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Econ 201 Week 12 Notes (GDP; Growth)

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by: Ekene Tharpe

Econ 201 Week 12 Notes (GDP; Growth) ECON 201

Marketplace > University of Tennessee - Knoxville > Economcs > ECON 201 > Econ 201 Week 12 Notes GDP Growth
Ekene Tharpe

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About this Document

Covers all aspects of GDP, business cycles, population growth, and more.
Intro Economics: Survey Course
Donna Bueckman
Class Notes
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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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