Download Economic Growth and GDP

Economic Growth and GDP
Using the AD/AS model to illustrate
Economic Growth
• Economic growth = increase in the amount of goods and
services produced in an economy (Shown as an increase
in Real GDP)
• Gross Domestic Product (GDP) = Total value of all goods
and services produced in an economy in a year
• Nominal GDP = Current dollar value of the production of
goods and services produced
• Real GDP = Nominal GDP with the effects of inflation
removed
Nominal GDP VS Real GDP
Quantity of
Pizzas
Price of
pizzas
Quantity of
pies
Price of pies
2000
10
$10
15
$5
2004
20
$12
30
$6
Imagine the economy only produces pizzas and pies.
Calculate GDP in year as the market value of production
GDP 2000=(10pizzasX$10/pizza) +(15piesX$5/pie)=$175
GDP 2004=(20pizzasX$12/pizza) + (30piesX$6/pie)=$420
Looking at these two GDPs what would you conclude?
BUT
Looking closely you can see the quantities produced of pizzas and pies in
2004 are twice that produced in 2000
If eco activity exactly doubled why do the calculated values of GDP show a
greater increase?
Prices as well as quantities rose!
Nominal and Real GDP Notes
• Nominal GDP= the actual dollar value of all goods and
services produced in a year
• Inflation = Increase’s in the price level
• These values cannot be meaningfully compared from
year to year
Consumer Price Index
(CPI)
• Measures the price level of a ‘basket’ goods and services purchased by the
average NZ household
• The data on prices comes from household surveys conducted by Statistics
New Zealand
• CPI is then released quarterly
• Used as a general measure of inflation
• Indicates the effect of price changes on the purchasing power of
households
• To calculate and index =Expenditure Now
Expenditure Base Year
Consumer Price Index
Year
CPI
2002
1000
2003
1222
2004
1300
2005
2300
% price
level
change
Measures rate of
change in price level
from the base year
(2002).
Rate of change between
2003 and 2004 is
22.2%
30%
130%
1300 – 1222 * 100
1222
6.4%
Change in CPI
• An increase in the CPI is called inflation. The
price level increases. The purchasing power of
money decreases.
• A decrease in the CPI is called deflation.
• Disinflation refers to a decrease in the inflation
rate. The CPI is increasing at a decreasing rate.
Real Values
• Calculated using constant prices. –prices used for
one year is used to calculate values for all years
• Are inflation adjusted.
• Can be meaningfully compared from year to year
• Real GDP
= Nominal Value X 1000
CPI
Real GDP and Nominal GDP
• Nominal GDP= the actual dollar value of all
goods and services produced in a year
• Real GDP= is nominal GDP adjusted for
inflation.
• This measure allows for comparison of
changes in the value of national output
without price changes distorting the data.
Real GDP
• In order to calculate RGDP the effect of price increases
need to be removed.
• We will use the CPI index to do this: both the base year
value (1000) and the value for the year we are
calculating the RGDP for.
• The part of the equation in which this is taken into
account is the GDP deflator: (taking inflation out of
GDP value)
» CPIbase
CPIyear1
Real GDP equation
• RGDP = GDPyear1 × CPIbase (GDP deflator)
CPIyear1
NOTE: Year 1 refers to the year you are calculating the RGDP
for.
• Real GDP =
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 (𝐶𝑃𝐼)
× 1000
• Where CPI is the official measure of inflation in New
Zealand.
Real GDP
Quantity of
Pizzas
Price of
pizzas
Quantity of
pies
Price of pies
2000
10
$10
15
$5
2004
20
$12
30
$6
Using the data in the table above and assume year 2000 is the base year
find real GDP fro years 2000 and 2004
How much did real output grow between 2000 and 2004
Year 2000 real GDP=(10pizzasX$10/pizza) +(15piesX$5/pie)=$175
Year 2004 real GDP=(year 2004 quantity pizza's X year 2000 pizza prices) +
(Year 2004 quantity pies X year 2000 pie prices)
= (20X$10) + (30X$5)
=$350
By using real GDP we have eliminated the effects of price changes and
obtained a reasonable measure of actual change in physical production
Measuring the % Change
The general formula for calculating the % change
% change =
𝑁𝑒𝑤 − 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙
× 100
Measuring the rate of Economic Growth
• Rate of growth= GDP 2nd year-GDP 1st year x 100
GDP 1ST year
Calculating the rate of inflation

Rate of inflation= CPI 2ND year - CPI 1ST year x 100
CPI 1ST year
Limitations to GDP
• In groups give an opinion into how well GDP is as a
measure of the standard of living.
• Think about
– Unpaid work? Non-market activities? If it is not sold it is not
counted
– Merit and demerit goods
– The distribution of wealth.
• Standard of living - the degree to which people have
access to goods and services that make their lives
easier, healthier, safer and more enjoyable
Limitations to GDP as a measure of
Standard of Living
• Non market activity
– GDP excludes
• Voluntary Labour
• Cash transactions, barter
• Illegal transactions
• Relative Merits of production
– There is no distinction in GDP whether goods being produced are merit
goods or demerit goods e.g. a dollar spend on cigarettes has the same
weight as a dollar spent on education
• Distribution of Income
– GDP is a total.
– Does not tell us how this total is distributed
• e.g. a country may have high GDP but there also may be large numbers of
people living in poverty.
GDP per capita
• Use GDP per capita (per head of population).
• GDP per capita =
GDP
Total Population
Shows how much of the economies total
production each person would receive if it was
divided equally