Measures of Economic Growth
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MEASURES OFECONOMIC GROWTH
Biba S. Kavass
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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.
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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
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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
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Measure Economic Growth
• Gross Domestic Product (GDP
• National Income per Capita
• Consumption per Capita
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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
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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
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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
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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.
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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
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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
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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
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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%
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http://www.usinflationcalculator.com/inflation/current-inflation-rates/
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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."
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Business Cycle
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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
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Standard of Living
• Measure of the goods and services available to
each person in a country – measure of economic well-being.
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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?
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World’s Richest Countries
Source: International Monetary Fund 2011
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World’s Poorest Countries
Source: International Monetary Fund 2011
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Food for Thought
• Why is there such a disparity between wealth and poverty among some countries?