Transcript Measure Economic Growth

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:
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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.
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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?