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Hello

You have one week behind you. Yes, it is the easiest week but you are on your way and that is good. This is a big week, we cover some big issues and your first milestone is due. As I will provide every week, here is a preview of what is to come:

This week we will be talking about unemployment, inflation, and GDP. 

These are broad sweeping measures of economic performance and have a number of limitations in telling us about street-level details of what is really going on in individual's lives but they are useful in giving us the big picture.

Unemployment is a pretty straight forward concept although the measure itself is a little more complex - a measure of how many people are out of work that would like to have work. However, interestingly enough, the unemployment number itself can start looking better even if people are not finding jobs as some people give up looking and then are no longer considered part of the labor force. So when we hear that unemployment has improved we need context, are more people working or are fewer looking for work. There are also many people not working that are not part of labor force; retirees, students, stay at home parents, etc. Anyway, all that to say it is not as straightforward as it looks or would seem to be. Context is always important, something to remember for your presentations.

Inflation is a measure of the spending power of the currency. While few people will ever say they have too much money, the economy as a whole can have too much. As with anything, the more there is of it the less valuable each unit is. With money this is seen in rising prices. But, do not make the mistake of thinking any price increase is inflation, that is not the case. Prices can go up for many reasons. Inflation is when there is too much money in the economy and will eventually cause prices to increase. What is too much money in the economy? Well, you can get a picture of what that means here, these are kids playing bundles of money in post World War I Germany because buying toys was too expensive. Too much money is when the money supply grows faster than the population and actual output (the actual goods and services produced) in the economy. So if we produce 2% more goods then last year and our population is 1% larger but the money supply grew by 5%, we will have some inflation. When these two sides (growth and the money supply) do not match that creates pressures and when money is growing faster than production that pressure is inflation and it is released through price increases.

 GDP is Gross Domestic Product, it is a measure of how large the economy is based on spending; the four categories of spending are consumption, investment, government spending and net foreign spending (exports-imports). The larger the GDP the better according to most analysis. This is a fine tool as long as it is used appropriately, the problem is many try to see more in GDP then it is able to tell us. GDP does not tell us how individuals are doing, conceivably a nation could have a large GDP but it is concentrated in the hand of just a few people while many in the country are very poor. This is the case in many African and Asian nations. The GDPs are low but what there it goes to a few in power to keep them in power and the army fed and the rest of the nation suffers. GDP does not really let us see that so we need other measures as well.

There are other issues with GDP as well. Since it is a spending based number any spending looks good to it and increases GDP. But we all know there is much wasteful spending. We could spend a lot of money digging ditches and filling them back in (as we have actually done in this country during the 30s) but that doesn't improve the economy, but it makes GDP higher. Some would argue that at least we're paying workers and that's good, but to the extent that is good it is very short-term and it really is not good because we're paying them to basically waste their time and resources.

True economic growth comes when we increase our wealth not just when we spend more money. Spending increases GDP but it does not automatically increase wealth. Think about it this way; we could have taken the wilderness that New York City once was, dug a big hole and filled it back repeatedly and spent a lot of money and increase GDP or we could've taken that money and invested in making buildings and roads and businesses and actually create more wealth and grow into the international economic and cultural center that it currently is. Theoretically we can spend the same amount of money in either case but one was a waste and the other has created tremendous amounts of wealth and value for millions if not billions of people.

Some argue that natural disasters during down economic times is a good thing because it stimulates GDP, but that spending is in repair work, all we are doing is trying to make the affected areas whole and return them to their previous condition. There is no growth or expansion there, fixing a house's broken window just returns the house to its previous condition whereas if you spent the same amount of money upgrading the kitchen the house is actually worth more.

These three numbers are commonly reported and referenced in media and politics, it will be good for you to get a good grasp of them this week.