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3. [8 pts] Indicate whether each of the following is counted in the U.S. GDP for the year 2006. Explain each of your answers. (a) The value of used textbook sold through online auction in 2006. Answer: No, it was counted the year it was produced. Because it was not produced again, it would not be counted. That would be double counting. [2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006] b. Rent paid in 2006 by residents in an apartment building built in 2000 Answer: Yes, rents consist of the income received by the households and businesses that supply property resources. The properties have to be maintained or “serviced” each year. It is included in the income approach to GDP. [2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services] c. Commissions earned in 2006 by a stockbroker Answer: Yes, payment is being made for productive services of the broker. So the purchase of stocks would not count but his work would. [2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services] d. The value of autos produced in 2006 entirely in South Korea by a firm fully owned by U.S. citizens Answer: No, GDP measures production inside the U.S. regardless of ownership. These autos were produced in South Korea. [2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea] ECONOMIC GROWTH An increase in real GDP over time An increase in Real GDP per capita over time [Real GDP/population = Real GDP per capita] •Increase in population decrease in the standard of living •Growth is a Goal [lessens the burden of scarcity] •Main Sources of Growth •Increases in Resources •Increases in Productivity [Health, training, education and motivation improvements] Rule of 70- the time it takes a variable that grows gradually over time to double $5,000 invested at 7 percent interest per year, will double in size in 10 years 70/ 7 = 10 Can only be applied to positive growth “RULE OF 70” 7 yrs “REAL INCOME” 6 yrs 8 yrs 6 15 Productivity refers to the amount of goods and services produced from each unit of labor input. A nation’s standard of living is determined largely by the productivity of its workers. The inputs used to produce goods and services are called the factors of production. The factors of production include: Physical capital (buildings and machinery) Human capital (education and training) Natural resources Technological knowledge (inventions) The factors of production directly determine productivity. How Productivity Is Determined Physical Capital- produced factor of production and stock of equipment and structures that are used to produce goods and services. Tools used to build or repair automobiles. Tools used to build furniture. Office buildings, schools, etc. Human Capital- knowledge and skills that workers acquire through education, training, and experience Natural Resources- inputs used in production that are provided by nature Renewable resources include trees and forests. Nonrenewable resources include petroleum and coal. can be important but are not necessary for an economy to be highly productive in producing goods and services. Technological Knowledge- society’s understanding of the best ways to produce goods and services. (super important) http://www.yo utube.com/wat ch?v=rSKS96 DVx1M Labor productivity- output/worker Sustained growth in rGDP/capita occurs only when amount of output produced by the average worker increases steadily This is the only way to measure growth, not unemployment rate Healthier workers are more productive. Good investments in the health of the population can lead to increase living standards. Countries can get caught in a vicious cycle. People are poor People cannot afford adequate health care and nutritious food. Why do economics focus on rGDP/capita as a measure of economic progress rather than nGDP or rGDP? Look at a measure that rises with the standard of living because the economists believe that if citizens are better off than that’s the best measure of progress. rGDP/capita accounts for changes in population and changes in prices Although China and India have higher growth rates than the US, typical Chinese and Indian households are far poorer than US households, why? China and India have just begun to grow rapidly, so Chinese and Indian households have not yet caught up with US households AGGREGATE PRODUCTION FUNCTION Shows how productivity depends on the quantities of physical capital/worker and human capital/worker as well as the state of technology .4 GDP/worker= t(pc/worker) x (hc/worker) t= technology pc= physical capital/worker hc= human capital/worker .6 Production Function: another expression Y = A F(L, K, H, N) Y = quantity of output A = available production technology L = quantity of labor K = quantity of physical capital H = quantity of human capital N = quantity of natural resources F( ) is a function that shows how the inputs are combined. The Production Function Setting x = 1/L, Y/ L = A F(1, K/ L, H/ L, N/ L) Where: Y/L = output per worker K/L = physical capital per worker H/L = human capital per worker N/L = natural resources per worker As the stock of capital rises, the extra output produced from an additional unit of capital falls; this property is called diminishing returns. Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while. In the long run, the higher saving rate leads to a higher level of productivity and income, but not to higher growth in these areas. DIMINISHING RETURNS TO PHYSICAL CAPITAL If human capital/worker and technology are fixed, each successive increase in the amount of physical capital/worker leads to a smaller increase in productivity More expensive equipment won’t make a worker exponentially more productive Growth accounting- estimate contribution of each major factor in the aggregate production function to economic growth Allows ability to calculate effects of greater physical and human capital on economic growth Total factor productivity- amount of output that can be achieved with a given amount of factor inputs increased Expanding Productive Capacity No change Maintaining our production possibilities Static Productive Capacity decreased Declining Productive Capacity International differences in rGDP/capita tend to narrow over time Catch-up effect- condition that, other things being equal, it is easier for a country to grow fast if it starts out relatively poor Asia Increased savings Education- generate new ideas about how best to produce goods and services, which in turn, might enter society’s pool of knowledge and provide an external benefit to others. Technology (used technology that had already been invented by the time they were ready) Problems (Africa and Latin America) Political instability Corruption Lack of investment Irresponsible gov’t policy eroding savings Table 1 The Variety of Growth Experiences Copyright©2004 South-Western Green = free Orange = partly free Red = not free PROPERTY RIGHTS AND POLITICAL STABILITY Property rights refer to the ability of people to exercise authority over the resources they own. An economy-wide respect for property rights is an important prerequisite for the price system to work. It is necessary for investors to feel that their investments are secure. The amounts of physical and human capital/worker are unchanged, but there’s significant technological progress, what’s the effect on the growth rate of productivity? Positive growth rate, because of the impact of technology The amount of physical capital/worker grows, but the level of human capital/worker and technology are unchanged? Productivity will grow, but due to diminishing marginal returns, each successive increase results in smaller productivity DIFFERING GROWTH RATES Increased I Increased importance of education Research and development Role of gov’t Infrastructure- education, transportation, communication, and technology Reliable banking Encourage saving and investment. Encourage investment from abroad Encourage education and training. Establish secure property rights and maintain political stability. Promote free trade. Promote research and development. Tax rates- too high? See Laffer Curve The Russian government forced thousands of people to move to Siberia in order to develop the natural resources and economy of the region. Figure 1 Growth and Investment (b) Investment 1960–1991 (a) Growth Rate 1960–1991 South Korea Singapore Japan Israel Canada Brazil West Germany Mexico United Kingdom Nigeria United States India Bangladesh Chile Rwanda 0 South Korea Singapore Japan Israel Canada Brazil West Germany Mexico United Kingdom Nigeria United States India Bangladesh Chile Rwanda 1 2 3 4 5 6 7 Growth Rate (percent) 0 10 20 30 40 Investment (percent of GDP) Copyright©2003 Southwestern/Thomson Learning 100 Tax rate (%) n m m Maximum Tax Revenue l 0 Tax revenue (dollars) President Reagan said that after WWII, when he started making big money, that he could do 4 movies before making$200,000 and hitting the top marginal tax rate of 91%. After four, he would quit making movies until the next year. Tax revenue (dollars) b 0 Maximum Tax Revenue c a Reagan b Tax rate (percent) 100 For rich people, this was a disincentive to keep working, so they would quit when they hit the top marginal tax rate. For most workers, this was not the case. Country Per Capita Luxembourg 80,800 Qatar 75,900 Bermuda 60,000 Norway 55,600 Kuwait 55,300 U.A.E. 55,200 U.S. $46,000 Ireland 45,600 Hong Kong 42,000 Switzerland 39,800 Iceland 39,400 Canada 38,200 Australia 37,500 Denmark 37,400 Country Sweden U.K. Germany France Japan Italy Australia Russia Mexico China Swaziland Liberia Zimbabwe Congo, Rep of Per Capita 36,900 35,300 34,400 33,800 33,800 31,000 24,000 14,600 12,500 5,300 4,800 500 500 300 China and India are still poorer than he U.S. was in 1900. 