Transcript Real GDP per Capital

AP Macroeconomics
Economic Growth &
Productivity
Module 37
Standard of living (or quality of life) can be
measured, in part, by how well the
economy is doing…
But it needs to be adjusted to reflect the
size of the nation’s population.
• Real GDP per capita is real GDP divided
by the total population. It identifies on
average how many products each person
makes.
Real GDP per capita is the best measure of
a nation’s standard of living.
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Economic Growth Defined
• Sustained increase in Real GDP over time.
• Sustained increase in Real GDP per Capita over
time (real GDP divided by the population size).
• Economic growth is not simply the recovery from a
recession. Economic growth fundamentally
increases the nation’s ability to produce goods and
services.
• One way to think about economic growth is to think
back to the model of production possibilities.
Short-run recovery is a movement from a point inside
the PPC to the limits of the PPC. Long run economic
growth is an outward shift of the entire PPC.
Sample Problem
• If a country has a population of 1,000
an area of 100 square miles, and a
GDP of $5,000,000, then its GDP per
capita is:
A) $500
B) $5,000
C) $50,000
D) 5,000,000
E) $50
Sample Problem
• If a country has a population of 1,000
an area of 100 square miles, and a
GDP of $5,000,000, then its GDP per
capita is:
A) $500
B) $5,000
C) $50,000
D) 5,000,000
E) $50
Practice Quiz 37
2. Which of the following is the key statistic
used to track economic growth?
a. GDP
b. real GDP
c. real GDP per capita
d. median real GDP
e. median real GDP per capita
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Part A: Measuring Economic Growth in Hamilton and Jefferson County
FIGURE
47.1
Year
Hamilton
Real GDP
Hamilton
Population
Jefferson
Real GDP
Jefferson
Population
1
$2.1 billion
70,000
$500,000
15
2
$2.5 billion
80,000
$525,000
16
3
$2.8 billion
90,000
$600,000
17
4
$2.7 billion
86,000
$650,000
18
1. Using Figure 47.1 as a reference, fill out the tables in 47.2-4
Time Period
Hamilton % ch. In Real GDP
Jefferson % ch. In Real GDP
Year 1 to Year 2
19% [(2.5-2.1)/2.1]
5% [(525-500)/500]
Year 2 to Year 3
12%
14.3%
Year 3 to Year 4
-3.6%
8.3%
Part A: Measuring Economic Growth in Hamilton and Jefferson County
FIGURE 47.1
Year
Hamilton
Real GDP
Hamilton
Population
Jefferson
Real GDP
Jefferson
Population
1
$2.1 billion
70,000
$500,000
15
2
$2.5 billion
80,000
$525,000
16
3
$2.8 billion
90,000
$600,000
17
4
$2.7 billion
86,000
$650,000
18
Figure 47.3:
Year
Hamilton Per Capita Real GDP
Jefferson Per Capita Real GDP
1
2
$30,000 ($2,100,000,00/70,000)
$31,250
$33,333.33
$32,812.50
3
4
$31,111
$31,395
$35,294.12
$36,111.11
Part A: Measuring Economic Growth in Hamilton and Jefferson
County
FIGURE 47.1
Year
Hamilton
Real GDP
Hamilton
Population
Jefferson
Real GDP
Jefferson
Population
1
$2.1 billion
70,000
$500,000
15
2
$2.5 billion
80,000
$525,000
16
3
$2.8 billion
90,000
$600,000
17
4
$2.7 billion
86,000
$650,000
18
Time Period
Year 1 to Year 2
Year 2 to Year 3
Year 3 to Year 4
Hamilton % ch. In Per Capita Real GDP
4.17% (31250-30000/30000)
-0.44%
0.91%
Jefferson % ch. In Per Capita Real GDP
-1.6%
7.56%
2.31%
YEAR 1 TO 2
2. When did Hamilton County experience the largest growth in real GDP? ____________
In per capita real GDP? YEAR
____________
1 TO 2
Are these growth rates different? Explain.
Both increased the most from year 1 to year 2. However, per capita real GDP
increased by less than real GDP because of population growth.
YEAR 2 TO 3
3. When did Jefferson County experience the largest growth in real GDP? ____________
YEAR 2 TO 3
In per capita real GDP? ____________
Are these growth rates different? Explain.
The per capita growth rate is smaller than the GDP growth rate
because the population has increased.
