10. Economic progress comes primarily
through trade, investment, better
ways of doing things, and sound
economic institutions.
12 Key Elements of Economics
Factors of Production

How do we get the economy to grow?


Produce more stuff
Factors of Production – resources necessary
to produce something
Factors of Production



Land – natural resources
Labor – human resources
Capital – capital resources



Capital – stuff used to make other goods
Capital is NOT money
Remember money is not a resource
Growing the Economy

Increase in productive resources


More people, better education (labor)
More capital (capital)
Education is Important
Growing the Economy

Technology – the ability of labor to use
capital for production


If the same amount of L and K is able to increase
output then technology has improved
Better technology helps us get more with the
same amount of scarce resources
Economic Progress
1973 – 3.4 months to buy all items
2009 – 1.1 months to buy all items
Sources of Economic Growth

Investments in productive assets


Entrepreneurial discoveries and improvements in
technology


Physical capital (tools, machines, computers, and
buildings) and human capital (education, vocational
training, and professional development)
Internal combustion engine, electricity, assembly line,
refrigerators, telephone, polio vaccine, microwave,
computer, and artificial heart
Improvements in economic organization

Rule of law, even handed enforcement, competitive
markets, limited government and money of stable value
Growing the Economy



Economic growth means more wealth and less
poverty
If we want to end poverty we must grow the
economy of the country
How do we measure economic growth?
Gross Domestic Product
Gross Domestic
Product is the
total market value
of all final goods
and services
produced inside a
country in a year.
Why GDP?

When judging whether the economy is
doing well or poorly, it is natural to look at
the total income that everyone in the
economy is earning.
onsumption
nvestment
overnment Spending
Net Exports
The Four Components of GDP

Consumption (C):

Spending by households on goods and services
The Four Components of GDP

Investment (I):

Purchases of capital equipment and structures
(including houses)
The Four Components of GDP

Government Purchases (G):


Includes spending on goods and services by local,
state and federal governments
Does not include transfer payments
The Four Components of GDP

Net Exports (X-M): Exports minus imports
If X > M Trade surplus
If X = M Trade balance
If X < M U.S.A.
Trade Deficit
US Trade Balance from 1992-2013
Top Countries
Deficits
Surplus
China
Hong Kong
Japan
Netherlands
Germany
United Arab Emirates
Mexico
Australia
GDP Components of Measurement
Consumption
70.9 %
GDP Components of Measurement
Investment
13.2%
Consumption
70.9 %
GDP Components of Measurement
Investment
13.2%
Consumption
70.9 %
Government
Spending
19.6%
GDP Components of Measurement
Investment
13.2%
Consumption
70.9 %
Government
Spending
19.6%
Net Exports
-3.7 %
Important Features of GDP


Output is valued at market determined
prices.
Reporting Delays – takes a long time to
calculate GDP so it is only estimated every
3 months – may take up to 6 months to get
accurate information about today
What Is and What Is Not
Counted in GDP?

GDP records only the output of final goods

Intermediate Products – products used in making other
products are not included
What Is and What Is Not
Counted in GDP?

Secondhand Sales – sales of used goods
are not included because they do not
generate new wealth
What Is and What Is Not
Counted in GDP?

Production Within National Borders –
measures only those things made within a
country’s border
What Is and What Is Not
Counted in GDP?

Illegal Activities – GDP could increase 10-15%
if underground economy was included (as high
as 40% in Italy)
What Is and What Is Not
Counted in GDP?

Exclusion of Nonmarket Activities – any work
you do outside of the marketplace does not
count in the GDP
GDP and Economic Well-Being

Quality of Life – does not take into
consideration quality of life issues
GDP and Economic Well-Being

Composition of Output – GDP does not take
into consideration what is made, only how
much stuff is being produced
GDP and Economic Well-Being?




It is a good measure of production, not income
It is a good measure of the material wellbeing of the economy as a whole.
More GDP means we have a higher material
standard of living by being able to consume
more goods and services.
It is NOT intended to be a measure of
happiness or quality of life.
Per Capita GDP and Economic
Well-Being?


GDP Per Capita tells us the income and
expenditure of the average person in the
economy (real GDP divided by population)
It tells us little or nothing about distribution
GDP Per Capita in US Dollars
Based on 2009 IMF Data
Per Capita Income and Economic
Freedom Quartile
GDP Per Capita
(ppp), 2008
$35,000
$32,744
$30,000
$25,000
$20,000
$15,000
$14,659
$10,000
$5,000
$3,858
$7,188
$0
Least Free
Quartile
3rd Quartile
2nd Quartile
Most Free
Quartile
Least Free ………………... Most Free
Sources: The Fraser Institute; The World Bank, World Development
Indicators, 2010.
Let’s Review

What would happen to GDP after each of
the following events?
How is GDP effected?



Due to a tax cut, more new cars are sold.
Consumption increases
GDP increases
How is GDP effected?



Worry about an increasing budget deficit
causes fewer military planes to be
purchased.
Government spending decreases
GDP decreases
How is GDP effected?



Increasing prices in the U.S. encourages
the purchase of more foreign goods.
Imports increase causing Net Exports to
decrease
GDP decreases
How is GDP effected?



Due to tax increase vacation travel
purchases decline.
Consumption decreases
GDP decreases
How is GDP effected?



Due to increased incomes, Europeans buy
more U.S. goods and services.
Exports increase causing Net Exports to
increase
GDP increases
How is GDP effected?



A foreign government imposes a tariff on
U.S. goods.
Exports decrease causing Net Exports to
decrease
GDP decreases
How is GDP effected?



Optimism about the future increases
construction of new factories.
Investment increases
GDP increases
How is GDP effected?



Japanese cars become more popular than
American cars.
Imports increase causing Net Exports to
decrease
GDP decreases
How is GDP effected?



Interest rates increase decreasing
spending on new machinery.
Investment decreases
GDP decreases
How is GDP effected?



To fight unemployment government work
programs are expanded.
Government spending increases
GDP increases
How is GDP effected?



Mortgage rates fall and more houses are
sold.
Investment increases
GDP increases