Chapter 1 Alleviating Human Misery: The Role of Economic Reasoning Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

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Chapter 1 Alleviating Human Misery: The Role of Economic Reasoning Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Goods & Services Food, Clothing, Shelter, Transportation Health Care, Education Truth, Justice, and the American Way 1-2

Resources Labor Capital Technology 1-3

Scarcity Economic Problem Our Insatiable Wants Our Limited Means 1-4

The Capacity of the Economy to Produce Gross Domestic Product total market value of all final goods and services produced within an economy during a specific time period 1-5

Production Possibilities FoodEducation Education (millions of student years) Food (millions of tons) 72 A D C C’ E F Z 100 B 1-6

General and Specific Economic Growth 100 Education (millions of student years) Food (millions of tons) 1-7

The Opportunity Cost Principle There is no such thing as a free lunch Increasing opportunity cost The Optimal Combination of Goods and Services Marginal Social Cost (MSC) Marginal Social Benefit (MSB) Cost-Benefit Analysis Education (millions of student years) Food (millions of tons) A B D C C’ E F Z 1-8

Adjusting GDP for Inflation YearProduction of Bread (Loaves) Price of Bread GDP in Current Dollars (1)x(2) Price Index Percentage and Decimal Forms Real GDP (2009 Dollars) (3)/(4) 20091,000$1.00$1,000($1/$1) x 100 = 100, or 1.00 $1, , ,000($2/$1) x 100 = 200, or 2.00 $1,000 Two good example 1-9

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Adjusting GDP for Population Year GDP, Current Dollars (Billions) Price Index GDP, Real 2000 dollars (Billions) Population (Millions) GDP, Real per Capita (2000 Dollars) 19802, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Recession 1-10

Country Population Estimate 2006 (Millions) Annual Rate of Population Increase Population Density per Square Kilometer (2006) Per Capita Real GDP (2006) Percentage Annual Growth Rate of Real GDP (2006) Life Expectancy at Birth, Latest Available Dates Lesser-developed Chile , China1, , Columbia , Egypt , El Salvador , Ethiopia India1, Indonesia Kenya Mexico , Nigeria Peru , Philippines , South Africa , Thailand , Venezuela , Zambia Average Developed Canada , France , Germany , Italy , Japan , Singapore43.16,38828, Sweden , Switzerland , United Kingdom , United States , Average

Adjusting GDP for Distribution Country (Year of Study) Poorest 20 Percent Second 20 Percent Third 20 Percent Fourth 20 Percent Richest 20 Percent Lesser-developed Chile (2003)3.8%7.3%11.1%17.8%60.0% China (2004) Columbia (2004) Egypt (2004) El Salvador (2002) Ethiopia (2000) India (2004) Indonesia (2005) Kenya (1997) Mexico (2004) Nigeria (2003) Peru (2002) Philippines (2003) South Africa (2000) Thailand (2002) Zambia (2004) Average Developed Canada (2000) France (1995) Germany (2000) Italy (2000) Japan (1993) Singapore (1998) Sweden (2000) Switzerland (2000) United Kingdom (1999) United States (2000) Average

Adjusting GDP for Distribution Annual Income Family A Annual Income Family B Annual Income Family C Annual Income Family D Annual Income Family E Annual Income of all Families Average Annual Family Income Alpha$2,000 $10,000$2,000 Omega000010,000 2,

Causes of Poverty and Requisites of Economic Growth Quality of the Labor Force Stock of Capital and Capital Accumulation Technology Efficiency Population 1-14

Can Governments Help? Governments of LDCs  Private property rights  Universal education  Capital accumulation process  Social infrastructure  Population control Governments of DCs  Loans and grants  Technical assistance  World Bank 1-15

Computing Current-dollar GDP Year BreadFruit PunchCurrent- dollar GDP PbPb QbQb PbQbPbQb PfPf QfQf PfQfPfQf 2009$ $100$2.0075$150$250 (P b * Q b ) + (P f * Q f ) = Current-dollar GDP 1-16

Adjusting GDP for Inflation Year BreadFruit PunchCurrent- dollar GDP PbPb QbQb PbQbPbQb PfPf QfQf PfQfPfQf 2009$ $100$2.0075$150$ $ $300$ $600$

Year PbPb QbQb PbQbPbQb PfPf QfQf PfQfPfQf Real GDP 2009$ $100$2.0075$150$ $ $200$ $300$600 Adjusting GDP for Inflation Base Year BreadFruit PunchCurrent- dollar GDP PbPb QbQb PbQbPbQb PfPf QfQf PfQfPfQf 2009$ $100$2.0075$150$ $ $300$ $600$

GDP Deflator GDP Deflator t = Current-dollar GDP t * 100 Real GDP t 1-19

Converting Current-dollar GDP to Real GDP Real GDP t = Current-dollar GDP t * 100 GDP Deflator t 1-20