MEASURES OFECONOMIC 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: • 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%
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."
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?