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%

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

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."

Business Cycle

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?