Chapter 10 GDP and Economic Growth McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved 1-1 Agencies Involved • Bureau of Economic Analysis (BEA) • National Income and Product Account • The national accounts that measure the overall production and income of the economy for the nation as a whole. McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved Gross Domestic Product • The primary measure of the economy’s performance is its annual total output of goods and services. This output is called gross domestic product (GDP) McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved Gross Domestic Product • So, what is GDP? The total market value of all final goods and services produced annually within the borders of the United States, whether by U.S. or foreign-supplied resources. McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved Gross Domestic Product • Measure of aggregate output • Monetary measure • Avoid multiple counting • Market value of final goods • Ignore intermediate goods • Count value added 10-5 Gross Domestic Product Comparing Heterogeneous Output by Using Money Prices Year 1 2 LO1 Annual Output 3 sofas and 2 computers 2 sofas and 3 computers Market Value 3 at $500 + 2 at $2000 = $5500 2 at $500 + 3 at $2000 = $7000 10-6 Gross Domestic Product • Exclude financial transactions • • • • Public transfer payments (Social security and welfare payment) Private transfer payments (Cash Gifts) Stock (and bond) market transactions Exclude secondhand sales • Sell used car to a friend 10-7 Measuring GDP • Expenditure approach • Count sum of money spent buying the final goods 10-8 Expenditures Approach • Personal consumption expenditures (C) Expenditures by households for durable goods, nondurable goods, and services. • Personal consumption expenditures (C) • Durable consumer goods • Nondurable consumer goods • Consumer expenditures for services • Domestic plus foreign goods produced 10-9 Expenditures Approach • Gross private domestic investment (Ig) Expenditures for newly produced capital goods (such as plant and equipment) and for additions to inventories. • Gross private domestic investment (Ig) • Machinery, equipment, and tools • All construction • Changes in inventories • Creation of new capital assets • Noninvestment transactions excluded LO1 10-10 Expenditures Approach • Government purchases (G) Government expenditures on final goods, services, and publicly owned capital. • Government purchases (G) • Expenditures for goods and services • Expenditures for publicly owned capital • Excludes transfer payments • Net exports (Xn) • GDP = C + Ig + G + Xn • Add exported goods and subtract imported goods • Xn = Exports – Imports 10-11 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved 1-12 Comparative GDP 10-13 Nominal versus Real GDP • • • GDP is a dollar measure of production Using dollar values creates problems Nominal GDP • • Use prevailing price Real GDP • • Reflect changes in price Use base year price 10-14 GDP Price Index Calculating Real GDP (Base year = Yr 1) (2) (1) Price of Units of Pizza Year Output per Unit (3) Price Index (Year 1 = 100) (4) Unadjusted, or Nominal, GDP (1) × (2) (5) Adjusted, or Real, GDP 1 5 $10 100 $ 50 $50 2 7 20 200 140 70 3 8 25 250 200 80 4 10 30 ___ ___ ___ 5 11 28 ___ ___ ___ 10-15 Economic Growth • Increase in real GDP or real GDP per • • • capita over some time period Percentage rate of growth Growth as a goal Arithmetic of growth: Rule of 70 Approximate number of years required to double real GDP 70 = Annual percentage rate of growth 10-16 Economic Growth • • • Growth in U.S. real GDP 1950–2009 • • Increased sixfold 3.2 percent per year Growth in U.S. real GDP per capita • • Increased more than threefold 2 percent per year Qualifications • • • Improved products and services Added leisure Other impacts 10-17 Economic Growth Real GDP and Real GDP per Capita (1) Year (2) Real GDP, Billions of 2005 $ (3) Population , Millions (4) Real GDP, per Capita, 2005 $ (2) ÷ (3) 1950 $ 2,006 152 $13,197 1960 2,831 181 15,640 1970 4,270 205 20,829 1980 5,839 228 25,610 1990 8,034 250 32,136 2000 11,226 282 39,809 2010 13,248 309 43,456 Source: Bureau of Economic Analysis, www.bea.gov and U.S. Census Bureau, www.census.gov 10-18 Average Annual Growth Rates 10-19 Determinants of Growth • Supply factors • Increases in quantity and quality of • • • natural resources Increases in quality and quantity of human resources Increases in the supply (or stock) of capital goods Improvements in technology 10-20 Determinants of Growth • Demand factor • Households, businesses, and • government must purchase the economy’s expanding output Efficiency factor • Must achieve economic efficiency and full employment 10-21 Production Possibilities C Capital goods A Economic growth c b a B D Consumer goods 10-22 Inputs and Productivity Real GDP = Hours of work × labor productivity • Size of employed labor force Labor inputs (hours of work) • Average hours of work x • Technological advance • Quantity of capital • Education and training • Allocative efficiency • Other = Real GDP Labor productivity (average output per hour) 10-23 Accounting for Growth Accounting for the Growth of U.S. Real GDP, 1953– 2007, Plus Projection from 2009–2021 1953 Q2 to 1973 Q4 Item 1973 Q4 to 1995 Q4 1995 Q4 to 2001 Q1 2001 Q1 to 2007 Q3 Projected 2010 Q1 to 2021 Q4 Increase in real GDP 3.6 2.8 3.8 2.6 2.5 Increase in quantity of labor 1.1 1.3 1.4 -0.1 0.2 Increase in labor productivity 2.5 1.5 2.4 2.7 2.3 (average percentage changes) Source: Derived from Economic Report of the President, 2008, p. 45; and Economic Report of the President, 2011, p. 82 10-24 Accounting for Growth • Factors affecting productivity growth • Technological advance (40 percent) • Quantity of capital (30 percent) • Education and training (15 percent) • Economies of scale and resource allocation (15 percent) 10-25 Education and Training 10-26 Institutional Structures • Strong property rights • Patents and copyrights • Efficient financial institutions • Free trade • A competitive market system 10-27 Productivity Growth • • • • Microchip/information technology New firms and increasing returns Sources of increasing returns • More specialized inputs • Spreading of development costs • Simultaneous consumption • Network effects • Learning by doing Global competition 10-28 Productivity Growth 10-29 Economic Growth • Is economic growth desirable and • • sustainable? The antigrowth view • Environmental and resource issues In defense of economic growth • Higher standard of living • Human imagination can solve environmental and resource issues 10-30 Economic Growth • 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 10-31 Global Snapshot Country Global Competitiveness Ranking, 2011-2012 Switzerland 1 Singapore 2 Sweden 3 Finland 4 United States 5 Germany 6 Netherlands 7 Denmark 8 Japan 9 United Kingdom 10 10-32