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Lec15-_Ch10_Ch11-I_-ECON2123-LI-fa13-stu

Lec15-_Ch10_Ch11-I_-ECON2123-LI-fa13-stu - Macroeconomics...

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Ch10 The Facts of Growth Measuring the Standard of Living Growth in Rich Countries since 1950 A Broader Look at Growth across Time and Space Thinking about Growth: A Primer Macroeconomics by Yao Li 1
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THE FACTS OF GROWTH ´ We now turn from the determination of output in the short and medium run where fluctuations dominate to the determination of output in the long run where growth dominates. ´ Growth is the steady increase in aggregate output over time. Macroeconomics by Yao Li 2
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10.1 MEASURING THE STANDARD OF LIVING U.S. GDP Since 1890 Figure 10 - 1 Macroeconomics by Yao Li 3
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´ The straightforward method of taking a country’s GDP expressed in that country’s currency, and then using the current exchange rate to express it in terms of dollars does not always work for two reasons: « First, exchange rates can vary a lot. « The second reason goes beyond fluctuations in exchange rates. In general, the lower a country’s output per capita, the lower the prices of food and basic services in that country. 10.1 MEASURING THE STANDARD OF LIVING The reason we care about growth is that we care about the standard of living . The variable we want to focus on and compare either over time or across countries is output per person rather than output itself. Macroeconomics by Yao Li 4
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´ Output per capita equals GDP divided by population. ´ To compare GDP across countries, we use a common set of prices for all countries. Adjusted real GDP numbers are measures of purchasing power across countries, also called purchasing power parity (PPP) numbers. ´ The bottom line: When comparing standard of living across countries, make sure to use PPP numbers. 10.1 MEASURING THE STANDARD OF LIVING Macroeconomics by Yao Li 5
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IN-CLASS (Q1 textbook) Assume that the average consumer in Mexico and the average consumer in the U.S. buy the quantities and pay the prices indicated in the following table: a. Compute U.S. consumption per capita in dollars. b. Compute Mexican consumption per capita in pesos. Macroeconomics by Yao Li 6
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(CONT.) c. Suppose that 1 dollar is worth 10 pesos. Compute Mexico’s consumption per capita in dollars. d. Using the purchasing power parity method and U.S. prices, compute Mexican consumption per capita in dollars. e. Under each method, how much lower is the standard of living in Mexico than in the U.S.? Does the choice of method make a difference? Macroeconomics by Yao Li 7
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The Construction of PPP Numbers These average prices across countries are called international dollar prices. Many of the estimates we use in this chapter are the result of “Penn World Tables.” (Penn stands for the University of Pennsylvania, where the project is taking place.) Led by three economists Irving Kravis, Robert Summers, and Alan Heston have constructed PPP series not only for consumption (as we just did in our example) but, more generally, for GDP and its components, going back to 1950, for most countries in the world.
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