36 Reading: Measuring the Health of the Economy
Measuring the Health of the Economy
Every day, we’re bombarded with economic news. We’re told that the economy is struggling, unemployment is high, home prices are low, and consumer confidence is down. As a student learning about business, and later, as a business manager, you need to understand the nature of the U.S. economy and the terminology used to describe it. It’s important to have some idea of where the economy is heading and know something about the government’s role in influencing its direction.
Economic Indicators
An economic indicator is a statistic that provides valuable information about the economy. The majority of economic indicators are collected and released by government and/or non-profit groups. In the U.S., Department of Commerce and the Department of Labor track and publish key indicators such as the unemployment rate and GDP. There is no shortage of economic indicators, and trying to follow them all would be an overwhelming task. Thus, economists and businesspeople typically track only a select few that are most pertinent to their professional, financial and economic interests.
Economic Goals
All the world’s economies share the following three main goals:
- Growth
- High employment
- Price stability
Economic indicators provide information about how an economy is performing relative to these goals. Let’s take a closer look at each of these goals, both to find out what they mean and to show how we determine whether they’re being met.
Growth
One purpose of an economy is to provide people with goods and services—cars, computers, video games, houses, rock concerts, fast food, amusement parks. One way in which economists measure the performance of an economy is by looking at a widely used measure of total output called gross domestic product (GDP). GDP is defined as the market value of all goods and services produced by the economy in a given year. In the United States, it’s calculated by the Department of Commerce. GDP includes only those goods and services produced domestically; goods produced outside the country are excluded. GDP also includes only those goods and services that are produced for the final user; intermediate products are excluded. For example, the silicon chip that goes into a computer (an intermediate product) would not count, even though the finished computer would.
By itself, GDP doesn’t necessarily tell us much about the state of the economy. But change in GDP does. If GDP (after adjusting for inflation) goes up, the economy is growing. If it goes down, the economy is contracting.
High Employment
To keep the economy going strong, people must spend money on goods and services. A reduction in personal expenditures for things like food, clothing, appliances, automobiles, housing, and medical care could severely reduce GDP and weaken the economy. Because most people earn their spending money by working, an important goal of all economies is making jobs available to