MEASURES OF ECONOMIC GROWTH

# MEASURES OF ECONOMIC GROWTH

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## MEASURES OF ECONOMIC GROWTH

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1. MEASURES OFECONOMIC GROWTH Biba S. Kavass

2. 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.

3. 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

4. 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

5. Measure Economic Growth • Gross Domestic Product (GDP • National Income per Capita • Consumption per Capita

6. 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

7. 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

8. 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

9. 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.

10. 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

11. 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

12. 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

13. 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%

14. http://www.usinflationcalculator.com/inflation/current-inflation-rates/http://www.usinflationcalculator.com/inflation/current-inflation-rates/

15. 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."