Week 5

Brazil's GDP in U.S. $$$ (5.3)

$1 = 2.57 reals; Brazil gdp is 4.8 trillion reals 1. = Brazil gdp in reals/exchange rate (reals/$$) 2. = 4.845 trillion reals/2.157 reals per dollar 3. GDP of Brazil = 2.246 trillion U.S. dollars

Using data from the following table, how much of the nominal GDP growth from 1980 to 1990 was real GDP and how much was inflation? (5.2)

From 1980 to 1990, nominal GDP grew by (5979.6 - 2862.5) / (2,862.5/100) =109%.Over the same period, prices increased by (72.7 - 48.3) / (48.3/100) = 50.5%.So about 46% of the growth (50.5/109) was inflation, and the remainder: 109% - 46% = 63% was growth in real GDP.

GDP formula (5.1)

GDP = C + Ig + G + (X-M)

point (5.2)

If economists do not know the inflation rate, it is difficult to distinguish if the growth in GDP stems from an increase in the overall price level or an increase in the quantities of goods and services produced.

Find real GDP per capita in each of the two years. Calculate the growth rate of real GDP per capita. (5.3)

Real GDP per capita in year 1 is $50,000/200 = $250, while in year 2 it is $51,400/202 = $254.46. The growth rate of real GDP per capita is then found as [($254.46 - 250)/250] x 100 = 1.78%

Why are non-durable goods more volatile than durable goods? (5.4)

Recall that the definition of durable goods is a good with an expected life of three or more years. Spending on durable goods output is more volatile than for non-durables and services because spending on non-durables or services often cannot be postponed.

point (5.1)

To avoid multiple counting of goods, GDP includes only the market value of final goods and ignores intermediate goods, which are goods purchased either for resale or for further processing into final goods.

economic growth (5.3)

increases in real gdp

recession (5.3)

significant decline in national output

exchange rate (5.3)

the value or price of one currency in terms of another currency

The gap between exports and imports in a nation's economy is called the ___________. (5.1)

trade balance

expansion (5.4)

when output and employment are recovering and expanding toward the full-employment level

trough (5.4)

During the business cycle, the lowest point of output in a recession, before a recovery begins.

real gdp growth rate (5.2)

% change = larger year real gdp - smaller year real gdp/ (smaller year gdp/100)

Society can increase its real output and income in one of two ways: (5.3)

(1) by increasing its inputs of resources and (2) by raising the productivity of those inputs.

point (5.3)

- In order to compare GDP between nations, economists convert to a common currency and divide GDP by population. - Long-term growth stems from increases in worker productivity. - Real GDP is important because it is highly correlated with other measures of economic activity, like employment and unemployment.

point (5.4)

- Prices can be inflexible downwards, which means that if total spending unexpectedly decreases and firms cannot lower prices, the firms will end up selling fewer units of output - Inflexible prices are thought to be a major factor in preventing the economy from quickly adjusting to economic shocks

business cycle (5.4)

- alternating increases and decreases in economic activity over time - The economy's relatively short-term movement in and out of recession - recurrent swings in real gdp

recession (5.4)

- decline in total output, income, employment, and trade lasting six months or more; this is sometimes referred to as an economic contraction - A significant decline in national output.

peak (5.4)

- during the business cycle, the highest point of output before a recession begins - when business activity reaches a temporary maximum with full employment and near-capacity output

goals of economy (5.1)

- economic growth - low unemployment - low inflation

real gdp (5.2)

- gdp that has been deflated or inflated to reflect changes in price levels - adjusted for inflation - today's output @ base-year prices = nominal gdp/(price index/100) OR = (nominal gdp/gdp deflator) x 100

gross private investment (5.1)

- includes all final purchases of machinery, equipment, and tools by businesses - When gross investment exceeds depreciation during a year, net investment occurs. This net investment expands the stock of private capital from the beginning of the year to the end of the year, allowing the economy's production capacity to expand, all other things equal.

government purchases/spending (5.1)

- includes expenditures for goods and services that the government uses in providing public services and expenditures for publicly owned capital such as for schools or roads

net exports (5.1)

- net exports are calculated by subtracting the value of imported goods from the value of exported goods

GDP breakdown U.S. (5.1)

- personal consumption (60-66%) - government spending (20%) - business/gross private investment (15%) - net exports (will vary) - You can see that exports are added to total demand for goods and services, while imports are subtracted from total demand. If exports exceed imports, a trade surplus exists. If imports exceed exports, as in recent years, then a trade deficit exists.

