2OBJECTIVES Define economic growth. Analyze measures of economic growth.Examine GDP per capita.Analyze how GDP is related to a country’s standard of living.
3Economic GrowthProcess by which a nation’s wealth increases over time.Rate of economic growth affected by:Natural ResourcesHuman Resources/CapitalCapital ResourcesTechnological Development – makes workers more productiveTrade
4Labor ProductivityHuman Capital – skills, education, or training that makes workers more productive such as technologyMost important determinant of long-run economic growthMeasured by nominal GDP per worker
5Measure Economic Growth Gross Domestic Product (GDPNational Income per CapitaConsumption per Capita
6Gross 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 spendingCalculated: Price x Quantity
7Calculating GDP Price x Quantity Example: Only count final goods so no double countingExample:In 2005, Country X produced 10 computers at $800In 2008, Country X produced 14 computers at $900Real GDP is(10 x 800) = $8,000 (14 x $800) = $11,200Growth Rate in Real GDP11,200 – 8,000 x 100 = 40%8,000
8Types of GDP Nominal GDP (Current Dollar GDP): Use current year’s prices for goods and servicesReal 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
9Inflation 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 lendingImpact to consumers: standard of living decreasesDifference 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.
10Inflation vs. Deflation Inflation – upward price movement of goods and services in an economy.Real GDP is less than nominal GDPDisinflation – decrease in rate of inflationUnanticipated Inflation – benefits borrowers – harms lendersReal Interest Rate – nominal interest rate minus rate of inflation
11Inflation 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
12Measure InflationConsumer Price Index (CPI) – weighted average of price changes in consumer goods and services – weighted by number of units of each good average household consumesCurrent CPI – 3.9% ( )Calculate rate of inflation over time using CPI:May 2010 – May 2011 –– x 100 = 1.14%
13Measure 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%
15Business CycleDescribes 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."
17Unemployment 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 jobCyclical Unemployment – when unemployment rises during a recession
18Standard of LivingMeasure of the goods and services available to each person in a country – measure of economic well-being.
20GDP per Capita GDP divided by the total population of a country. Increase in GDP per capita means standard of living has increasedWhy would GDP per capita provide more information about a country’s standard of living than total GDP? Look at China?
21World’s Richest Countries Source: International Monetary Fund 2011
22World’s Poorest Countries Source: International Monetary Fund 2011
23Food for ThoughtWhy is there such a disparity between wealth and poverty among some countries?