Nominal (money)price or wage – how many dollars it takes to buy something or hire someone Realprice or wage – nominal value with inflation explicitly removed Theratioof the value of amarket basket of goods & servicesfor the typical household in one monthcompared to the market basket value in the (arbitrary) base period • 100. It measures the price level for consumers. CPI8/2017 = 245.0 %Δ CPI = 1.9% –inflation over last year - the “core rate” measures inflationwithoutfood & energy prices - regular or “headline” CPI includes food and energy prices inflation: 4% -> 2% CPI:100 à 104 à 106 this isdisinflation– less inflation deflation:CPI declines (100 -> 98) Areal priceor interest rate removes inflation from a nominal price or interest rate. There is anexplicit calculation: subtraction, division, or deflating. Subtraction Method: Δ%real price (or wage) =Δ%nominal price (or wage) - inflation rate Deflating Method The division method, but to base period values. Harm fromunanticipatedinflation - can reduce real wages - can reduce real interest rates Harm fromanticipatedinflation - menu costs Section 2 Zero-sum – one person’s (or group’s) gain comes as a loss for another If countries get rich at the expense of others (i.e. growth is zero-sum), then real per capita GDP around the world would be constant over the years Is Economic Growth Zero-Sum? No. Growth is largely “win-win.” Growth over 1 year: ("final - initial" /"initial" ) • 100 Growth over n years: ("final value " /"initial value " )^(("1" /"years between" ) ) " - 1" Rule of 70: an easy-to-use approximation for the # years it take foranythingto double in size:
years to double ≈ 70/(growth rate) Small annual growth rate->huge changes over many years. Key: compounding Y: real GDP (real production or income) ex: $17.0 trillion L: number of workers in a country’s economy (i.e., “labor”) Y/L: labor productivity – how much the average worker produces in a year pop: population of a country Y/pop: GDP per person (or per capita) ex: $57,300 ("Y" /"pop" )" =" ("L" /"pop" )"•" ("Y" /"L" ) Technologyincreases productionwithoutan increase in the amount of capital (K) or labor (L) TPF: -better capital (K) -better organized production -more human capital Y/L=A•(K/L).3 K ↑ due to investment is one key factor to economic growth In today’s world, domesticnatural resources don’t aid growth; on average, actually hinder growth. Sustainedeconomic growth depends on sustainedtechnological changedue to diminishing returns for K/L Markets people & firms freely buying & selling -Markets set the wage of just about everyone at rates far above the minimum -More broadly, almost all nominal wages & prices are set in markets & are flexible -promote innovation -Prices & wages provide signals & incentives (to add capital and technology) ex: firms need more skilled workers->higher wages for college grads Creative destruction:one industry or business replaces another in search of more profits by introducing new or better products. Ex: blockbuster and netflix Every economy that has had sustained growth used or uses free markets. Rule of Law (Institutions) -peace -commercial law -limits on government power -rewards for innovation opatents & keep profits
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