Chapter 10 - GDP
Economic Growth
(1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita.
Two approaches to GDP
(1)* income approach* > count income derived from production > wages, rental income, interest income, profit (2) *expenditure approach* > count sum of money spent buying the final goods > who buys the goods? C: consumption by households I; Investment by business G; gov purchases x ports; expenditures by foreigners
GDP does not value
- the quality of the environment - leisure time - non-market activity, such as the child care a parent provides at home - an equitable distribution of income - under ground economy - equal trade in g and s not monetary
Policies to promote technological progress
-patent laws -tax incentives or direct support for private sector R&D -grants for basic research at universities
determinants of productivity
1. physical capital (K) stock of equipment and structures used to produce g and s Physical Cap per worker is K/L productivity is higher when avg worker has more capital inc in K/L inc Y/L 2. human capital (H) knowledge and skills workers acquire and use through education and training and experience H/L human capital per worker productivity higher when avg worker has more human capital (education skills etc) 3. natural resources (N) other things equal, more n allows a country to produce more Y inc in N/L inc Y/L 4. technological knowledge (A) just boosts overall productiivty
Startup firm
A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.
Nominal GDP
Gross domestic product measured in terms of the price level at the time of the measurement; GDP that is unadjusted for inflation.
learning by doing
Achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale.
Increasing Returns
An increase in a firm's output by a larger percentage than the percentage increase in its inputs.
Real GDP
Gross domestic product measured in terms of the price level in a base period (i.e., GDP that is adjusted for inflation).
LO10.7 Discuss differing perspectives as to whether growth is desirable and sustainable.
Critics of rapid growth say it adds to environmental degradation, increases human stress, and exhausts the earth's finite supply of natural resources. Defenders of rapid growth say that it is the primary path to the rising living standards nearly universally desired by people, that it need not debase the environment, and that there are no indications that we are running out of resources. Growth is based on the expansion and application of human knowledge, which is limited only by human imagination.
gross private domestic investment (Ig)
Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories.
LO10.3 List two ways that economic growth is measured.
Economic growth is either (a) an increase of real GDP over time or (b) an increase in real GDP per capita over time. Growth lessens the burden of scarcity and provides increases in real GDP that can be used to resolve socioeconomic problems.
Government Purchases (G)
Expenditures by government for goods and services that government consumes in providing public goods and for public capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and services.
Net Exports (Xn) = Exports (X) - Imports (M)
Exports minus imports.
how econ growth is measured
GDP Unemployment inflation
final goods and services
Goods and services that have been purchased for final use and not for resale or further processing or manufacturing.
LO10.1 Explain how gross domestic product (GDP) is defined and measured.
Gross domestic product (GDP) is the market value of all final goods and services produced within the borders of a nation in a year. Intermediate goods and secondhand sales are purposely excluded in calculating GDP. GDP can be calculated by adding consumer purchases of goods and services, gross investment spending by businesses, government purchases, and net exports: GDP = C + Ig + G + Xn.
New Technology
Improves productivity and living standards
Network Effects
Increases in the value of a product to each user, including existing users, as the total number of users rises.
savings and investment
Invest in capital goods! Emphasis on Capital over Consumption important determinants of the long-run growth in GDP and standards of living spike in K is temp due to diminishing return
Population growth
Large population - more workers to produce goods and services - larger total output of goods and services - more consumers Population growth may effect living standards in 3 ways 1. stretch in natural resources - Population grows too much with limited resources N/L decr. , L (living standards) increase 2. Diluting the capital stock K/L lets say 2K per 4L we won't have enough K for all the L 3. Promoting tech progress: conclusion: In the long run - living standards are determined by productivity policies that affect the determinants of productivity - will in future affect next gen living standars one of these detminants: saving and investing
Information Technology (IT)
New and more efficient methods of delivering and receiving information through use of computers, fax machines, wireless phones, and the Internet.
LO10.2 Describe how economists distinguish between nominal GDP and real GDP.
Nominal (current-dollar) GDP measures each year's output valued in terms of the prices prevailing in that year. Real (constant-dollar) GDP measures each year's output in terms of the prices that prevailed in a selected base year. Because real GDP is adjusted for price-level changes, differences in real GDP are due only to differences in output.
