Download Measuring Economic Growth

ECONOMIC GROWTH
AND PERFORMANCE
MEASURING ECONOMIC
GROWTH
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GDP OR GNP?
Measures a nation’s
annual output
Based on total market
value of final goods
and services
produced within the
borders of a country
Provides the single
most important
measure of the
economy’s overall
performance
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GDP OR GNP?
Measures a nation’s annual
income
Based on total market
value of goods and
services produced by the
residents of a country
(even if they are living
abroad)
Goods, services, produced
by labor & property
supplied by U.S. residents
Business Cycles
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A period of expansion followed by a
period of contraction --- “economic
fluctuation”
Expansion = economic growth
Peak = height of an expansion (GDP
stops rising)
Contraction = economic decline
Trough = lowest point in a
contraction
Recession vs. Depression
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Recession = prolonged economic
contraction
• 6 to 18 months usually
• Unemployment 6 – 10%
• The Great Recession?
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Depression = long, severe, deep
recession
• Lasts longer
• More unemployment; low output
Variables that affect business cycles:
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Business investment
• Expand when economy does; creates
addfitional output and jobs
Interest Rates and Credit
• High rates; consumers don’t buy and
businesses don’t expand
• Low savings rates --- no $ for loans
Consumer Expectations
• Consumers may reduce spending if
expecting a downturn
External Shocks
• Droughts, oil crisis, wars
Measuring
Economic Growth
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By real GDP per capita over time.
Census every 10 yrs. since 1790 (required by Constitution)
Trend in rate of population growth since colonial times
is that it is declining; households are getting smaller
Major pattern of regional population change?
• W and S growing; NE & Central Plains show losses
GDP measures standard of living - in the U.S.?
What does GDP NOT measure?
Measuring
Economic Growth
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Also done by looking at foreign trade.
Can result in a trade deficit where the value of goods
imported is higher than the value of goods exported.
• BUT, if these imports are goods such as structures and
equipment used by businesses, a trade deficit may not
necessarily be bad.
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Also measure economic growth by looking at a
nation’s technological progress
• In economic terms, this is defined as an increase in efficiency
gained by producing more output without using more inputs.
• What would cause technological progress?
MEASURING UNEMPLOYMENT
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Number of unemployed
identified monthly by
Census Bureau
Unemployment rate does
not include dropouts and
makes no distinction
between full and part time
employees
What is the difference
between frictional,
structural, cyclical,
seasonal and technological
unemployment?
MEASURING UNEMPLOYMENT
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Frictional unemployment is
when workers are between
jobs – trying to find a job.
Structural unemployment
happens when a change in
the economy occurs that
reduces the demand for
workers’ skills
• New technology… horses to
cars
• New resources
• Changes in consumer demand
• Globalization – companies
move assembly work to China
• Lack of education… so can’t do
a good job…get fired
MEASURING UNEMPLOYMENT
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Seasonal unemployment occurs as the result of
harvest schedules, vacations, or when industries
make seasonal shifts in their production schedules
Cyclical unemployment: unemployment that rises
during economic downturns and falls when the
economy improves
MEASURING UNEMPLOYMENT
Unemployment
always exists, even
in a booming
economy.
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Unemployment rate calculated by the BLS
The Bureau of Labor Statistics (BLS) computes the unemployment
rate from a monthly household survey of 60,000 families who
represent a cross-section of the U.S.
• It’s always adjusted for seasonal unemployment.
• It’s an average for the nation, not particular regions.
An unemployment rate of around 4 to 6 percent is normal.
What is “full employment” according to economists?
• when no cyclical unemployment exists
Interactive map of the Recession http://www.latoyaegwuekwe.com/geographyofarecession.html
The Effects of Rising Prices
Inflation = a general
increase in prices across
an economy.
 Over the years, prices
generally go up. Inflation
shrinks the value, or
purchasing power of
things.
• To measure inflation,
economists compare price
levels.
– To help them calculate
price level, economists
use a price index
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PRICE INDEXES
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Price Indexes remove distortions
of inflation in measuring economic
performance
CONSUMER PRICE INDEX – CPI
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Best known price index
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Reports on price changes for
about 90,000 items in 364
different categories
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Items in the basket
reevaluated every 10 years
PRODUCER PRICE INDEX Measure of price changes paid by
producers for their inputs based
on samples of approximately
100,000 different types of items
INFLATION
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Major Causes?
• Growth of Money Supply
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Excessive Monetary Growth
Money supply grows too fast….value
down…prices up
• Changes in Demand
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Output can’t keep up with
demand…shortages…prices up
• Changes in Supply Costs
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Rising input costs (labor…unions) push up costs
of products
• Wage-Price Spiral
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Higher prices..workers want higher
wages..producers try to recover by setting higher
prices……
INFLATION
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Consequences?
• Dollar buys less
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What does it mean if the
inflation rate is 10%
• Affects Income
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Causes people to change spending habits
Hard on fixed incomes: retired, etc.
Encourages speculation - people trying to take
advantage of higher prices and buy luxury items
expecting price to go up
• Affects Interest Rates
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If the inflation rate is higher than the bank’s
interest rates, savers lose money
• Current Inflation Rate: 1%
POVERTY
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Poverty threshold: the income level
below which income is insufficient to
support a family or household
• Currently about $11,000/individual
• Approximately $23,000/family of 4
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Poverty rate: the percentage of people
who live in households with income
below the official poverty threshold
Poverty rates differ sharply by group,
according to several indicators:
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Race and ethnic origin—the poverty rate among
minorities is higher than among whites
Type of family—single mother families have a
greater poverty rate
Age—children are the largest age group living in
poverty
Residence—inner cities have double the poverty
rate of those who live outside the inner city
Households headed by women, African
Americans, Hispanics, and Native Americans
are more likely than other groups to have
incomes below the poverty threshold
The new Homeless in America: VIDEO
International Trade
NAFTA
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Created world’s largest free trade zone
Removed or reduced many, but not all, tariff barriers
among U.S., Canada, Mexico
Signed in December 1992; in force by January 1994
Main Features of NAFTA
Market Access
Increases market access for goods to move across
borders in North America.
Duty free access already between U.S. & Canada for
most goods but brought immediate elimination of
tariffs on more than one half of all Mexican exports
and rest of export tariffs to be eliminated over the
next 10 years.
Provisions that make customs administration easier
and help solve disputes on customs matters more
quickly.
A huge success or a colossal failure?
• Total trade between the nations has increased.
• The US goods trade deficit with NAFTA was $94.6 billion in 2010, a 36.4%
increase ($25 billion) over 2009.
• The US goods trade deficit with NAFTA accounted for 26.8% of the
overall U.S. goods trade deficit in 2010.
World Trade Organization
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January 1995 – to promote free trade – to
supervise and liberalize international trade
• Countries reducing tariffs, quotas…some tariffs dropped
altogether
• Sets the rules for international commerce
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Helps settle disputes between nations
• Authorizes trade sanctions
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The WTO is a place where member governments
go to try to sort out the trade problems they face
with each other.
Provides technical assistance
and technical training for
developing countries
So…..why the negativity?
• Human rights issues
• Environmental issues