The problem with gross domestic product is the gross bit.
There are no deductions involved: all economic activity is
accounted as if it were of positive value.
Social harm is added to, not subtracted from, social good.
A train crash which generates £1bn worth of track repairs, medical
bills and funeral costs is deemed by this measure as beneficial as
uninterrupted service which generates £1bn in ticket sales.
George Monbiot
We can get a very good idea of the pulse of economic
activity by looking at only six key economic variables,
six variables that together give a very large chunk of
significant information about the macroeconomy. These
six variables are:
real GDP
the unemployment rate
the inflation rate
the interest rate
the level of the stock market
the exchange rate
real: corrected for changes in the price level
gross: includes the replacement of worn-out
and obsolete equipment and structures as well
as new investment
domestic: counts economic activity that
happens in the US
product: represents the production of final
goods and services
...measures how well the economy produces goods
and services that people find useful
often divided by the number of workers in the
economy (GDP per capita)
does not indicate the relative distribution of the
nation’s economic product
an imperfect measure of economic well-being
Over time, economies tend to move through
periods of peak and trough. This business cycle is
the fluctuations in the rate of economic growth that
take place in the economy.
...equal to the number of unemployed people divided by the
labor force
To be unemployed, a person must want to work and be
actively looking for a job (but not yet have one).
The labor force consists of those who are employed and
those who are unemployed.
unemployment rate (U-3): the rate that’s reported to the
media and public ... only counts those who are completely
unemployed and have looked for a job in the past four weeks
real unemployment rate (U-6): U-3 numbers plus marginally
attached (haven’t looked in last 4 weeks), discouraged (given
up and stopped looking) and underemployed (working part-
time but still looking for full-time) ... U-6 includes everyone
who wants a full-time job but doesn't have one and is usually
twice U-3
The Strange Case of American Inequality
frictional unemployment: occurs because
workers and firms spend time searching for the
best match
cyclical unemployment: occurs during
recessions and depressions
The unemployment rate is the best indicator of
how well the economy is doing relative to its
productive potential.
An economy with no unemployment would not be a
good economy.
Just as an economy needs inventories of goods - goods
in transit, goods in process, goods in warehouses and
sitting on store shelves - in order to function smoothly,
so an economy needs inventories of jobs-looking-for-
workers (vacancies) and of workers-looking-for-jobs
(the unemployed).
An economy in which each business grabbed the first
person who came in the door to fill a newly-open job
and in which each worker took the job associated with
the first help-wanted sign that he/she saw would be a
less productive economy.
We want workers to be somewhat choosy about what
jobs they take, to be willing to think "this job pays too
little” or "this job would be too unpleasant.”
We want employers to be somewhat choosy about
which workers they hire, to find the best fit.
Such frictional unemployment is an inevitable part of
any process that will make good matches between
workers and firms: match workers qualified to do jobs
with jobs that use their qualifications.
But there are recessions and depressions during which
unemployment is definitely not frictional.
The market economy's matching of the supply of
workers willing and able to work with businesses that
could put their skills and labor-power to making useful
goods and services breaks down.
In the US and Germany during the Great Depression,
the share of workers unemployed rose to between 25%
and 30%.
The unemployment rate is perhaps the best indicator of
how well the economy is living up to the potential
created by the current level of technology and the
current stock of productive capital.
...a measure of how fast the overall price level is
rising
If the inflation rate this year is 5%, that means this
year things in general cost 5% more in money
terms than last year.
Moderate inflation rates - more than 10% a year -
are very unsettling to consumers and businesses.
Hyperinflation (one of the worst economic disasters
that can befall an economy) occurs when the price
level is rising by more than 20% per month.
Germany's Hyperinflation-Phobia, The Worst
Hyperinflations in History: Hungary
...important because it governs the
redistribution of purchasing power across time
The many different interest rates in the
economy – applying to loans that mature at
different times in the future and to loans of
different degrees of risk – vary by duration and
degree of risk but often move up and down
together.
When interest rates are low (money is "cheap“)
investment tends to be high, because businesses
find that even less-profitable investments will still
generate the cash flow needed to pay the interest
and repay the principal sum borrowed.
nominal interest rate: interest rate in terms of
money ... does not take into account the effects of
inflation
real interest rate: nominal interest rate minus the
inflation rate ... does take into account the effects of
inflation
...most talked about of the six variables
...an index of expectations for the future
A high value (rising prices, bull market) means that
investors expect economic growth to be rapid,
profits to be high and unemployment to be low.
When the stock market is low (falling prices, bear
market), average opinion expects the economic
future to be relatively gloomy.
...the price of one currency in terms of another
currency. For example, if the exchange rate
between the £ and the $ is £1=$1.65, you pay a
price of £1 for every $1.65.
Exchange rates can be fixed or floating.
Fixed means that rates stay at the value set
by the government.
Floating means that rates fluctuate day to
day according to the market.
The Non-Existent but Remarkable Austerity-
Depreciation Mechanism
nominal exchange rate: rate at which monies of
different countries can be exchanged for one
another
real exchange rate: (1) nominal exchange
rate adjusted for inflation ... R = EP*/P (where E
is the nominal domestic-currency price of
foreign currency, P is the domestic price level,
and P* is the foreign price level) or (2) real price
of foreign goods ... the quantity of domestic
goods needed to purchase a unit of foreign
goods
...governs the terms under which international trade
and investment take place
if domestic currency appreciates
its value compared to other currencies
increases
foreign-produced goods are relatively cheap
for domestic buyers ... imports are likely to be
high
domestic-made goods are relatively
expensive for foreigners ... exports are likely
to be low
...governs the terms under which international trade
and investment take place
if domestic currency depreciates
its value compared to other currencies
declines
domestic-produced goods are relatively
cheap for foreign buyers ... exports are likely
to be high
foreign-made goods are relatively expensive
for domestic buyers ... imports are likely to be
low
(Euro, Canadian dollar,
Japanese yen, British pound,
Swiss franc, Australian dollar,
Swedish krona)
