Fed would like constant inflation so it is predictable & 2% for the above results ● End of part G- harm of inflation ○ Question : Have we been harmed by rising prices? Recall 5 cent coffee in 1913. The CPI was 10.0 back then. ■ Answer- No. inflation was generally anticipated and we worked around it. For example in 1914 Henry ford made headlines for 5$ a day wage.
● Follow up question - how much is $5/day pay is how much today? ○ CPI 2016- 243.0 CPI-1914= 10.0 ○ $5*(243/10)= $121.50/day ■ Or $13.50/hour or $28,000/year ● Question - Why are real wages so much more today? ● Why economies grow in the Long Run ○ Data for this section ■ Economist measure well-being with real per capita GDP (section 1) ● Ex) U.S: $55,800 per person ○ Australia: $47,000 ○ Canada: $42,000 ○ S. Korea: $36,500 ○ China: $14,100 ○ Haiti: $1,800 ● Growth is measured by %change real per capita GDP ○ We want to explain values above as well as growth. ○ Part A- Is economic growth “Zero-sum”? ■ Do some countries get rich by making other countries poorer? ■ Zero-Sum ● One person (or group) gain comes as a loss for another person. For example finding $20 on the floor. “Win-lose” ■ Question - In your view, are some countries rich because they have taken wealth, income and resources from poor countries (i.e. is world growth zero-sum)? ● Answer- no. ● If it was zero-sum you would expect to see some countries going to the right and some going to the left not up and down. In data almost every country moved to the right because they act independently. ● During the 14th century- growth in real world GDP per capita, GDP per person.. ⅓ of population grew so GDP per person rose because there was less people ● No, capitalism is most important ■ Growth start in about 1750 in Great Britain with the great revolution ● Question - What average annual growth rate of the economy will make your life so radically different from the lives of your grandparents? ○ 1%? 2%? 5%? 10%? ● Ex) CPI 200 → 204 in 1 year; growth rate?
○ In this situation it would typically be found by 204- 200/200 * 100 = 2%. ■ Or 204= (1 + 0.2) * 200 ■ Symbol wise, X0 → X1 ■ X1= (1 + growth rate [g]) * X0 ■ G = average annual growth rate ○ Growth of 2 years ■ X2 = ( 1 + g ) * X1 ■ X could be price index or real GDP, whatever ■ X2 = ( 1+ g) * (1 + g) * X0 ● Sooo … X2= (1+g)^2 * X0 ○ Growth over N years ■ Xn= (1+g)^n * X0 ○ If Xn and X0 known, g? ■ g= (Xn/Xo)^1/n - 1 Feb 21 ● Question: what average annual growth rate of the economy will make your life so radically different from the lives of your grandparents? ● g= final value/initial value ^ 1/years beetween -1 ● Part C- Role of capital and technology in growth ○ Question - how did Gdp per person in the US rise from $19.000 in 1961 to $55800 today and change everyone's lives? ○ Key terms ■ Y: real gdp (real production or income) ● $16.8 trillion in US ■ 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 for a country ■ Y/pop: GDP per person ● $55,800 in US ● ( Y/ Pop ) = ( L/ Pop) * (Y / L) ○ This equation is adjusted for inflation because it is