# MEASURES OF ECONOMIC GROWTH

## Presentation on theme: "MEASURES OF ECONOMIC GROWTH"— Presentation transcript:

MEASURES OF ECONOMIC 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 Example:
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% ( ) Calculate rate of inflation over time using CPI: May 2010 – May 2011 – – x 100 = 1.14%

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

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?