Measuring the Health of the Economy

Key Takeaways

• 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.