Lecture Essentials of economics (3/e): Chapter 10 - Brue, McConnell, Flynn

Chapter 10 - GDP and economic growth. We will be calculating how economists estimate a country’s output and income for a year. The importance of these figures will be discussed, as well as the differences between the various ways that we can measure income. Lastly we will discuss how we can adjust the figures that we have calculated for inflation effects and analyze some of the issues associated with the various accounts.

Chapter 10

GDP and Economic

Growth

• Avoid multiple counting

• Market value of final goods

• Ignore intermediate goods

1 3 sofas and 2 computers 3 at $500 + 2 at $2000 = $5500

2 2 sofas and 3 computers 2 at $500 + 3 at $2000 = $7000

Comparing Heterogeneous Output by Using Money Prices

• Exclude financial transactions

• Public transfer payments

• Private transfer payments

transactions

• Sell used car to a friend

the final goods

Expenditures Approach

• Creation of new capital assets

Expenditures Approach

Comparative GDP

Nominal versus Real GDP

Year

(1) Units of

Output

(2) Price of Pizza per Unit

(3) Price Index (Year 1 = 100)

(4) Unadjusted,

or Nominal, GDP (1) × (2)

(5) Adjusted,

or Real, GDP

• Increase in real GDP or real GDP per

capita over some time period

• Percentage rate of growth

Economic Growth

(1)

Year

(2) Real GDP, Billions of 2005 $

(3) Population

, Millions

(4) Real GDP, per Capita,

Source: Bureau of Economic Analysis, www.bea.gov and

U.S Census Bureau, www.census.gov

Real GDP and Real GDP per Capita

Average Annual Growth Rates

government must purchase the

economy’s expanding output

• Efficiency factor

and full employment

Economic growth

• Size of

employed labor force

• Average

hours of work

Labor inputs (hours of work)

Real GDP

Real GDP = Hours of work × labor productivity

Item

1953 Q2

to 1973 Q4

1973 Q4

to 1995 Q4

1995 Q4

to 2001 Q1

Accounting 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 82

• Factors affecting productivity growth

• Quantity of capital (30 percent)

• Education and training (15 percent)

allocation (15 percent)

Education and Training

• Strong property rights

• Efficient financial institutions

• Free trade

Productivity Growth

Productivity Growth

sustainable?

• The antigrowth view

• Higher standard of living

environmental and resource issues

• Growth is the path to greater material

abundance

• Results in higher standards of living

• Increases leisure time

• Allows for the expansion and

application of human knowledge