measures consumer spending (Commerce)
Personal Income Consumption--measures growth in personal income and consumer spending (Commerce)
Identifying Economic Problems
Problems occur when the growth rate jumps ahead or drops back too quickly.
1. Recession--decline in GDP that continues for 6 months or more
u Demand for total goods and services available is less than the supply
u Decreased production and increased unemployment occur
2. Inflation--rapid rise in prices caused by inadequate supply of goods and services
Consumers want to buy goods and services that are not readily available
u Increased demand causes prices to rise
u Decline in purchasing power of money
Dollars needed to buy an item costing $100
1983 $100 1985 $108
1987 $114 1989 $124
1991 $136 1993 $144
Correcting Economic Problems
u Most major nations experience business cycles
A pattern of repeated expansions and contractions of GDP
On the average the cycles last about 5 years
Cycles pass through 4 phases:
u Expansion--modest rise in GDP, profits, and employment (Low inflation)
u Peak--growth reaches highest level (Modest to runaway inflation)
u Contraction--growth begins to decline (Modest inflation)
u Trough--Lowest point in cycle with increased unemployment (Recession or depression)
u Depression--long and severe drop in GDP
How Can the Government Help to Correct Economic Problems:
u Controlling Taxes
Raised to slow growth (less money to spend)
Lower to encourage growth (more money to spend)
u Regulating Government Expenditures
Increase spending to stimulate a slow economy
Reduce spending to slow economic growth
u Adjusting Interest Rates
Low interest rates encourage businesses to borrow
Raising interest rates discourages borrowing
u Taxes, Government Spending, and Interest Rates are controls used to influence economic growth. The results are not always visible in the short run. Economists do not always know exactly when control devices should be used, for how long they should be applied, or how effective they may be. But, they are necessary to prevent a destructive runaway inflationary period or a depression.