March 17 - Using the Economic Indicators

Though there are a lot of different things we could look at to measure the health of a country's economy there are three indicators that are seen as more important than any other.  They are:

- Unemployment: The number of people looking for jobs, that don't currently have a job
- Inflation: The loss of a money's purchasing power over time
- GDP: A measure of how productive an economy is, expressed as the dollar amount of the final goods it has produced.

We also saw that while unemployment is often seen of as a bad thing, that isn't necessarily always true.  There are four types of unemployment, but only one of them is a bad thing.  Frictional, seasonal and structural unemployment are all good types of unemployment.  Only cyclical unemployment is bad.  Thus, we don't actually want our unemployment rate to be zero.

Inflation is also generally considered to be bad.  Certainly too much inflation can seriously hurt your economy.  However, it turns out that we also don't want 0% inflation.  This is in part because the opposite of inflation, which is called deflation, is even worse than inflation.  But it is also true because some inflation is actually needed.  (I'll explain that at a later date.)

GDP is the "good" indicator and we want to see it rising.  However, we don't want it to rise too quickly.  If it does rise too quickly, it is usually too much for the economy and the economy will "correct" itself afterward by adjusting downward.  Often this means a recession or possibly a depression. 

These three indicator become a way to see what is going on in the economy.  If inflation gets too high, that is a problem that has to be corrected.  If unemployment gets too high and GDP falls, that is also a problem.  But there is something else that links all three of them together.  It is money.

There are several causes of inflation.  One of the causes of inflation is having too much money in the economy.  The simplest way to fix this is to take money out of the economy.  In fact, regardless of what caused the inflation, removing money from the economy is a method we can use to get rid of the inflation.

If GDP is low and unemployment high, we can do the opposite.  We can put more money into the economy.  How does that help?  In the GDP power point it talks about how we can achieve economic growth.  The common thing among the three methods listed is that they all require money.  So putting money in the economy means businesses can expand their capital, people can save & invest, and new things get invented which businesses can then buy.  Of course when businesses get bigger they have to hire more people and that makes unemployment go down.

Money is the key to solving all three of these problems. 

But who is it that is actually watching these indicators and what are they doing about it?

Today we will look at one of those groups.  It is the Federal Reserve.  The Fed is a government agency that is actively watching the economy and trying to adjust things to keep unemployment and inflation low and GDP rising.  We call this monetary policy.

Tomorrow we will look at how the Federal Government is doing the same thing.  When the government does this we call it fiscal policy.

Power Points
The Federal Reserve
Monetary Policy

Worksheet
Monetary Policy