75% of Africans live on less than $2 a day & it is getting worse. $46,000 There are 6.6 billion people on our planet; 5 billion are in the Third World. 2.5 billion live on less than $2 a day. The direst poverty is in Africa, home of the world’s 10 poorest countries. Over ½ the people of Sub-Sahara Africa live on less than $2 a day. 8 million people die each year because they are too poor to stay alive. The Poorest Nations Nation 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Per Capita Congo, Rep. of $300 Zimbabwe $500 Liberia $500 Somalia $600 Ethiopia $700 Niger $700 Cen. African Rep. $700 Gambia, The $800 Sierra Leone $800 Malawi $800 Djibouti $1,000 ½ of the world’s population have yet to make their $25,989 first phone call. GDP Per Capita [in 1992 dollars] $15,931 $6,538 1929 1967 1996 2007 Sustained growth- continuing in the face of limited supply of resources and impact on environment Malthus- population will grow geometrically while resources will grow arithmetically Stretch natural resources Dilute capital stock Technology: What is missing? Radios: 1, Telephones: 0, Televisions: 1, VCRs: 0, Cars: 0 No running water, sink, or bathroom! Most Valued Possession – the T.V. Interesting Details – kids must walk 3 hours to get to and from school each day kids work 21 -28 hours a week Technology: What is missing? Radios: 1, Telephones: 0 Televisions: 0, Cars: 0 Why they don’t have a TV? (No electricity. They have never seen a TV.) Most Valued Possessions You can’t see them, but can you guess what they are? Religious books (parents, 1st daughter) Schoolbooks (1st son) Jump-rope (1st daughter) Technology: What is missing? Radios: 2, Telephones: 0, Televisions: 1, Cars: 0 No washing machine: The women wash clothes in the pond! No bathroom: They have two outhouses. Most valued possession: bicycle Technology: What is missing? Radios: 5, Telephones: 4, Televisions: 2, VCRs: 0, Stereos: 3, Cars: 2 Most valued possession: sailboat Technology: What is missing? Radios: 0, Telephones: 0, Televisions: 0, VCRs: 0, Cars: 0 (No electricity, running water, or bathroom.) Most valued possession: none 80% of their income is spent on food – breakfast ic, potaoes, fish and coffee, lunch is only potatoes, they do not eat dinner Technology: What is missing? Radios: 1, Telephones: 1, Televisions: 1, VCRs: 1, Cars: 1 Most valued possession: family and children Technology: What is missing? Nothing is missing! Radios: 3, Telephones: 1, Televisions: 1, Cars: 1, VCRs: 1, Microwave ovens: 1, Computers: 1 Most valued possession: family and heirloom ring and pottery Technology: What is missing? Radios: 4, Telephones: 5, Televisions: 2, VCRs: 2, Computers: 1, Cars: 4 Size of Home 4850 sq. ft. house Their home is the one with a satellite dish on the roof and a refrigerator in the carport. Living room, sitting room, dining room, kitchen, 4 bedrooms, 4 bathrooms. Office, indoor swimming pool, and servants’ quarters. Technology: What is missing? Radios: 1, Telephones: 0, Televisions: 0, VCRs: 0, Bicycles: 1, Cars: 0 (They have no electricity. No running water, no kitchen sink, no bathroom.) Most Valued Possession Bicycle (Father) What do you suppose they wish for in the future? (An irrigation system for their garden. An enclosed garden. A motorcycle.) Technology: What is missing? Radios: 1, Telephones: 0, Televisions: 1, VCRs: 1, Stereos: 2, Cars: 0 Why do they have big bottles of water? (They have running water. The city runs water lines to the street. Every family runs a garden hose from the street water main into their apartment.) Most valued possession: T.V. Technology: What is missing? Radios: 2, Telephones: 2, Televisions: 2, VCRs: 0, Stereos: 1, Cars: 1 Most valued possession: mother (after the picture was taken, the father was murdered, so the mother takes care of the family alone) What do you suppose they wish for in the future? (The mother hopes to repair her car. Cost of repairs: $2,500) Technology: What is missing? Radios: 1, Telephones: 0, Televisions: 1, VCRs: 0, Cars: 0, Motorscooters: 1 (No bathroom or running water: Mom washes in rubber tubs.) Most Valued Possessions: Motorscooter