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GDP & PRODUCTIVITY?
CHAPTER 12 Notes
Koehn, Davis & Adamo
2010
How do your parents know whether or not
you are doing well in school?
WELL, THE USA NEEDS
 Progress Reports
TO TRACK IT’S PROGRESS
TOO. WE MUST TRACK
 Report Cards
OUR COUNTRY TO SEE IF
 Test Grades
WE ARE GROWING
 Teacher feedback
BETTER EACH YEAR. WE
 Behavior (Suspensions,
School…etc)
TRACK OURSaturday
COUNTRY
EVERY THREE MONTHS
(CALLED QUARTERS) BY
MEASURING OUR GDP.
Gross Domestic Product is
The total value of all FINAL
goods and services produced in
the United States
WHICH IS A FINAL PRODUCT?
!!!REMEMBER!!!
GDP only figures in values of
FINAL products
GDP is only a measurement of
money earned from sales
INSIDE the US.
GDP is calculated
QUARTLY…ever 3 months!!
THE FOUR PARTS OF GDP
•(C) CONSUMPTION
•(I) INVESTMENT
•(G) GOVERNMEN PURCHASES
•(NX) NET EXPORTS
Y = C + I + G + NX
EXPLANATION OF GDP COMPONENTS
CONSUMPTION
EXAMPLES
is total spending
by households
Your family buying
on g&sGROCERIES,
A NEW CAR, CLOTHING
INVESTMENT
is total spending
on goods that
EXAMPLES
will be used in the
future to
COMPUTERS,
HAMMERS,
produceDRILLS,
more goods…USUALLY
SAWS
BOUGHT BY A BUSINESS
GOVERNMENT PURCHASE
EXAMPLES
is all spending
on the g&s
TANKS,
GUNS,byPLANES,
purchased
govt
PROPERTY
at the federal,
state, and local
levels
EXAMPLES
NET
EXPORTS
selling–cars
to Germany,
NXFord
= exports
imports,
Exports
APPLEforeign
selling computers
to
represent
spending on
the economy’sFrance
g&s
HEY! DON’T INCLUDE…
Be sure not to include TRANSFER PAYMENTS when
calculation GOVERNMENT PURCHASES.
TRANSFER PAYMENTS included things like
WELFARE, SOCIAL SECURITY, UNEMPLOYMENT
CHECKS, DISABILITY, FOOD STAMPS….
These are not PURCHASES, they are just
distributions of money to people that need it. People
who receive these payments will buy stuff. Their
purchases will be tracked under CONSUMPTION.
The Goal of GDP
 The United States hopes to sell more
products and services each year.
 More sales means companies are earning
more profits.
 More profits earned means more jobs for
people.
 Hopefully our GDP is higher each quarter.
PRODUCTIVITY
NOW…
What are some things that help YOU be a
more PRODUCTIVE person?
 Computer
 Calculator
 Planner
 Smart Phone
 Text messaging
 Email
 Responsible parents who teach you the right way
to do things
A wise man once said….
So…the BIG question is…WHY ARE
SOME COUNTRIES POOR AND WHY
ARE SOME RICH?
“If you give a man a fish, he
can eat for a day. If you
teach a man how to fish,
he can eat for a lifetime.”
WE WILL FIND OUT RIGHT NOW.
A COUNTRY’S SUCCESS DEPENDS ON
ITS ABILITY TO PRODUCE GOODS
AND SERVICES…IF IT CAN’T, PEOPLE
CAN NOT BE EMPLOYED AND WILL
HAVE A LOWER QUALITY OF LIFE.
IF A COUNTRY HAS NOTHING TO
OFFER, LESS COUNTRIES CARE TO
HELP THEM OUT.
A typical family with all their possessions in the U.K., an
advanced economy
Real GDP per capita:
Life expectancy:
Adult literacy:
$32,000
78 years
99%
A typical family with all their possessions in Mexico, a
middle income country
Real GDP per capita:
Life expectancy:
Adult literacy:
$10,200
74 years
92%
A typical family with all their possessions in Mali, a
poor country
Real GDP per capita:
Life expectancy:
Adult literacy:
$1,000
41 years
46%
Incomes
and Growth
Around the
World
FACT 1:
There are
vast
differences
in living
standards
around the
world.
