Overview

Measuring economic performance helps policymakers and economists evaluate how well an economy is functioning. Key indicators include gross domestic product (GDP), inflation, and unemployment. These statistics guide decisions about interest rates, taxes, spending, and long-term planning.

Key Themes and Concepts

• National Income Accounts: Track income and spending in an economy. Includes GDP, net exports, investment, government spending, and consumption.
• Circular Flow Model: Illustrates how money moves between households, businesses, government, and foreign sectors in an economy.
• Gross Domestic Product (GDP):
  • Nominal GDP: Measured in current prices; includes inflation.
  • Real GDP: Adjusted for inflation; reflects true output growth.
  • Components: C + I + G + (X - M) — consumption, investment, government spending, net exports.
• Inflation:
  • Measured by: Consumer Price Index (CPI), GDP deflator.
  • Types: Demand-pull, cost-push inflation.
  • Real vs. nominal values: Real values are adjusted for inflation.
  • Costs of inflation: Menu costs, shoe leather costs, reduced purchasing power, wage uncertainty.
• Unemployment:
  • Measured by: Labor force surveys — percentage of people actively seeking work but not employed.
  • Types: Frictional, structural, cyclical, seasonal.
  • Natural rate: Includes frictional and structural unemployment; occurs even in healthy economies.

Quick Tip

GDP shows output, unemployment shows labor market health, and inflation shows price stability. Real GDP is the best way to track economic growth over time. Distinguish between short-term cycles and long-run trends when analyzing performance data.