There is a lot of economic jargon out there as we lead up to the election. To keep you informed and ready to debate your co-workers or golf buddies, here is a quick primer on what it all means:
GDP: Gross Domestic Product, is the total market value of goods and services we produce in this country. (reported on a quarterly basis) This is a number that everyone looks at as the overall health of the economy. Unfortunately it is a lagging indicator as we don't find out we are in or out of a recession until several quarters later. (technically 2 consecutive quarters of declining GDP is a recession). GDP = Consumption + Investment + Gov Purchases + (exports - imports).
CPI: Consumer Price Index, which is the measure of average prices paid for a fixed basket of goods and services. (since you asked here is the "basket": housing, transportation, food, medical, recreation, education, apparel and other)
The change in the CPI is how the inflation rate is calculated. The inflation rate is then used to determine cost of living increases in social security benefits and some pension plans.
Monetary Tools: The Federal Reserve has several monetary tools at their disposal to smooth out economic ups and downs. Their official mandate is to promote price stability (low inflation) and full employment.
Fed Monetary Tools:
- Discount Rate, also known as the Fed Funds Rate. They can raise or lower this to try and slow down or accelerate the economy.
- Reserve Requirement: this is the % of deposits that the Fed makes banks keep in reserve. In a fractional banking system banks are only required to hold a small percentage of assets and can loan out the rest.
- Open Market Operations: The Fed buying and selling securities (treasuries) with banks.
Fiscal Policy: this is the governments role in the economy. They do this with spending and revenue legislation. A quick summary of Fiscal Policy goals:
- influence level of economic activity and Aggregate demand
- redistribution of wealth and income (not a political statement, simply part of the definition)
- allocating resources among sectors in economy
The government does this through payments such as SS and Unemployement and also through Government purchases of goods and services. On the revenue side fiscal policy is directed toward direct taxes (income, cap gain, estate) and indirect taxes (sales, excise, etc).
And lastly Employment. Full employment does not mean "0" unemployment. The Fed looks at 3 types of unemployment: Frictional, Structural and Cyclical. There will always be frictional and structural unemployment. These involve normal people entering and leaving the workforce and long run changes in economy due to technology advancements or international trade. It is the cyclical unemployment that the Fed and Politicians worry about.