4. The residents of Hamilton County believe they live in a wealthier community than small rural
Jefferson county. Based on these numbers, do they? Explain.
No. Real GDP per capita is larger in Jefferson County than in Hamilton
County.
There are some problems with using GDP to
measure a nation’s true standard of living
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The top 10 most populated countries
15
GDP Per Capita
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•Real GDP per Capital
Real GDP per Capital
II. The Sources of Long-Run Growth
A. The Crucial Importance of Productivity
Sustained growth in real GDP per capita occurs
only when the amount of output produced by
the average worker increases steadily.
Labor productivity = (real GDP/# of people
working)
If workers are creating more output, on average,
the size of the economic pie will be rising and
the average person’s slice will also be rising.
What factors lead to higher productivity?
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Growth Rates
Rule of 70 = number of years for variable to double =
70/annual growth rate of variable. So if real GDP per
capita grows at 2% per year, it will take 35 years to
double GDP per capita. The US average growth rate
is 1.9%.
Sample Problem
• The rule of 70 indicates that a 6%
annual increase in the potential level
of real GDP would lead to the potential
output doubling in about _____years.
A) 6
B) 12
C) 24
D) 30
E) 35
Sample Problem
• The rule of 70 indicates that a 6%
annual increase in the potential level
of real GDP would lead to the potential
output doubling in about _____years.
A) 6
B) 12
C) 24
D) 30
E) 35
Why Grow?
• Growth leads to greater prosperity for
society.
• Lessens the burden of scarcity.
• Increases the general level of wellbeing.
Conditions for Growth
• Willingness to sacrifice current consumption
in order to grow
• Saving
• Trade
Sample Problem
• In the long run an increase in saving
will generally:
A) reduce the rate of economic growth
B) leave the rate of economic growth
unchanged
C) increase the rate of economic growth
D) increase consumption simultaneously
E) decrease the standard of living
Sample Problem
• In the long run an increase in saving
will generally:
A) reduce the rate of economic growth
B) leave the rate of economic growth
unchanged
C) increase the rate of economic growth
D) increase consumption simultaneously
E) decrease the standard of living
The Sources of Long-Run Growth
Physical Capital
(Machinery)
Human Capital
(Education)
Technology
(new methods of
production)
Physical Capital
• Tools, machinery, factories,
infrastructure
• Physical Capital is the product of
Investment.
• Investment is sensitive to interest rates
and expected rates of return.
• It takes capital to make capital.
• Capital must be maintained.
Sample Problem
• Physical capital would include:
A) the education or knowledge a worker
has in his or her physical being
B) the tools a worker has to work with
C) the money available for the worker to
use
D) the stocks and bonds in an individual’s
portfolio
E) the natural resources a worker has to
work with
Sample Problem
• Physical capital would include:
A) the education or knowledge a worker
has in his or her physical being
B) the tools a worker has to work with
C) the money available for the worker to
use
D) the stocks and bonds in an individual’s
portfolio
E) the natural resources a worker has to
work with
Technology & Productivity
• Research and development,
innovation and invention yield
increases in available technology.
• More technology in the hands of
workers increases productivity.
• Productivity is output per worker.
• More Productivity = Economic Growth.
Human Capital
• People are a country’s most important
resource. Therefore human capital must be
developed.
• Education
• Access to technology
AN EXAMPLE OF HOW INVESTMENT IN HUMAN CAPITAL CAN LEAD
TO INCREASED GROWTH AND A HIGHER GDP PER CAPITA
Sample Problem
• Investment in human capital shifts the
aggregate production function:
A) downward
B) leftward
C) inward
D) rightward
E) upward
Sample Problem
• Investment in human capital shifts the
aggregate production function:
A) downward
B) leftward
C) inward
D) rightward
E) upward
Growth Illustrated
PL
LRAS
SRAS
P
AD
YF
GDPR
B. The Role of Government in
Promoting Economic Growth
1.
Governments and Physical Capital
Governments provide infrastructure by building roads,
airports, seaports, electrical grids and many others.
These systems help consumers and firms engage in
economic activity that promotes economic growth.
Private firms also invest in physical capital like building new
factories, shopping malls, and housing developments.
Firms also purchase computer systems, delivery trucks,
forklifts and many other pieces of physical capital.
