CHP 12 Economic Growth

What is a final good or service?

A good or service that is produced for its final user and not as a component of another good or service. Final Good: DOES count toward GDP

Expenditure Approach

A method of computing GDP that measures the total amount spent on all final goods and services during a given period.

transfer payments

Benefits given by the government directly to individuals. Transfer payments may be either cash transfers, such as Social Security payments and retirement payments to former government employees, or in-kind transfers, such as food stamps and low-interest loans for college education.

Why are property rights so important for economic growth?

Economic growth rates tend to be higher when property rights are enforced.

Why is education so important for economic growth?

Education, investment of human capital, is important to improving standards of living and economic growth.

GDP and externalities

GDP measures the good and services produce not the goods and bads that result from the production process.

What are five measures of production and income?

GNP NNP NI PI Disposable personal income

Net National Product (NNP)

Gross national product minus depreciation; a nation's total product minus what is required to maintain the value of its capital stock.

real GDP

Nominal GDP/Price Index * 100

What factors contribute to long-run economic growth?

Physical capital Per worker production Human capital Natural Resources Technology and innovations

True or False: Inventory investment and net exports can be negative.

TRUE. if end-of-the-year inventories are smaller than beginning-of-the-year inventories, inventory investment is negative, and if the value of exports is smaller than the value of imports, net exports are negative.

Gross National Product (GNP)

The total value of goods and services, including income received from abroad, produced by the residents of a country within a specific time period, usually one year.

What are nonmarket transactions?

Transactions covering goods or services that their producers supply to others free or at prices that are not economically significant.

How is national income calculated?

adding together the payments to the factors of production- wages, rent,interest, and profit

Why must expenditures equal income?

all of our spending (the value of total expenditure) ends up as someone's income ( the value of total income). Every buyer has a seller.

What is the underground economy?

all transactions which are not accounted for in regular GDP. These can include black markets such as drugs, or other innocuous things such as the teenager who mows lawns but does not report the income. Thus, the output of the economy is not counted in measured GDP.

How does technology contribute to productivity growth?

allows workers to produce more even with the same amount of physical and human capital. Technological changes allows the economy to escape the full impact of diminishing marginal returns to capital.

depreciation

annual allowance to set aside to replace worn-out capital. EX: worn out plant equipment

Innovation

applications of new knowledge that create new products or improve existing products

A price-level index

attempts to provide a measure of the prices paid for a certain bundle of goods and services over time.

What are four categories of purchase included in the expenditure approach?

consumption investment government purchases net exports

Investment (I)

creation of capital goods

GDP only counts _____.

current or new production

What is the Rule of 70?

divide 70 by the real GDP growth rate to find the number of year for an economy to double in size

How can human capital be improved?

education, on-the-job training, and experience

government purchases (G)

expenditures on goods and services

Why is the saving rate so important for increasing economic growth?

higher levels of saving rate will lead to higher rates of investment and capital formation and therefore economic growth.

Free Trade & Economic Growth

if two nations or individuals with different resource endowments and production capabilities specialize in producing a smaller number of goods and services an engage in trade both parties will benefit. total output will rise.

disposable personal income

income remaining for people to spend or save after all taxes have been paid

How does physical Capital contribute to productivity growth?

increases labor productivity. EX: combining more workers with more capital makes workers more productive.

Why is research and development so important for economic growth?

innovations resulting from investments in R&D have the potential to accelerate economic growth even further

What is per capita GDP?

is real output of goods and services per person. In some cases, real GDP may increase, but per capita real GDP may actually drop as a result of population growth.

What is productivity?

is the amount of goods and services a worker can produce per hour.

What is economic growth?

is usually measured by the annual percentage change in real output of goods and services per capita (real GDP per capita), reflecting the expansion of the economy over time.

Why is the quality of goods such a problem with GDP as a measure of economic welfare?

it can miss important changes in the improvement in the quality of goods and services.

What are the problems with using GDP to measure output?

it is difficult to compare the real GDP over time because of the changing value of money over time.

If mary received a welfare check this year, would that transfer payment be included in this year's GDP? and why?

it would not be included in the annual GDP because it doesn't go to purchased newly produced good or services but is a transfer of income to the citizen

How do pollution and crime-control expenditures impact GDP?

market expenditures for pollution and crime control are included in GDP are currently produced goods and services.

Value is determined by the ____ at which _____ and ____ sell.

market prices/goods/services

New Growth Theory

modern theories of growth that try to explain the origins of technological progress.

how do pollution and crime affect GDP?

neither pollution or crime are included ( as bads to be subtracted) in GDP calculations.

What are some of the deficiencies of GDP as a measure of economic welfare?

nonmarket transactions underground economy leisure externalities quality of the goods purchsed

Real GDP per capita

real GDP divided by the total population to get the value of real output of final goods and services.

standard of living is measured by using the growth rate of

real gdp per person

Indirect Business Taxes (IBT)

taxes, such as sales tax, levied on goods and services sold

________ is the key to sustaining economic growth

technological change

Is real GDP always less than nominal GDP?

the adjustment of nominal GDP to real GDP will tend to reduce the growth in GDP suggested by nominal GDP figures.

What does personal income measure?

the amount of income received by households (including transfer payments) before personal taxes

What is physical capital?

the human-made objects used to create other goods and services

factor payments

the income people receive in return for supplying factors of production

Difference between GDP and GNP

the main differences between them comes from the fact that there may be companies owned by foreign residents that produce goods in the country, and companies owned by domestic residents that produce goods for the rest of the world and revert earned income to domestic residents.

double counting

the mistake of including both the value of intermediate products and the value of final products in calculating gross domestic product; counting the same production more than once

natural rate of output

the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate

Consumption (C)

the purchase of final goods and services by households, excluding new housing

per-worker production function

the relationship between the amount of capital per worker in the economy and the average output per worker

What is human capital?

the skills and knowledge gained by a worker through education and experience.

What does productivity determine?

the standard of living. Sustained economic growth occurs when productivity rises.

GDP (Gross Domestic Product)

the total value of goods produced and services provided in a country during a given period

Why is the measure of per capita GDP so important?

using GDP as a crude welfare measure is to relate output to human desires, we need to adjust for population change.

How are net exports calculated?

• NX= X- M(imports). Calculated by subtracting total imports from total exports