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MEASURES OF ECONOMIC GROWTH Biba S. Kavass. OBJECTIVES Define economic growth. Analyze measures of economic growth. Examine GDP per capita. Analyze how.

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Presentation on theme: "MEASURES OF ECONOMIC GROWTH Biba S. Kavass. OBJECTIVES Define economic growth. Analyze measures of economic growth. Examine GDP per capita. Analyze how."— Presentation transcript:

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 countrys standard of living.

3 Economic Growth Process by which a nations 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 countrys 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 years prices for goods and services Real GDP (Constant Dollar GDP): –Use a base years 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 Cont 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 Cont Producer Price Indexes (PPI) – measure of price changes from the perspective of the seller – leading indicator of consumer spending. –Current CPI – +0.8%

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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.recession –Expansion - When the economy starts growing again. –Peak - When the economy is in a state of "irrational exuberance."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.

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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 countrys standard of living than total GDP? Look at China?

21 Worlds Richest Countries Source: International Monetary Fund 2011

22 Worlds Poorest Countries Source: International Monetary Fund 2011

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


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