If the government can provide infrastructure and maintain a
financial system that provides for the saving and
borrowing that is required for private investment, a
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nation’s physical capital
will grow.
B. The Role of Government in
Promoting Economic Growth
1. Governments and Physical Capital
2.Governments and Human Capital
Governments pay for the vast share of primary
and secondary education. Any American child
can complete high school at very little out-ofpocket expense.
When nations make education a higher priority,
they subsidize it. More people acquire the
education and the nation prospers with long-run
economic growth. Duffka School of Economics
B. The Role of Government in
Promoting Economic Growth
1. Governments and Physical Capital
2. Governments and Human Capital
3.Governments and Technology
While much R & D is done by private companies,
the government subsidizes this research with
grants.
The government also provides direct support and
grant money to professors at public and private
universities and that research helps to drive
technological progress.
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B. The Role of Government in
Promoting Economic Growth
1. Governments and Physical Capital
2. Governments and Human Capital
3. Governments and Technology
4. Political Stability, Property Rights, and
Excessive Government Intervention
Revolutions and changes to government
cause investment to decrease.
Investors like stability.
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Growth Illustrated
PL
LRAS
SRAS
P
AD
YF
GDPR
MODULE 40
• LONG-RUN ECONOMIC GROWTH IS
BASED UPON THE SUSTAINED RISE IN THE
PRODUCTION OF GOODS AND
SERVICES
• SHORT-RUN “UPS” AND “DOWNS” ARE
THE RESULT OF THE BUSINESS CYCLE

Capital Goods
Growth Illustrated
or
.
.

PPC

Consumer Goods
PPC1
Remember this? Economic Growth and Potential Growth for the Production
Possibility Curve
I. Productivity and Growth
A. Accounting for Growth: The Aggregate Production
Function:
Productivity depends on the quantities of physical
capital per worker and human capital per worker as
well as the state of technology.
+$30,000
+$15,000
+$10,000
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What About Natural
Resources?
•Other things equal, more natural
resources leads to higher GDP per
capita
•Other things are often NOT equal
(Political / Legal instability)
THE ISSUE OF GROWTH AND ENVIORNMENTAL DAMAGE IS A WORLD-WIDE ISSUE AND NOT
A UNITED STATES ISSUE ALONE
ENVIORNMENTAL CONCERNS
• Pollution is a negative externality
because it allows firms to impose a
cost on society without having to pay
compensation
• Many have called for “cap and trade”
policies which impose costs and
limits/purchases/trades on firms who are
engaged in pollution type industries.
Are Economies Converging? Convergence Theory:
differences in real GDP per capita among countries tend
to narrow over time because countries that state with
lower real GDP per capita tend to have higher growth
rates.
Long-run Growth and the LRAS Curve
From the Short Run to the Long Run: Notice the impact of
wages on SRAS since wages are an input
Hindrances to Growth
• Economic and Political Instability
– High inflationary expectations
•
•
•
•
Lack of Savings
Excess current consumption
Failure to maintain existing capital
Crowding Out of Investment
– Government deficits & debt increasing long term interest rates!
• Trade Barriers
2005 AP Exam Questions
• Changes in which of the following
factors would affect the growth of an
economy?
I. Quantity and quality of human and
natural resources
II. Amount of capital goods available
III. Technology
A. I only
B. I and II only
C. I and III only
D. II and III only
E. I, II, and III
2005 AP Exam Questions
• The long-term growth rate of an
economy will be increased in all of the
following ways EXCEPT
A. Capital stock
B. Labor supply
C. Real interest rates
D. Rate of technological change
E. Spending on education and training
2012 AP Exam Question
• Which of the following best illustrates an
improvement in a country’s standard of
living?
a. An increase in real per capita gross
domestic product
b. An increase in nominal per capita gross
domestic product
c. Price stability
d. A balanced budget
e. An increase in the consumer price index
2012 AP Exam Questions
• An increase in which of the following
would LEAST likely increase labor
productivity?
a. Physical capital
b. Human capital
c. Technological improvements
d. Educational achievement
e. The labor force
2012 AP Exam Question
The shifting of a country’s production
possibility curve to the right will most likely
cause
a. Net exports to decline
b. Inflation to increase
c. The aggregate demand curve to shift to
the left
d. The long-run aggregate supply curve to
shift to the left
e. The long-run aggregate supply curve to