GDP Growth
Define business cycle
Alternating periods of economic expansion and economic contraction relative to trend growth
Value added
An alternative way of calculating GDP is the value-added method. The value added method refers to the additional market value a firm adds to a product and is equal to the different between the price the firm sells a good for and the price it paid other firms for intermediate goods
If there is a sharp increase in the crime rate, will GDP increase of decrease?
An increase in crime will reduce wellbeing but may actually increase GDP if it leads to greater spending on police, security guards and alarm systems.
Explain in words how you calculate real GDP.
The real value of goods and services is found by multiplying the price of the good or service in the base year by the quantity produced of that good or service. The total real value of GDP is found by summing up the individual real values.
Per-worker production function
The relationship between real GDP, or output, per hour worked and capital per hour worked, holding the level of technology constant
What does the per-worker production function show?
The relationship between real GDP, or output, per hour worked and capital per hour worked, holding the level of technology constant. Increases in capital per hour worked increase output per hour worked, but at a diminishing rate. This is the law of diminishing returns. Increases in the quantity of capital per hour worked result in movements along the per-worker production function, increasing the quantity of output each worker produces
Microeconomics
The study of how households and firms make choices, how they interact in markets and how the government attempts to influence their choices
Net exports
The value of exports minus the value of imports
Explain how total production in an economy is measured.
Total production is measured by gross domestic product (GDP), which is the market value of all final goods and services produced in an economy during a period of time. When we measure the value of total production in the economy by calculating GDP, we are simultaneously measuring the value of total income. GDP is divided into four major categories of expenditures: consumption, investment, government purchases, and net exports. We can also calculate GDP by adding up the value added of every firm involved in producing final goods and services.
Indicate whether these are the purchase of final goods: a) wheat from a wheat farmer by a bakery b) new fleet of police cars by government c) purchase of wine by consumer d) new machine tool by Ford
a) No b) Yes c) yes d) Yes
Transfer payments
Payments by the government to individuals for which the government does not receive a good or service in return
What variable is on the vertical axis of the per-worker production function?
Real GDP per hour worked Y/L
Government purchases
Spending by federal, state, and local governments on goods and services
Investment
Spending by firms on new factories, office buildings, machinery etc In calculating GDP, investment does not refer to investments in shares, only physical goods!
Consumption
Spending by households on goods and services, not including spending on houses (This is investment).
Economists believe what 2 key factors determine labour productivity?
The quantity of capital (both physical and human capital) per hour worked and the level of technology
Labour productivity
The quantity of goods and services that can be produced by one worker or by one hour of work
Economic growth rate
The rate of change of real GDP from one year to the next
What are the 3 main sources of technological change?
1. Better machinery and equipment 2. Increases in human capital 3. Better means of organising and managing production
What are 3 methods used to calculate GDP?
1. Production method 2. The expenditure method 3. The income method
What are some shortcomings of GDP as a measure of wellbeing? (5)
1. The distribution of GDP 2. The value of leisure is not included 3. The level & quality of health care and education 4. Not adjusted for pollution or other negative effects of production 5. Not adjusted for changes in crime and other social problems
What are some argument supporting economic growth?
1. globalisation allows better variety to consumers 2. low-income access to new technology 3. increased standard of living 4. increased productivity and innovation
What are some arguments against economic growth?
1. globalisation undermining distinctive cultures (importing more) 2. exploitation (low wages, bad conditions) 3. increases in pollution (contributing to global warming) 4. depletion of natural resources (deforestation)
Year: 2004, 2005, 2006, 2007 and 2008 Real GDP 2004 = $41 806 Real GDP 2008 = $43 714 The average annual growth rate in real GDP is?
1.14%
Year: 2004, 2005, 2006, 2007 and 2008 Real GDP 2004 = $41 806 Real GDP 2008 = $43 714 The percentage increase in real GDP per capita between 2004 and 2008 is?
4.56%
Final good or service
A final good or service is a new good/service which the end product of the production process that is purchased by the final user
Intermediate good or service
A good or service that is an input into another good or service
Price level
A measure of average prices of goods and services in the economy
GDP Deflator + formula
A measure of price level, (Nominal GDP/ Real GDP) x 100
Real GDP
A measure of the volume of final goods and services, holding prices constant
In the circular flow of expenditure and income, why must the value of total production in an economy equal the value of total income?
Because all the money a business receives from the sale of its output must end up as someone's income
When the price level is increasing, is real GDP greater or less than nominal GDP in years before the base? Why?
Because, on average, prices rise from one year to the next, real GDP is greater than nominal GDP in years before the base year. Because prices were on average, lower before the base year
When the price level is increasing, is real GDP more or less than nominal GDP for years after the base year? Why?
Because, on average, prices rise from one year to the next, real GDP is less than nominal GDP for years after the base year
Investment is divided into what three categories?
