Chapter 10
GDP and Economic
Growth
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved
1-1
Gross Domestic Product
• Measure of aggregate output
• Monetary measure
• Avoid multiple counting
• Market value of final goods
• Ignore intermediate goods
• Count value added
10-2
Gross Domestic Product
Comparing Heterogeneous Output by Using Money Prices
Year
1
Annual Output
3 sofas and 2 computers
Market Value
3 at $500 + 2 at $2000 = $5500
2
2 sofas and 3 computers
2 at $500 + 3 at $2000 = $7000
LO1
10-3
Gross Domestic Product
• Exclude financial transactions
• Public transfer payments
• Private transfer payments
• Stock (and bond) market
•
transactions
Exclude secondhand sales
• Sell used car to a friend
10-4
Measuring GDP
• Expenditure approach
• Count sum of money spent buying
the final goods
10-5
Expenditures Approach
•
Personal consumption expenditures (C)
•
•
•
•
Durable consumer goods
Nondurable consumer goods
Consumer expenditures for services
Domestic plus foreign goods produced
10-6
Expenditures Approach
• Gross private domestic investment
•
•
LO1
(Ig)
• Machinery, equipment, and tools
• All construction
• Changes in inventories
Creation of new capital assets
Noninvestment transactions excluded
10-7
Expenditures Approach
•
•
•
Government purchases (G)
•
•
•
Expenditures for goods and services
Expenditures for publicly owned capital
Excludes transfer payments
Net exports (Xn)
•
•
Add exported goods and subtract imported
goods
Xn = Exports – Imports
GDP = C + Ig + G + Xn
10-8
Comparative GDP
10-9
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
10-10
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
___
___
___
10-11
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
10-12
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
10-13
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
10-14
Average Annual Growth Rates
10-15
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
10-16
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
10-17
Production Possibilities
C
Capital goods
A
Economic
growth
c
b
a
B
D
Consumer goods
10-18
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)
10-19
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
10-20
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)
10-21
Education and Training
10-22
Institutional Structures
• Strong property rights
• Patents and copyrights
• Efficient financial institutions
• Free trade
• A competitive market system
10-23
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
10-24
Productivity Growth
10-25
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
10-26
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
10-27
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
10-28