Chapter 10 - GDP and economic growth. We will be calculating how economists estimate a country’s output and income for a year. The importance of these figures will be discussed, as well as the differences between the various ways that we can measure income. Lastly we will discuss how we can adjust the figures that we have calculated for inflation effects and analyze some of the issues associated with the various accounts.
Chapter 10 GDP and Economic Growth McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved 11 Gross Domestic Product • Measure of aggregate output • Monetary measure • Avoid multiple counting • Market value of final goods • Ignore intermediate goods • Count value added 102 Gross Domestic Product Comparing Heterogeneous Output by Using Money Prices Year LO1 Annual Output Market Value sofas and computers at $500 + at $2000 = $5500 2 sofas and computers at $500 + at $2000 = $7000 103 Gross Domestic Product • Exclude financial transactions • Public transfer payments • Private transfer payments • Stock (and bond) market • transactions Exclude secondhand sales • Sell used car to a friend 104 Measuring GDP • Expenditure approach • Count sum of money spent buying the final goods 105 Expenditures Approach • Personal consumption expenditures (C) • Durable consumer goods • Nondurable consumer goods • Consumer expenditures for services • Domestic plus foreign goods produced 106 Expenditures Approach • Gross private domestic investment (Ig) • Machinery, equipment, and tools • All construction • Changes in inventories • Creation of new capital assets • Noninvestment transactions excluded LO1 107 Expenditures Approach • Government purchases (G) • • • Expenditures for goods and services Expenditures for publicly owned capital Excludes transfer payments • Add exported goods and subtract imported goods Xn = Exports – Imports • Net exports (Xn) • • GDP = C + Ig + G + Xn 108 Comparative GDP 109 Nominal versus Real GDP • GDP is a dollar measure of production • Using dollar values creates problems • Nominal GDP • Use prevailing price • Real GDP • Reflect changes in price • Use base year price 1010 Economic Growth Real GDP and Real GDP per Capita (1) Year 1950 (2) Real GDP, Billions of 2005 $ $ 2,006 (3) Population , Millions 152 (4) Real GDP, per Capita, 2005 $ (2) ÷ (3) $13,197 1960 2,831 181 15,640 1970 4,270 205 20,829 1980 5,839 228 25,610 1990 8,034 250 32,136 2000 11,226 282 39,809 2010 13,248 309 43,456 Source: Bureau of Economic Analysis, www.bea.gov and U.S Census Bureau, www.census.gov 1014 Average Annual Growth Rates 1015 Determinants of Growth • Supply factors • Increases in quantity and quality of • • • natural resources Increases in quality and quantity of human resources Increases in the supply (or stock) of capital goods Improvements in technology 1016 Determinants of Growth • Demand factor • Households, businesses, and • government must purchase the economy’s expanding output Efficiency factor • Must achieve economic efficiency and full employment 1017 Production Possibilities Capital goods C A Economic growth c b a B D Consumer goods 1018 Inputs and Productivity Real GDP = Hours of work ì labor productivity Size of employed labor force Labor inputs (hours of work) • Average hours of work x • Technological advance • Quantity of capital • Education and training • Allocative efficiency • Other = Real GDP Labor productivity (average output per hour) 1019 Accounting for Growth Accounting for the Growth of U.S Real GDP, 1953– 2007, Plus Projection from 2009–2021 1953 Q2 to 1973 Q4 Item 1973 Q4 to 1995 Q4 1995 Q4 to 2001 Q1 2001 Q1 to 2007 Q3 Projected 2010 Q1 to 2021 Q4 Increase in real GDP 3.6 2.8 3.8 2.6 2.5 Increase in quantity of labor 1.1 1.3 1.4 -0.1 0.2 Increase in labor productivity 2.5 1.5 2.4 2.7 2.3 (average percentage changes) Source: Derived from Economic Report of the President, 2008, p 45; and Economic Report of the President, 2011, p 82 1020 Accounting for Growth • Factors affecting productivity growth • Technological advance (40 percent) • Quantity of capital (30 percent) • Education and training (15 percent) • Economies of scale and resource allocation (15 percent) 1021 Education and Training 1022 Institutional Structures • Strong property rights • Patents and copyrights • Efficient financial institutions • Free trade • A competitive market system 1023 Productivity Growth • Microchip/information technology • New firms and increasing returns • Sources of increasing returns • More specialized inputs • Spreading of development costs • Simultaneous consumption • Network effects • Learning by doing • Global competition 1024 Productivity Growth 1025 Economic Growth • Is economic growth desirable and • • sustainable? The antigrowth view • Environmental and resource issues In defense of economic growth • Higher standard of living • Human imagination can solve environmental and resource issues 1026 Economic Growth • Growth is the path to greater material • • • abundance Results in higher standards of living Increases leisure time Allows for the expansion and application of human knowledge 1027 Global Snapshot Country Global Competitiveness Ranking, 2011-2012 Switzerland Singapore Sweden Finland United States Germany Netherlands Denmark Japan United Kingdom 10 1028 ... price • Use base year price 10 10 GDP Price Index Calculating Real GDP (Base year = Yr 1) (2) (1) Price of Units of Pizza Year Output per Unit (3) Price Index (Year = 100 ) (4) Unadjusted, or Nominal,... GDP $10 100 $ 50 $50 20 200 140 70 25 250 200 80 10 30 _ _ _ 11 28 _ _ _ 10 11 Economic Growth • Increase in real GDP or real GDP per • • • capita over some time period Percentage rate of. .. of growth Growth as a goal Arithmetic of growth: Rule of 70 Approximate number of years required to double real GDP = 70 Annual percentage rate of growth 10 12 Economic Growth • Growth in U.S