Download Economic growth

Chapter 12: GDP and
Economic Growth
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved
Gross Domestic Product
(GDP)
 GDP is the primary measure of an economy’s
performance.
 In the U.S. GDP is determined by the Bureau of
Economic Analysis (BEA), an agency of the Commerce
Department.
 GDP is a monetary measure.
 It compares the relative value of goods and services
produced in different year.
Gross domestic product (GDP) is the total market value of
all final goods and services produced annually within the
U.S., whether by U.S. or foreign-supplied resources.
LO: 12-1
12-2
Avoiding Double-Counting
in Computing GDP
 To avoid counting components that are bought
and sold multiple times, GDP includes only the
market value of final goods and ignores
intermediate goods altogether.
 Secondhand goods are also excluded from GDP
since they do not contribute to current
production.
 These goods were previously counted in the year
they were produced.
LO: 12-1
12-3
Measuring GDP
GDP = C + Ig + G + Xn
The simplest way to measure GDP is to add up all that
was spent to buy total output in a certain year.
Four categories of spending are added up
Personal
Consumption
Espenditures (C):
Expenditures by
households for
durable goods,
nondurable goods,
and services.
Gross Private
Domestic
Investment (Ig):
Expenditures for newly
produced capital goods
(such as plant and
equipment) and for
additions to inventories.
Government
Purchases (G):
Government
expenditures on
final goods,
services, and
publicly owned
capital.
Net Exports
(Xn):
Exports
minus
Imports
LO: 12-1
12-4
Nominal and Real GDP
 It is difficult to compare values over time without
correcting them for inflation or deflation.
 The monetary value of GDP changes from year to
year either due to changes in prices or output.
 To distinguish the two, economists compute nominal
GDP and real GDP.
Nominal GDP is measured in
terms of the price level at the time
of measurement (i.e., GDP that is
unadjusted for inflation).
Real GDP is measured in terms
of the price level in a base
period (i.e., GDP that is adjusted
for inflation).
LO: 12-2
12-5
Calculating Real GDP
Year
Units of
Price Nominal
Output per Unit
GDP
Real
GDP
1 (base)
5
10
50
50
2
7
20
140
70
3
8
25
200
80
4
10
30
300
100
LO: 12-2
12-6
Economic Growth
 Economic growth is an economic goal of
government since it raises the standards of living in
society and lessens the burden of scarcity.
 Two fundamental ways society can increase its real
output and income are:
 by increasing its inputs of resources
 by increasing the productivity of those inputs
Economic growth is the expansion of real GDP (or real GDP per
capita) over time.
LO: 12-3
12-7
Economic Growth in the U.S.
LO: 12-3
12-8
Ingredients of Economic
Growth
Six main ingredients of economic growth:
 Supply factors:




Increases in the quantity and quality of natural resources
Increases in the quantity and quality of human resources
Increases in the supply or stock of capital goods
Improvements in technology
 Demand factor: households, businesses, and
government must purchase the expanding output.
 Efficiency factor: economy must achieve economic
efficiency and full employment.
LO: 12-4
12-9
Capital Goods
Economic Growth and
Production Possibilities
Economic
Growth
A
LO: 12-4
b
a
B
Economic
growth is an
expansion of
production
possibilities.
D
Consumer Goods
12-10
Growth Accounting
Growth accounting measures relative importance
of supply factors contributing to growth:
 Increases in hours of work (small factor in the U.S.)
 Increases in labor productivity due to
 Technological advance (40% of productivity growth)
 Quantity of capital (30% of productivity growth)
 Education and training (15% of productivity growth)
 Economies of scale and resource allocation (15% of
productivity growth)
LO: 12-5
12-11
Labor Productivity
Accelerated since mid-90s
LO: 12-6
12-12
Reasons for Productivity
Acceleration
 Microchip/information technology
 New (start-up) firms
 Increasing returns (firm’s output increases
by a larger percentage than its inputs)





More specialized inputs
Spreading of development costs
Simultaneous consumption
Network effects
Learning by doing
 Global competition
LO: 12-6
12-13
Desirability and
Sustainability of Growth
 Is accelerated productivity growth sustainable?
 Is economic growth desirable and sustainable?
The antigrowth view:
• Environmental problems
and resource depletion
• No evidence that growth
solved sociological problems
• Economic wealth ≠ good life
• Fast economic growth is not
sustainable
LO: 12-7
In defense of economic growth:
• Growth increases the standard
of living
• Growth is the only way to
resolve the problem of poverty
• Growth improved working
conditions
• Human imagination can solve
environmental and resource
issues, and therefore, growth is
sustainable
12-14
Economic Growth in China
 Growth averages past 25 years:
 9% annual growth output
 8% annual growth output per capita
 What were the sources of this growth?




Labor more productive
More international trade
Transition to market economy
Joined WTO 2001
 What are the challenges?
 Financial system remains weak
 Income inequality across geographic areas
LO: 12-8
12-15