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 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
4 Labor 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
5 Measure Economic Growth Gross Domestic Product (GDPNational Income per CapitaConsumption 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 spendingCalculated: Price x Quantity
7 Calculating 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
8 Types 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
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 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.
10 Inflation 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
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 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%
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%
15 Business 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."
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 jobCyclical Unemployment – when unemployment rises during a recession
18 Standard of LivingMeasure 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 increasedWhy 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 ThoughtWhy is there such a disparity between wealth and poverty among some countries?