production breakdown (5.1)

- services - 62% - durable goods - 16% - nondurable goods - 13% - structures - 8% - change in in inventories - 1% - civ - any good that has been produced but not yet sold - manufacturing sector is made up of durable and nondurable goods

gdp per capita (5.3)

- the GDP divided by the population - allows one to compare countries of different sizes - for country-to-country comparisons, real GDP is more useful

nominal gdp (5.2)

- the production of goods and services valued at current prices - not adjusted for inflation - today's output @ today's prices = price x quantity

In 1980 Denmark had a GDP of $70 billion (measured in U.S. dollars) and a population of 5.1 million. In 2000, Denmark had a GDP of $160 billion (measured in U.S. dollars) s and a population of 5.3 million. By what percentage did Denmark's GDP per capita rise between 1980 and 2000? (5.3)

120%

5th + 6th determinants of economic growth (5.3)

5th - demand factor; households, businesses, and government must purchase the economy's expanding output 6th - economy must achieve economic efficiency as well as full employment

% change in real gdp (5.3)

= (new real gdp - old real gdp)/(old read gdp) x 100

per capita gdp (5.3)

= total gdp/total population

per-unit cost (5.3)

= total input cost/total output

real gdp (5.3)

= total work-hours x labor productivity

gdp deflator (5.2)

A price index measuring the average prices of all goods and services included in the economy. Much like nominal GDP, the GDP deflator has risen exponentially from 1960 through 2010. It includes all goods and services rather than just consumer goods and services. The price index will be 1 in the base year. = price index/100

economic shock (5.4)

An event that produces a significant change within an economy despite occurring outside it. Economic shocks are unpredictable and typically impact supply or demand throughout the markets. - major innovations, printing more/less money, unexpected changes in resource availability or in the rate of technological advances

Rule of 70 (5.3)

Approximate number of years required to double real GDP = 70/annual percentage rate of growth n, number of years r, rate of growth

In order to avoid double counting, statisticians just count the __________________. (5.1)

B. final goods and services

Gross Domestic Product equals $1.2 trillion. If consumption equals $690 billion, investment equals $200 billion, and government spending equals $260 billion, then: (5.1)

B. imports exceed exports by $50 billion.

GDP (5.1)

Economists typically measure the size of a nation's overall economy by its gross domestic product (GDP).

Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion. What is the dollar value of GDP? (5.1)

GDP is C + I + G + (X-M). GDP= $2,000 billion + $50 billion + $1,000 billion + ($20 billion - $40 billion)=$3,030

GDP measured by what four components of demand? (5.1)

Gross Domestic Product (GDP) is measured by four components of demand: consumption, business spending (investment), government spending on goods and services, and net export spending. The simplest way to measure GDP is to use the expenditures approach. The expenditures approach measures GDP as the sum of all of the money spent in buying the output.

point (5.1)

Non-production transactions must be excluded from GDP since they have nothing to do with the production of final goods. There are two types: purely financial transactions and secondhand sales.

personal consumption expenditures (5.1)

Personal consumption expenditures, indicated by a "C" notation, covers all expenditures by households on goods and services during a year. In any given year, approximately 10% of those expenditures are for durable consumer goods (washers, stoves, refrigerators), which are defined as having a life of three years or more. Another 30% go to non-durable goods such as food, clothing, and gasoline. The other 60% are for services (like doctors, lawyers, mechanics).

potential gdp (5.3)

The maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions.

Suppose an economy's real GDP is $5,000 billion. There are 125 million workers, each working an average of 2,000 hours per year. - What is the labor productivity per hour in this economy? - Suppose worker productivity rises by 5% over the following year and the labor force grows by 1%. What is the projected value of real GDP? (5.3)

Use the formula: labor productivity = real GDP / hours of work. There are 2,000 x 125 million = 250 billion worker hours available in the economy, producing a real GDP of $5,000 billion. Labor productivity is then $5,000/250 = $20 per worker hour. Productivity will rise by 5% to $21 (20 + .05 x 20 = 21) and work hours will rise by 1% to 252.5 billion (250 + .01 x 250 = 252.5). Since real GDP equals work hours times productivity, real GDP will rise to 252.5 billion x $21 = $5302.5 billion.

depression (5.3)

an especially lengthy and deep decline in output