Business fixed: new factories, buildings, machines Residential: households on new housing Changes in business inventories: goods that have been produced but not yet sold
Define Black economy
Buying and selling at prices that violate government price regulations
What is the underground economy?
Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal
What variable is on the horizontal axis of the per-worker production function?
Capital per hour worked K/L
Economic growth + formula
Economic growth refers to the expansion of society's productive potential (Real GDP current - Real GDP previous)/ Real GDP previous x 100
Discuss the differences between GDP and HDI.
GDP is the measure of production in an economy. HDI is a measure of the standard of living within economies and is based on four criteria: life expectancy, mean years of schooling, expected years of schooling and gross national income per capita. The two lists are different because GDP does not measure the value of leisure, income distribution, not adjusted for pollution and negative effects of production and is not adjusted for crime or other social problems. Because of these differences, you can't compare the two measures.
If higher tax rates cause some people to hide more of the income they earn, will GDP increase of decrease?
GDP will decrease. Top earners fuel economic growth. If they are going to be taxed more for their efforts, it is a desentive to work harder.
Is the proportion of women working outside the home likely to increase or decrease the measure of GDP?
Household production is not included in the calculation of GDP. Therefore, if more women leave the household and join the workforce, there will be an increase in GDP
Macroeconomics
Is the study of the economy as a whole, including topics such as inflation, unemployment and economic growth
Use the economic growth model to explain why economic growth rates differ between countries.
Labour productivity will increase if there is an increase in the amount of capital available to each worker or if there is an improvement in technology. An economy will have a higher standard of living: 1. the more capital it has per hour worked 2. the more human capital its workers have 3. the better its capital, and 4. the better the job its business managers do in organising production.
Discuss the importance of long-run economic growth and its impact on living standards.
Long-run economic growth is the process by which rising productivity increases the standard of living of the typical person. Long-run growth is measured by increases in real GDP per capita. Increases in real GDP per capita depend on increases in labour productivity. Labour productivity is the quantity of g/s that can be produced by one worker or by one hour of work. (2010: 5 x more productive than in 1901).
Define capital
Manufactured goods that are used to produce other goods or services
What is the different between nominal GDP and real GDP?
N: the market value of final goods and services evaluated at current year prices R: a measure of the volume of final goods and services, holding price constant
Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
Nominal GDP is the market value of final goods and services evaluated at current year prices. Therefore, changes in nominal GDP represents changes in the quantity of goods and services and inflation. To counter the trends of inflation, we measure real GDP.
Discuss the different between real variables and nominal variables.
Nominal GDP is the value of final goods and services evaluated at current year prices. Real GDP is the value of final goods and services evaluated at base year prices. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of goods and services produced in the economy.
What effect does technological change have on the per-worker production function?
Technological change shifts up the per-worker production functions and allows an economy to produce more real GDP per hour worked with the same quantity of capital per hour worked.
When there is a technological change, what happens to the production function and why?
Technological change will shift up the production function as more output is produced with the same amount of capital per hour worked
Human capital
The accumulated knowledge and skills workers acquire from education and training or from their life experiences
Technological change
The change in the ability of a firm to produce output with a given level of input
Recession
The contraction in economic activity may also lead to a fall in output and employment
Explain how the economic growth rate is measured.
The economic growth rate is the rate of change of real GDP from one year to the next (Real GDP current - Real GDP previous)/ Real GDP previous x 100
Describe the four major components of expenditures in GDP and write the equation used to represent the relationship between GDP and the four expenditure components.
The four major expenditure components of GDP are consumption, investment, government expenditure and net exports. Consumption is by households (except houses) Investment is by firms (& households buying houses: not shares) Government exp is spending by gov (all levels) on g/s and net exports is the value of exports minus the value of imports GDP = C + I + G + NX
Today, the typical Australian works fewer than 40 hours per week. In 1890, they worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the population's economic wellbeing?
The increase in real GDP per capita between 1890 and today understates wellbeing because the value of leisure is not included in GDP
Potential GDP
The level of GDP attained when all firms are producing at capacity
Gross domestic product (GDP)
The market value of all final goods and services produced in a country during a period of time Y = I + C + G + NX
Nominal GDP
The market value of final goods and services evaluated at current year prices
Inflation rate
The percentage increase in the general price level in the economy from one year to the next
Expansion
The period of a business cycle during which total production and total employment are increasing above trend growth
Long-run economic growth
The process by which rising productivity increases the average standard of living
What does the GDP deflator tell us?
it allows us to track increases in the price level over time
What is the income method?
sum of income generated from the production of goods and services, which includes profits, wages and other employee payments, income from rent and interest earned
What is the production method?
sum of the value of all goods and services produced by industries in the economy in a year minus the cost of goods/services used in the process
What is the expenditure method?
sum of total expenditures on final goods/services by households, investors, government and net exports