1. MEASURES OF ECONOMIC 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 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

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

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

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."

16. Business Cycle

17. 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

18. Standard of Living
Measure of the goods and services available to each person in a country – measure of economic well-being.

20. 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?

21. World’s Richest Countries
Source: International Monetary Fund 2011

22. World’s Poorest Countries
Source: International Monetary Fund 2011

23. Food for Thought
Why is there such a disparity between wealth and poverty among some countries?