GDP per
Growth rate,
capita, 2005 1960-2005
China
Singapore
Japan
Spain
India
Israel
United States
Canada
Colombia
New Zealand
Philippines
Argentina
Saudi Arabia
Rwanda
Haiti
$6,572
29,921
30,821
26,125
3,486
25,670
41,854
32,886
7,769
22,511
4,920
14,421
14,729
1,333
1,836
5.8%
5.4%
3.8%
3.2%
2.7%
2.7%
2.2%
2.1%
1.8%
1.4%
1.4%
1.0%
0.8%
0.3%
–1.2%
Incomes
and Growth
Around the
World
FACT 2:
There is also
great
variation
in growth
rates across
countries.
GDP per
Growth rate,
capita, 2005 1960-2005
China
Singapore
Japan
Spain
India
Israel
United States
Canada
Colombia
New Zealand
Philippines
Argentina
Saudi Arabia
Rwanda
Haiti
$6,572
29,921
30,821
26,125
3,486
25,670
41,854
32,886
7,769
22,511
4,920
14,421
14,729
1,333
1,836
5.8%
5.4%
3.8%
3.2%
2.7%
2.7%
2.2%
2.1%
1.8%
1.4%
1.4%
1.0%
0.8%
0.3%
–1.2%
Productivity
 Productivity:
the average quantity of g&s produced
per unit of labor input.
 Y = GDP = quantity of output produced
L = quantity of labor
so productivity = Y/L (output per worker)
Why Productivity Is So Important
 When a nation’s workers are very productive, GDP
is large and incomes are high.
 When productivity grows rapidly, so do living
standards.
 What, then, determines productivity and its
growth rate? WELL…THERE ARE FOUR
THINGS THAT DETERMING
PRODUCTIVITY…..
1. Physical Capital Per Worker
 The amount of equipment and structures used to
produce g&s is called [physical] capital, denoted
by the letter (K).
 K/L = capital per worker.
 Productivity is higher when the average worker has
more capital (machines, equipment, etc.).
 i.e.,
an increase in K/L causes an increase in Y/L.
2. Human Capital Per Worker
 Human capital (H):
the knowledge and skills workers acquire through
education, training, and experience
 H/L = the average worker’s human capital
 Productivity is higher when the average worker has
more human capital (education, skills, etc.).
 i.e.,
an increase in H/L causes an increase in Y/L.
3. Natural Resources Per Worker
 Natural resources (N): the inputs into production
that nature provides, e.g., land, mineral deposits
 More N allows a country to produce more Y.
In per-worker terms,
an increase in N/L causes an increase in Y/L.
 Some countries are rich because they have abundant
natural resources
(e.g., Saudi Arabia has lots of oil)
 But countries need not have much N to be rich
(e.g., Japan imports the N it needs).
4. Technological Knowledge
 Technological knowledge: society’s
understanding of the best ways to produce g&s
 Technological progress does not only mean
a faster computer, a higher-definition TV,
or a smaller cell phone.
 It means any advance in knowledge that boosts
productivity (allows society to get more output
from its resources).
 e.g., Henry Ford and the assembly line.
The Production Function
 So…as you can see, a country’s success depends on its
ability to produce goods and services.
 Countries that are more productive have a better
quality of life and the people live longer.
 Countries that are poor lack (NATURAL
RESOURCES, EDUCATION, TOOLS AN D
TECHNOLOGY)
 If you really want to help poor countries, don’t send
them money…give them the means to produce
 Don’t give a man a fish…teach a
man how to fish!!!
Real versus Nominal GDP
 Inflation can distort economic variables like GDP,
so we have two versions of GDP:
One is corrected for inflation, the other is not.
 Nominal GDP values output using current prices.
It is not corrected for inflation.
 Real GDP values output using the prices of
a base year. Real GDP is corrected for inflation.
CHAPTER 23 MEASURING A
NATION’S INCOME
EXAMPLE:
Pizza
Latte
year
P
Q
P
Q
2002
$10
400
$2.00
1000
2003
$11
500
$2.50
1100
2004
$12
600
$3.00
1200
Compute nominal GDP in each year:
2002:
2003:
2004:
$10 x 400 +
$2 x 1000
$11 x 500 + $2.50 x 1100
$12 x 600 + $3 x 1200
Increase:
= $6,000
= $8,250
= $10,800
37.5%
30.9%
EXAMPLE:
Pizza
Latte
year
P
Q
P
Q
2002
400
500
$2.00
$2.50
1000
2003
$10
$11
2004
$12
600
$3.00
1200
Compute real GDP in each year,
using 2002 as the base year:
1100
Increase:
2002: $10 x 400 + $2 x 1000 = $6,000
20.0%
2003: $10 x 500 + $2 x 1100 = $7,200
2004: $10 x 600 + $2 x 1200 = $8,400
16.7%
CHAPTER 23 MEASURING A
NATION’S INCOME