Chapter 10: GDP and Economic Growth

Chapter 10GDP and Economic GrowthMcGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reservedGross Domestic ProductMeasure of aggregate outputMonetary measureAvoid multiple countingMarket value of final goodsIgnore intermediate goodsCount value added10-*Gross Domestic ProductLO1YearAnnual OutputMarket Value13 sofas and 2 computers3 at $500 + 2 at $2000 = $550022 sofas and 3 computers2 at $500 + 3 at $2000 = $7000Comparing Heterogeneous Output by Using Money Prices10-*Gross Domestic ProductExclude financial transactionsPublic transfer paymentsPrivate transfer paymentsStock (and bond) market transactionsExclude secondhand salesSell used car to a friend10-*Measuring GDPExpenditure approachCount sum of money spent buying the final goods10-*Expenditures ApproachPersonal consumption expenditures (C)Durable consumer goodsNondurable consumer goodsConsumer expenditures for servicesDomestic plus foreign goods produced10-*Expenditures ApproachGross private domestic investment (Ig)Machinery, equipment, and toolsAll constructionChanges in inventoriesCreation of new capital assetsNoninvestment transactions excludedLO110-*Expenditures ApproachGovernment purchases (G)Expenditures for goods and servicesExpenditures for publicly owned capitalExcludes transfer paymentsNet exports (Xn)Add exported goods and subtract imported goodsXn = Exports – ImportsGDP = C + Ig + G + Xn10-*Comparative GDP10-*Nominal versus Real GDPGDP is a dollar measure of productionUsing dollar values creates problemsNominal GDPUse prevailing priceReal GDPReflect changes in priceUse base year price10-*GDP Price IndexYear(1)Units of Output(2)Price of Pizzaper Unit(3)Price Index(Year 1 = 100)(4) Unadjusted, or Nominal, GDP (1) × (2)(5)Adjusted, or Real, GDP15$10100$ 50$502720200 140703825250 2008041030_________51128_________Calculating Real GDP (Base year = Yr 1)10-*Economic GrowthIncrease in real GDP or real GDP per capita over some time periodPercentage rate of growthGrowth as a goalArithmetic of growth: Rule of 70Approximatenumber of yearsrequired to doublereal GDP=70Annual percentage rateof growth10-*Economic GrowthGrowth in U.S. real GDP 1950–2009Increased sixfold3.2 percent per year Growth in U.S. real GDP per capitaIncreased more than threefold2 percent per yearQualifications Improved products and servicesAdded leisureOther impacts10-*Economic Growth(1)Year(2)Real GDP, Billions of 2005 $(3)Population,Millions(4)Real GDP, per Capita,2005 $ (2) ÷ (3)1950$ 2,006152$13,19719602,83118115,64019704,27020520,82919805,83922825,61019908,03425032,136200011,22628239,809201013,24830943,456Source: Bureau of Economic Analysis, www.bea.gov and U.S. Census Bureau, www.census.govReal GDP and Real GDP per Capita10-*Average Annual Growth Rates10-*Determinants of GrowthSupply factorsIncreases in quantity and quality of natural resources Increases in quality and quantity of human resourcesIncreases in the supply (or stock) of capital goodsImprovements in technology10-*Determinants of GrowthDemand factorHouseholds, businesses, and government must purchase the economy’s expanding output Efficiency factorMust achieve economic efficiency and full employment10-*aEconomicgrowthbDProduction PossibilitiesBACConsumer goodsCapital goodsc10-*Inputs and ProductivitySize of employed labor forceAverage hours of workLaborinputs(hours ofwork)Technological advanceQuantity of capitalEducation and trainingAllocative efficiencyOtherLaborproductivity(average output per hour)RealGDPReal GDP = Hours of work × labor productivityx=10-*Accounting for GrowthItem1953 Q2to 1973 Q41973 Q4 to 1995 Q41995 Q4to 2001 Q12001 Q1 to 2007 Q3Projected2010 Q1to 2021 Q4Increase in real GDP3.62.83.82.62.5Increase in quantity of labor1.11.31.4-0.10.2Increase in labor productivity2.51.52.42.72.3Accounting for the Growth of U.S. Real GDP, 1953–2007, Plus Projection from 2009–2021(average percentage changes)Source: Derived from Economic Report of the President, 2008, p. 45; and Economic Report of the President, 2011, p. 8210-*Accounting for GrowthFactors affecting productivity growthTechnological advance (40 percent)Quantity of capital (30 percent)Education and training (15 percent)Economies of scale and resource allocation (15 percent)10-*Education and Training10-*Institutional StructuresStrong property rightsPatents and copyrightsEfficient financial institutionsFree tradeA competitive market system10-*Productivity GrowthMicrochip/information technologyNew firms and increasing returnsSources of increasing returnsMore specialized inputsSpreading of development costsSimultaneous consumptionNetwork effectsLearning by doingGlobal competition10-*Productivity Growth10-*Economic GrowthIs economic growth desirable and sustainable?The antigrowth viewEnvironmental and resource issuesIn defense of economic growthHigher standard of livingHuman imagination can solve environmental and resource issues10-*Economic GrowthGrowth is the path to greater material abundanceResults in higher standards of livingIncreases leisure timeAllows for the expansion and application of human knowledge 10-*Global SnapshotCountryGlobal Competitiveness Ranking, 2011-2012Switzerland1Singapore2Sweden3Finland4United States5Germany6Netherlands7Denmark8Japan9United Kingdom1010-*