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Transcript
MEASURES OF ECONOMIC GROWTH Biba S. Kavass OBJECTIVES • Define economic growth. • Analyze measures of economic growth. • Examine GDP per capita. • Analyze how GDP is related to a country’s standard of living. Economic Growth Process by which a nation’s wealth increases over time. • Rate of economic growth affected by: – – – – Natural Resources Human Resources/Capital Capital Resources Technological Development – makes workers more productive – Trade Labor Productivity • Human Capital – skills, education, or training that makes workers more productive such as technology • Most important determinant of long-run economic growth • Measured by nominal GDP per worker Measure Economic Growth • Gross Domestic Product (GDP • National Income per Capita • Consumption per Capita Gross Domestic Product (GDP) • Real rate of growth in a country’s total output of goods and services produced in a given year. • Single best measure of the economic well-being of a society. • Largest category of spending measured – consumer spending • Calculated: Price x Quantity Calculating GDP • Price x Quantity – Only count final goods so no double counting • Example: – In 2005, Country X produced 10 computers at $800 – In 2008, Country X produced 14 computers at $900 – Real GDP is • (10 x 800) = $8,000 (14 x $800) = $11,200 • Growth Rate in Real GDP 11,200 – 8,000 x 100 = 40% 8,000 Types of GDP • Nominal GDP (Current Dollar GDP): – Use current year’s prices for goods and services • Real GDP (Constant Dollar GDP): – Use a base year’s prices – adjusted for price changes over time (i.e., inflation or deflation) – Used to compare the growth of output of a country or countries over time. – PRIMARY MEASURE OF ECONOMIC PERFORMANCE OVER TIME Inflation vs. Deflation Inflation – upward price movement of goods and services in an economy. – Caused by: rise in production costs, excess printed money in circulation, national debt and international lending – Impact to consumers: standard of living decreases – Difference between inflation and normal price increases: Normal price increases are caused by natural law of supply and demand. Inflation is an increase in prices due to more money moving into the system. Inflation vs. Deflation Inflation – upward price movement of goods and services in an economy. – Real GDP is less than nominal GDP – Disinflation – decrease in rate of inflation – Unanticipated Inflation – benefits borrowers – harms lenders • Real Interest Rate – nominal interest rate minus rate of inflation Inflation vs. Deflation Con’t • Deflation – downward price movement of goods and services in an economy. – Caused by: drop in demand, increase in supply of goods, and decrease in money supply. – Impact to consumers: spend less, credit harder to come by, can lead to recession. – Recessions – usually short run economic issue Measure Inflation Consumer Price Index (CPI) – weighted average of price changes in consumer goods and services – weighted by number of units of each good average household consumes – Current CPI – 3.9% (224.433) Calculate rate of inflation over time using CPI: May 2010 – 221.898 May 2011 – 224.433 224.433 – 221.898 x 100 = 1.14% 221.898 Measure Inflation Con’t • Producer Price Indexes (PPI) – measure of price changes from the perspective of the seller – leading indicator of consumer spending. – Current CPI – +0.8% http://www.usinflationcalculator.com/inflation/current-inflation-rates/ Business Cycle • Describes short-run GDP fluctuations in overall economic activity. – – – – Contraction - When the economy starts slowing down. Trough - When the economy hits bottom, usually in a recession. Expansion - When the economy starts growing again. Peak - When the economy is in a state of "irrational exuberance." Business Cycle Unemployment Definition • Person does not have a job but is looking for one. • Natural Rate of Unemployment – rate that occurs when resources are fully employed. • Current US Unemployment Rate – 9.1% • Frictional Unemployment – due to time spent looking for a job • Cyclical Unemployment – when unemployment rises during a recession Standard of Living • Measure of the goods and services available to each person in a country – measure of economic well-being. GDP per Capita • GDP divided by the total population of a country. • Increase in GDP per capita means standard of living has increased • Why would GDP per capita provide more information about a country’s standard of living than total GDP? Look at China? World’s Richest Countries Source: International Monetary Fund 2011 World’s Poorest Countries Source: International Monetary Fund 2011 Food for Thought • Why is there such a disparity between wealth and poverty among some countries?