Transcript Economic Growth

Economic
Growth
Definitions
 Expansion
of the productive potential of
the economy. (Aggregate Supply)
 Increase
 Increase
in the factors of production.
in the efficiency of the factors of
production.
Economic Growth
 Increase
in output is also caused by an
expansion of aggregate demand in the
economy as long as the economy is not
already operating at full capacity.
 If
at full capacity, an increase in AS will be
needed to further increase output.
 Otherwise,
nothing but inflation.
Importance of Economic
Growth
 Increased
Incomes
 Increased
Standards of living
 Governments
make more in tax revenue
and have to spend less.
 Can
attack more countries with ease.
GDP
 Total
output of an economy over a period
of time.
 Nominal
 GDP
GDP vs. Real GDP
vs. GDP Per Capita.
Why do you need to know the
GDP level?
 Governments
need the evidence to
make decisions about taxation,
spending and interest rates.
 They are useful to make international
comparisons.
 Economists and historians can learn a
lot from GDP numbers. For example,
we can make a judgement on the
economic policies of Margaret
Thatcher or Tony Blair.
WWII
 GDP
first became widely used in the U.S.
In the period following the great
depression leading up to WWII.
 The
government wanted to know if the
U.S. Economy could sustain the impact of
being involved in a large war after an
economic crisis.
Advantage of GDP
 Well
understood in almost every country
throughout the world.
Disadvantages of GDP
 GDP
may be innaccurate.
 Black Market
 Statistical Errors
 Political Interference with
results..China???
 Populations change
Disadvantages of GDP
 It
does not include:
 Population
Change
 Externalities
 Spending on Defense (Millitary)
What about something
else?
GNI
 Gross
National Income
 GDP + Net Income Abroad
 Many
nationals working abroad do not
report their whole income.
 GNI
Per Capita= The average level of GNI
per person.
GNI... Here is your definition
 GDP
plus incomes earned by foreign
residents, minus income earned in the
domestic economy by nonresidents
Difference between GDP
and GNI
 It
can also be said that GDP is the value
produced within a country’s borders,
whereas the GNI is the value produced by
all the citizens.
 Suppose
a firm in the United States has an
establishment in Canada, the profits from
the products will not be part of the US
Gross Domestic Product, as production
has not taken place in another area.
However, this would count towards the US
Gross National Income, as the firm is
owned by US citizens even though it is
located in another country.
GDP vs. GNI
 GNI
is used more and more today to
reflect the fact that more and more
people are working abroad and sending
the money home.
Other Indicators of
Development
 Income
Distribution.
 Human
Development Index
Human Development Index
 There
are key aspects of human
development.
 The
Human Development Index (HDI) is a
summary measure of average
achievement in key dimensions of human
development: a long and healthy life,
being knowledgeable and have a
decent standard of living.
 The
health dimension is assessed by life
expectancy at birth component of the
HDI is calculated using a minimum value
of 20 years and maximum value of 85
years.
 The
education component of the HDI is
measured by mean of years of schooling
for adults aged 25 years and expected
years of schooling for children of school
entering age.
 The
standard of living dimension is
measured by gross national income per
capita at PPP or purchasing price parity.
Purchasing Power Parity
 This
takes into account the cost of living in
different countries. This makes comparing
different countries easier.
 In
short, what this means is that a bundle
of goods should cost the same in Canada
and the United States once you take the
exchange rate into account.
The Big Mac Index

For example, using figures in July 2008:[5]

1.the price of a Big Mac was $3.57 in the United
States (varies by store)
2.the price of a Big Mac was £2.29 in the United
Kingdom (varies by region)
3.the implied purchasing power parity was $1.56 to
£1, that is $3.57/£2.29 = 1.56
4.this compares with an actual exchange rate of
$2.00 to £1 at the time
5.(2.00-1.56)/1.56 = 28%
6.the pound was thus overvalued against the dollar
by 28%
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 The
HDI does not reflect on inequalities,
poverty, human security, empowerment,
etc.
Limitations of HDI
 Does
not take into account qualitative
factors such as political freedoms.


Human rights
Gender equality
Limitations to HDI
 PPP

values change very quickly.
Currency speculation can make currencies
volatile.
PPP values can change
quickly
 Differences
available.
 Different
in the range of products
indirect taxes and subsidies
 Variations
in the strength of competition.
Limitations of HDI
 Still
does not take into account income
distribution.
 Remember
it is GNI per capita.
Which brings us to MDPI
 Posession
of some assets
 Nutrition
 Child
mortality
 Access to drinking water
 Access to sanitation
 Access to a safe room
 Access to electricity.
Costs of Economic Growth
 Can
Cause Inflation.
 Can
lead to environmental damage.
 China
 Effects
of Chinese air pollution claim over
1 million lives a year.