Real GDP + Economic Growth

Real GDP + Economic Growth -  REAL GDP  ECONOMIC...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview:  REAL GDP  ECONOMIC GROWTH   PER CAPITA REAL GDP Economic Growth   Real GDP tells economists the amount of final goods and services being produced   It does not indicate at what rate the economy is growing or slowing.   To determine whether the economy is healthy and growing, and at what rate the economy is growing, economists must compare the percentage change in Real GDP over time.   Economic Growth is an increase in Real GDP or in Real GDP per capita over some time period   Usually measured as:     Percentage Rate of Growth in RGDP = RGDP2007 – RGDP2006 x 100   RGDP2006   RGDP per capita = RGDP/Population   Percentage Rate of Growth in RGDP per capita=   RGDP per capita 2007 – RGDP per capita 2006 x 100   RGDP per capita 2006   Importance of a Growing Economy   For one, a growing economy helps keep pace with a growing population.   If   standard of living is measured as real GDP per capita—   and   RGDP per capita = RGDP/Population   Then   to maintain the current standard of living—the economy must grow at least as fast as the population is growing Calculating Growth Rates Year 1, Quarter 1 RGDP = $13,392 Year 1, Quarter 2 RGDP = $13,551 Year 1, Quarter 3 RGDP = $13,768 Year 1, Quarter 4 RGDP = $14,084 Year 2, Quarter 1 RGDP = $14,299 Calculating Growth Rates Year 1, Quarter 1 RGDP = $13,392 Year 1, Quarter 2 RGDP = $13,551 Q1 ­Q2 1.18% Year 1, Quarter 3 RGDP = $13,768 Q2 ­Q3 1.6% Year 1, Quarter 4 RGDP = $14,084 Q3 ­Q4 2.29% Year 2, Quarter 1 RGDP = $14,299 Y1Q1 ­Y2Q2 6.77%  Growth U.S. Real GDP 1950 ­2005   Increased 6 fold   3.5% per year  Growth in U.S. Real GDP per capita   Increased more than 3 fold   2.3% per year  Qualifications   Improved products and services   Added leisure   Other impacts 8 ­7 Country Real GDP Real GDP Average annual per capita, per capita, growth rate, 1960 2004 1960 ­2004 United States United Kingdom France Ireland Japan Singapore Hong Kong South Korea $12,892 10,323 8,531 5,294 4,509 4,219 3,322 1,458 Figures are in 1996 dollars $36,098 26,762 26,168 28,957 24,661 29,404 29,642 18,424 2.3% 2.2 2.5 3.9 3.9 4.4 5.0 5.8 Source: Penn World Table 8 ­9 GDP per capita: Life expectancy: Adult literacy: $35,580 79 years 99% GDP per capita: Life expectancy: Adult literacy: $11,410 76 years 92% GDP per capita: Life expectancy: Adult literacy: $1,130 50 years 46% GDP per Growth rate, capita, 2005 1960-2005 FACT 1: There are vast differences in living standards around the world. China Singapore Japan Spain India Israel United States Canada Colombia New Zealand Philippines Argentina Saudi Arabia Rwanda Haiti $6,572 29,921 30,821 26,125 3,486 25,670 41,854 32,886 7,769 22,511 4,920 14,421 14,729 1,333 13 1,836 5.8% 5.4% 3.8% 3.2% 2.7% 2.7% 2.2% 2.1% 1.8% 1.4% 1.4% 1.0% 0.8% 0.3% –1.2% GDP per Growth rate, capita, 2005 1960-2005 FACT 2: There is also great variation in growth rates across countries. China Singapore Japan Spain India Israel United States Canada Colombia New Zealand Philippines Argentina Saudi Arabia Rwanda Haiti $6,572 29,921 30,821 26,125 3,486 25,670 41,854 32,886 7,769 22,511 4,920 14,421 14,729 1,333 14 1,836 5.8% 5.4% 3.8% 3.2% 2.7% 2.7% 2.2% 2.1% 1.8% 1.4% 1.4% 1.0% 0.8% 0.3% –1.2% U.S. QUINTILE SHARES (2006) Fact 3: There are vast differences in living standards within the United States SOURCE: http://www.census.gov/hhes/www/income/histinc/h03ar.html WITH PERFECT INCOME EQUALITY THE QUINTILE SHARES WOULD APPEAR AS FOLLOWS: WITH PERFECT INCOME INEQUALITY THE QUINTILE SHARES WOULD APPEAR AS FOLLOWS: BACK TO GROWTH… •  WHAT CAUSES ECONOMIC GROWTH?   Short Answer:   Increases in Labor Productivity (measured as increase in Output of Labor per hour or period of time)   So… what causes increases in labor productivity?   Increases in quality and quantity of labor   Increases in the numbers of workers or hours of work   Increases in human capital which allows a given worker to produce more   Increases in the quantity and quality of capital   Increase the supply (or stock) of capital goods   Improvements in technology  Increases in quantity and quality of natural resources Real GDP = hours of work x labor productivity •  Size of Quantity employed labor force of Labor •  Average hours of work Labor Inputs (hours of work) x •  Technological advance Quality •  Quantity of capital of •  Education and Labor training •  Allocative efficiency •  Other = Real GDP Labor Productivity (average output per hour) 8 ­20  Spending  Households, businesses, and government must