Section 12.2 — Economic Measures and Indicators

  • 💰 Gross Domestic Product (GDP)

  • 🌍 Gross National Product (GNP)

  • 📈 Consumer Price Index (CPI)

  • 📊 Types of Economic Indicators

💰 Gross Domestic Product (GDP):

  • Definition: The total annual economic output of a nation — all goods and services produced within its borders.

  • Includes: All production within the country, even by foreign companies operating inside it.

  • Excludes: U.S. companies producing outside the U.S.

  • Reported: Quarterly.

  • Meaning of changes:

    • Positive → Economic growth

    • Negative → Economic contraction

  • Expressed as: A percentage change from one period to the next.

🌍 Gross National Product (GNP):

  • Definition: Measures the total output of citizens and entities of a nation, no matter where they operate.

  • Reported: Quarterly (used less often than GDP).

  • Example:

    • Foreign Motor Corp (Japan) builds a factory in Texas → adds to U.S. GDP, not GNP.

    • Debrown Motor Corp (U.S.) builds a factory in Germany → adds to U.S. GNP, not GDP.

📈 Consumer Price Index (CPI):

  • Definition: Measures the rate of price changes in a “basket” of common consumer goods and services (food, housing, transportation, medical care, clothing, electricity, entertainment, services).

  • Frequency: Computed monthly.

  • Purpose: Used to adjust GDP to reflect real growth by accounting for inflation or deflation.

  • Real GDP = GDP adjusted for inflation/deflation using CPI.

📊 Types of Economic Indicators

  • Indicators are classified by when they change direction relative to the overall economy:

    1. Leading Indicators

    Change before the overall economy does — help predict future economic trends.
    Examples:

    • Money Supply (M2)

    • Building Permits / Housing Starts

    • Average Weekly Initial Claims for Unemployment

    • Average Work Week in Manufacturing

    • New Orders for Consumer Goods

    • Machine Tool Orders

    • Changes in Inventories of Durable Goods

    • Changes in Prices of Sensitive Materials

    • Stock Prices (S&P Index)

    • Changes in Business and Consumer Borrowing

    2. Coincident Indicators

    Change at the same time as the overall economy — confirm the current trend.
    Examples:

    • Number of Hours Worked

    • Employment Levels

    • Non-Agricultural Employment

    • Personal Income

    • Industrial Production

    • Manufacturing and Trade Sales

    • GDP

    3. Lagging Indicators

    Change after the economy has already begun a new trend — confirm its direction and duration.
    Examples:

    • Corporate Profits

    • Average Duration of Unemployment

    • Labor Cost per Unit of Output

    • Ratio of Inventories to Sales

    • Commercial and Industrial Loans Outstanding

    • Ratio of Consumer Installment Credit to Personal Income

Fees & Commission

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Fees & Commission 〰️

💵 Price Movement Terms (from CPI changes)

Term / Definition / Notes

  • Inflation / General increase in prices / Mild inflation can encourage growth; high inflation reduces buying power.

  • Deflation / General decline in prices / Occurs during severe recessions with rising unemployment.

  • Stagnation / Slow or little growth + low inflation + high unemployment / Weak economy with minimal progress.

  • Hyperinflation / Extremely high and accelerating inflation / Destroys purchasing power; investors move money out of the country. Rare.

  • Stagflation / Inflation + high unemployment / Economy not growing, demand is low, but prices still rise. Inflation doesn’t need to be high—just present.

✺ Review questions ✺

  • The total value of all goods and services produced within a nation’s borders.

  • GNP measures the output of a nation’s citizens and entities, no matter where the production occurs.

  • Quarterly.

  • To measure price changes and adjust GDP for inflation or deflation to get real GDP.

  • Leading, Coincident, and Lagging indicators.

  • Money Supply (M2), Building Permits, Housing Starts, Stock Prices, etc.

  • Employment levels, GDP, Industrial Production, Personal Income, etc.

  • Corporate Profits, Duration of Unemployment, Ratio of Inventories to Sales, etc.

  • Inflation is a general rise in prices; mild inflation can stimulate business investment and growth.

  • A combination of rising prices (inflation) and high unemployment during a period of little or no economic growth.