Econ 201 Week 12 Notes (GDP; Growth)
Econ 201 Week 12 Notes (GDP; Growth) ECON 201
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This 5 page Class Notes was uploaded by Ekene Tharpe on Saturday April 2, 2016. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Donna Bueckman in Fall 2015. Since its upload, it has received 28 views. For similar materials see Intro Economics: Survey Course in Economcs at University of Tennessee - Knoxville.
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Date Created: 04/02/16
Econ Week 12 GDP: Expenditure Approach • 4 parts: Components add up to GDP o 1) Consumption o 2) Investment Y= C + I + G + NX o 3) Government Purchases o 4) Net Exports (NX) 1. Consumption (C) o Total spending by on G&S by a household § Durables: long lasting § Non-‐durables: don’t last § Services 2. Investment (I) o Total spending on: § Capital equipment: help in the production of other G&S § Structures (ex. factory, house) § Inventories: goods that have been produced, but not sold 3. Government Purchases (G) o Spending on G&S by the government at all levels (federal, state, local) o Excludes transfer payments § Social Security, UI benefits (transfers of income) 4. Net Exports (NX) o NX = Exports – Imports (Trade balance: Surplus or Deficit) § Exports: produced domestically; sold abroad § Imports: produced abroad; sold domestically Examples: 1. Sarah spends $200 on dinner: GDP and C increase by $200 2. John spends $1200 on a computer for a business: GDP and I increase by $1200 o If he got last years model instead Current GDP and I don’t change 3. Kate buys a laptop for $2000 for business. The laptop is from China: I increases by $2000, NX decreases by $2000, GDP doesn’t change 4. Car produces build $400million worth of cars, consumers only buy $370mil. C increases by $370mil, I increase by $30mil (inventory investment), GDP increases by $400mil Real vs Nominal GDP • Nominal GDP: Output at current prices o Not corrected for inflation • Real GDP: Values output using prices of a base year o Is corrected for inflation Example: Pizza Lattes Price Quantity Price Quantity 2002 $10 400 $2 1000 2003 $11 500 $2.50 1100 2004 $12 600 $3 1200 Nominal GDP Increase ’02 = 10 * 400 + 2 *1000 = $6000 37.5% ’03 = 11 * 500 + 2.5 * 1100 = $8250 ’04 = 12 * 600 + 3 * 1200 = $ 10800 30.9% Real GDP: 2002 base year Increase ’02 = 10 * 400 + 2 *1000 = $6000 20% ’03 = 10 * 500 + 2 * 1100 = $7200 ’04 = 10 * 600 + 2* 1200 = $ 8400 16.7 The GDP Deflator: • It is a price index (measurement of overall prices) • Can be used to compute inflation rate GDP Deflator = 100 X (Nominal GDP/ Real GDP) GDP and Economic Well-‐Being • Real GDP per Capita: key indicator of average persons standard of living o Real GDP per capital= real GDP population • GDP does not value: o The environments quality o Leisure time o Non-‐market activity o Equitable distribution of income • GDP’s importance to us: o Large GPD means the country cant afford things like better schools, clean environment, health care, etc. o Indicators of life quality positively correlate with GDP Short vs. Long Run Changes in GDP • Long run: 3% GDP growth a year on average o Growth trend • Business cycles: o Short-‐run economic fluctuations around the long run trend § 4 phases: 1. Peak (Back to Peak) 2. Recession 4. Recovery 3. Trough o Recession-‐ Periods where real incomes falls and unemployment rises § Depression-‐ sever recession (rare) Production and Growth • Facts: 1. Significant differences in living differences exist 2. Large variation in growth rates exist • Global Income and Growth o Why are some countries richer than others? Some fast grow, others “stuck?” o What polices focus on raising growth rates and long run living standards? Productivity: output per worker • Remember: o Real GDP per capita is the key indicator of the average persons standard of living § So: A countries standard of living depends on their ability to produce G&S § Depends on productivity: • The value of output produced per unit of labor input Y = Real GDP (quantity of labor produced) Productivity = Y/L L = Quantity of Labor (output per worker) Physical Capital: Per Worker • Physical Capital = k = Equipment and Structures used to produce G&S o k/L = Capital per worker • Productivity is higher when the average worker has more capital K/L Y/L Human Capital: Per Worker • Human Capital = H = Knowledge and Skills workers acquire o H/L = the average worker’s human capital • Productivity is higher when the average worker has more human capital H/L Y/L Natural Resources: Per Worker • Natural Resources= N = Nature provided imports • All else equal, more N lets the country produce more Y N/L Y/L • Countries don’t need N to be wealthy Technological Knowledge • Society’s understanding of the best way to create G&S o Advance in knowledge: increases production (more output from resources) • Technological change: Advances in knowledge applied (intervention/ innovation combination) Investment • Domestic investment: increases k o More capital Less consumption of goods Increased savings, which funds k • Tradeoff exists between current and future consumption Abroad Investment • Policy encourages: o Foreign direct investment: capital investment owned and controlled by a foreign entity o Foreign portfolio investment: capital investment financed by foreign money, but is operated domestically • Downside: Some of the returns go back to the country of origin Education • Policy promotes investment in H (public schools, subsidies in college loans) • Education’s positive externalities: o Each year of schooling, increase works wage by 10% • Opportunity cost: present and future income Health and Nutrition • Healthier works = more productivity; investment in H • Malnourished countries: raising caloric intake increases worker productivity Property Rights and Political Stability • Remember: Markets allocate recourses to their most efficient uses • Require property right respect: o Ability for people to exercise authority over resources they own o Stable government = stable constitution = law enforcement • Justice system: o Enforce contracts o Address fraud/ corruption o Have effective courts • Political instability: o Uncertainty over whether property rights will be protected in the future is created Free Trade • Inward-‐oriented policies: limits on investments from abroad o Avoid interaction with other countries • Outward-‐ oriented polices: eliminate foreign investment and trade restrictions o Promotes involvement with the world economy Population Growth • 3 ways it can affect living standards: 1. Stretch Natural Resources: Technological productivity and progress growth 2. Dilute the Capital Stock: a. Larger population = Higher L = Lower k/L = lower productivity and living standards b. Applies to H as well 3. Promote Tech. Progress: Larger population = a. More scientist, engineers, inventors b. More frequent discoveries c. Faster tech progress/ economic growth
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