purchase the economy’s expanding output  Efficiency factor  Must achieve economic efficiency and full employment 8 ­23 From Chapter 1: Capital Goods C Economic Growth A c b a B D Consumer Goods 8 ­24 Annual Averages for Five Decades Average Annual Increase (Percent) Real GDP Real GDP Per Capita Year Source: Bureau of Economic Analysis 8 ­25  Factors affecting productivity growth  Technological advance (40%)  Quantity of capital (30%)  Education and training (15%)  Economies of scale and resource allocation (15%) Comparing Recent Growth Rates China and, to a lesser extent, India and Ireland have achieved impressive growth United States and France have had moderate growth Argentina has had sluggish growth and Zimbabwe has slid backward   The Rule of 70 tells us that the time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable’s annual growth rate.  Per Capita Gross Domestic Product (GDP) is typically used as a measure of standard of living or quality of life.  Per Capita GDP = GDP/Population  Historically, per capita GDP in the United States has grown an average of 52% for each generation.  Since 1973, overall median family income has grown only 0.6 percent per year.  This annual rate of 0.6% produces a 17% increase in the average family’s income for each generation.  Doing the math, 17% is roughly 1/3 of 52%  Thus, unless the rate of economic growth increases, the next generation will experience an improvement in its standard of living that is only one ­third as large as the historical average for earlier generations  "a rising tide lifts all boats" is associated with the idea that economic growth or improvements in the economy benefit everyone.  Economic growth, which increases Real GDP for the entire economy, will also raise the incomes of all of the individuals within the economy.  Thus, as the economy grows, income grows and everyone benefits from the growth.  In the United States, GDP growth began separating from median per ­family income in the 1980s, and that pattern continues today  Income inequality in the United States has been widening in the U.S. for nearly 3 decades  This means that increases in GDP (when they happen) are going more and more to those at the very top, and less and less to those at the middle and bottom.  According to the Congressional Budget Office, between 1979 and 2004,  The real after ­tax income of the poorest one ­fifth of Americans rose by 9% (bottom 20%).  The real after ­tax income of the richest one ­fifth of Americans rose by 69% (top 20%).  The real after ­tax income of the top 1 percent of Americans rose by 176%.  Thus, even if growth were to resume at its former pace, the widening gap between per family GDP and per family median income challenges the notion that a “rising tide will lift all boats.”  This is also reflected in the growing gap between U.S. productivity and median family income  For nearly thirty years after the end of World War II, productivity growth and median household income rose together in lockstep.  Beginning in the mid ­1970s, there is a growing gulf between the two, which widens dramatically at the turn of the century. What this graph shows is that working families have generally not shared in the productivity growth over this decade. This data illustrates that while productivity is up roughly 20% over the period, the real weekly earnings of the typical full-time male are down about 1.0% and those of women are up 3.5%. The wage trends in the 2000s represent a pronounced downshift for middle ­ and low ­wage workers relative to the late 1990s. 95th 50th 10th The wage trends in the 2000s represent a pronounced downshift for middle- and low-wage workers relative to the late 1990s. The figure plots low, middle, and high wages, corresponding to the 10th, 50th (median), and 95th percentiles, with each series indexed to 100 in 1973.1 What do real wages look like in chart form over this same time period? What about education? While education matters if you observe the differences in wages from a less ­than ­high ­school education thru advanced degrees, it did not matter in terms of the rate of growth in wages over the time period 2000 ­2007 or 2003 ­2007 So… despite the oft ­cited strong demand for more highly educated workers, the wages of college ­educated workers have not grown particularly quickly in the 2000s . After rising in the first year of the decade, college workers' wages were relatively stagnant for the next five years, though men in this category got a jump in the first half of this year. ...
View Full Document

Ask a homework question - tutors are online