LO10.6 Explain why the trend rate of U.S. productivity growth has increased since the earlier 1973-1995 period
Over long time periods, the growth of labor productivity underlies an economy's growth of real wages and its standard of living. Productivity rose by 1.5 percent annually between 1973 and 1995, 2.6 percent annually between 1995 and 2010, and just 0.4 percent annually from 2010 to 2015. The 1995-2010 increase in the average rate of productivity growth was based on (a) rapid technological change in the form of the microchip and information technology, (b) increasing returns and lower per-unit costs, and (c) heightened global competition that holds down prices. The main sources of increasing returns in recent years are (a) the use of more specialized inputs as firms grow, (b) the spreading of development costs, (c) simultaneous consumption by consumers, (d) network effects, and (e) learning by doing. Increasing returns mean higher productivity and lower per-unit production costs. Possible explanations for the slow productivity growth after the Great Recession of 2007-2009 include high debt levels, overcapacity, the rise of "free" Internet products, and a slowdown in technological innovation.
Intermediate goods
Products that are purchased for resale or further processing or manufacturing.
standard of living
Quality of life based on ownership of necessities and luxuries that make life easier. dependent on ability to produce goods and services
GDP can indicate
Quality of life, usually better GDP = country quality of life is better and higher life expectancy
Real GDP Per Capita
Real output (GDP) divided by population.
Economies of Scale
Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production.
human capital
The accumulation of knowledge and skills that make a worker productive.
Growth Accounting (not mentioned in class)
The bookkeeping of the supply-side elements that contribute to changes in real GDP over some specific time period.
infrastructure
The capital goods usually provided by the public sector for the use of its citizens and firms (for example, highways, bridges, transit systems, wastewater treatment facilities, municipal water systems, and airports). Fundamental facilities and systems serving a country, city, or area, as transportation and communication systems, power plants, and schools
personal consumption expenditures (C)
The expenditures of households for durable and nondurable consumer goods and services.
modern economic growth
The historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita. - began james watt steam engine 1776 -more trade - Social change - public education, less racism, equal rights democracy human life span double' began in britain has spread slowly
National income and product accounts (NIPAs)
The national accounts that measure overall production and income of the economy and other related aggregates for the nation as a whole.
labor force participation rate
The percentage of the working-age population that is actually in the labor force
LO10.4 Identify the general supply, demand, and efficiency forces that give rise to economic growth.
The supply factors in economic growth are (a) the quantity and quality of a nation's natural resources, (b) the quantity and quality of its human resources, (c) its stock of capital facilities, and (d) its technology. Two other factors—a sufficient level of aggregate demand and economic efficiency—are necessary for the economy to realize its growth potential. The growth of production capacity is shown graphically as an outward shift of a nation's production possibilities curve. Growth is realized when total spending rises sufficiently to match the growth of production capacity.
Gross Domestic Product (GDP)
The total market value of all final goods and services produced annually within the boundaries of the United States, whether by U.S.- or foreign-supplied resources. The total output of all economic activity in the nation, including goods and services. tangible services (dry cleaning, concert tickets, cell phone services) tangible goods (dvds, mountain bike, beer)
Labor Productivity
Total output divided by the quantity of labor employed to produce it; the average product of labor or output per hour of work.
LO10.5 Describe "growth accounting" and the specific factors accounting for economic growth in the United States.
U.S. real GDP has grown partly because of increased inputs of labor and primarily because of increases in the productivity of labor. The increases in productivity have resulted mainly from technological progress, increases in the quantity of capital per worker, improvements in the quality of labor, economies of scale, and an improved allocation of labor.
Inward-oriented policies
attempt to increase productivity and living standards within the country by avoiding interaction with the rest of the world generally tend to fail and halt econ growth 20th century argentina for ex don't want interactions with other countries
Bureau of Economic Analysis
compiles national income and product accounts GDP: gross domestic product NDP: national DOmestic product NI: national income PI: personal Income all measured by them Compiles the national income and product accounts (NIPA) for the U.S. economy. compiles National Income and Product Accounts - assess health of economy - track long-run course - formulate policy
Productivity function
gives real GDP per worker-hour as a function of capital per worker-hour, holding the level of technology constant Y/L=Af(K/L, H/L, N/L) shows A K H AND N depends on these only
Knowledge is a public good
ideas can be shared freely, increasing the productivity of many
Free Trade
international trade free of government interference trade has similar effects as discovery inward oriented policies outward oriented policies
Outward-oriented policies
international trade in goods and services can improve the economic well-being of a country's citizens have often succeeded ex: south korea singapore taiwan 1960 take away tariffs and other international trade regulations
two main goals of macroeconomics
long run econ growth mitigate short run fluctuation in output and employment
Technological progress
main reason why living standards rise over the long run
catchup effect
the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
Productivity (Y/L)
the quantity of goods and services produced from each unit of labor input prudcuted from each unit of labor
Property rights
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
