Download What is Economic Growth?

What is Economic Growth?
How do we know when we are better off?
What is our aim as consumers?
• Satisfy our wants and needs
• We do this through purchasing goods and
services
• Goods and services gives us satisfaction (called
utility)
• e.g. Purchasing food to satisfy
our hunger
• We make the assumption that we gain more
satisfaction when we have more goods and
services
• So the more goods and services the economy
produces the better off we will be
• Economic growth = When the economy
produces more goods and services
Real
Income
Economic
Growth is an
Increase in
Productive
Capacity
Net Social
Welfare
Economic growth as an increase in
real income
• GDP is a measure of national income
• Gross domestic product= dollar value of the production
of goods and services produced in an economy in a year
• An economies standard of living is measured by the
number of goods and services that it has available to use
and enjoy. Thus if GDP has risen (there has been an
increase in the amount of goods and services produced)
an economies standard of living would have risen also
as well as economic growth.
Growth as increased Social
Welfare
• Net social welfare takes into account factors other than
material wealth.
• Net social welfare = Economic welfare + non-economic
welfare
• Indicators of non-economic welfare include:
–
–
–
–
–
–
Population
Birth rate
Death rate
Life expectancy
Infant mortality
Density of population
Growth as increased Social Welfare
Net Social Welfare (EXAMPLE)
Economic Welfare
- More cars and
material
possessions
An
Econom
y
NET SOCIAL WELFARE
- But overall are people better
off than they were in the Past?
Non-Economic Welfare
- But there is
congestion, pollution
and not enough time to
enjoy these things.
Growth as increased Productive
capacity
• Is the potential of a Nations resources, i.e.:
– Everyone has a job
– All factories, shops are working to their potential
– All land and sea activities are in use
• Increasing capital formation (investment) means that the
economy is able to produce greater quantities of goods
and services
– Stocks of capital goods must have increased
• INVESTMENT
• Gross Fixed Capital Formation – Depreciation = Net
Fixed Capital Formation
means you must be replacing worn out capital plus some.
Growth as increased productive
capacity
Questions
1. Plot gross fixed capital formation, net fixed capital formation and consumption of
fixed capital on a multi line graph ( one graph 3 lines)
2. Describe the trends you observe
3. Give an example of capital formation of (a) private (b) central govt (c) local govt
4. What factors might be causing the changes in gross fixed capital formation by
the private sector and the public sector?
HDI index
• The HDI index is one way of attempting to
utilise the Net Social Welfare definition of
Growth.
• It takes into account three separate idea’s:
– Long and healthy life (life expectancy index)
– Education and Knowledge (adult literacy rate
and gross enrolment ratio= Education index)
– A decent standard of living (GDP index)
• HDI index = 1/3 (Life expectancy index) +
1/3 (Education index) + 1/3 (GDP index)
Measuring Economic Growth
• GDP= P x Q
• Gross domestic product is the quantity of
goods and services multiplied by the price
paid for each unit.
Measuring GDP: Example
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!
Real Vs Nominal GDP
• GDP= PXQ -what we call ‘nominal GDP’.
• Nominal Values are calculated using current
prices. These prices do not have the effects of
inflation or price changes removed.
• Inflation = Increase’s in the price level
• These values cannot be meaningfully compared
from year to year
Real GDP
• Real GDP is slightly different to nominal in that inflation is
taken into account
• Calculated using constant prices. – prices used for one
year is used to calculate values for all years
• Can be meaningfully compared from year to year
• Real Income= Nominal GDP (year x)
Price index (year x)
• Definition
• GDP = nominal GDP with the removal of the distortion
caused by increasing prices (inflation)
Measuring Economic Growth
• Rate of economic growth = Real GDP (year 2) –Real GDP (year1)
X 100
Real GDP (year 1)
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 for 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)
=$350
By using real GDP we have eliminated the effects of price changes and
obtained a reasonable measure of actual change in physical production
Growth 350-175/175 X 100 = 100% growth
A comparison of Real GDP growth : NZ and the OECD
During the 1980s NZ was well behind the OECD in its rate of economic growth.
But NZ has now managed to achieve growth rates in excess of the OECD
average since that time.
International Comparisons
• Is it fair that we compare NZ’s GDP with
Australia’s?
• That is, will we measure up to the amount of
final goods and services that Australia
produces?
• Why/ why not?
• Hence we calculate Real GDP per capita.
Real GDP per Capita
Country
Real GDP ($b)
A
B
100
150
By looking solely at this table which country seems better off?
Country B- since real GDP in B is higher than in A.
BUT
What matters is the number of people amongst whom this GDP has
to be spread.
Real GDP per Capita
Country
Real GDP ($b)
Population
(million)
Real GDP per
person ($)
A
B
100
150
5
10
20,000
15,000
Real GDP tells us the value of goods and services that is produced
per person.
The population of A is clearly better off as the real GDP per person
is greater in A than in B
Limitations of Real GDP per capita
• Distribution of goods
– The calculation of real GDP merely tells us the value of production if we
spread GDP equally across the population. This is almost
certainty not the case in real world. We need to know how evenly
or unevenly income is distributed across the population
The Lorenz Curve
- Illustrates the distribution of
income.
Line of inequality –
The further the line is
bowed out the greater
the inequality of
income distribution
Line of
equality. If
income was
distributed
evenly.
Limitations of Real GDP per capita
• Rates of unemployment
• The types of goods and services being
produced
• The level of the population in the economy
The Production Possibility
Frontier:
• The PPF model can be used to illustrate a
number of economic concepts, particularly those
related to growth.
• Three different ideas of Growth have been
outlined already. These were real income,
productive capacity, and net social welfare.
• Productive capacity in particular can be shown
using the PPF.