1. # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. GDP and Economic Growth 5

2. 5-2 Gross Domestic Product Measure of aggregate output Monetary measure Avoid multiple counting Market value of final goods Ignore intermediate goods Count value added LO1

3. 5-3 Gross Domestic Product LO1 YearAnnual OutputMarket Value 13 sofas and 2 computers3 at $500 + 2 at $2000 = $5500 22 sofas and 3 computers2 at $500 + 3 at $2000 = $7000 Comparing Heterogeneous Output by Using Money Prices

4. 5-4 Gross Domestic Product Exclude financial transactions Public transfer payments Private transfer payments Stock (and bond) market transactions Exclude secondhand sales Sell used car to a friend LO1

5. 5-5 Measuring GDP Expenditure approach Count sum of money spent buying the final goods LO1

6. 5-6 Expenditures Approach Personal consumption expenditures (C) Durable consumer goods Nondurable consumer goods Consumer expenditures for services Domestic plus foreign goods produced LO1

7. 5-7 Expenditures Approach Gross private domestic investment (I g ) Machinery, equipment, and tools All construction Changes in inventories Creation of new capital assets Noninvestment transactions excluded LO1

8. 5-8 Expenditures Approach Government purchases (G) Expenditures for goods and services Expenditures for publicly owned capital Excludes transfer payments Net exports (X n ) Add exported goods and subtract imported goods X n = Exports – Imports GDP = C + I g + G + X n LO1

9. 5-9 Comparative GDP LO1

10. 5-10 Nominal versus Real GDP GDP is a dollar measure of production Using dollar values creates problems Nominal GDP Use prevailing price Real GDP Reflect changes in price Use base year price LO2

11. 5-11 GDP Price Index Calculating Real GDP (Base year = Yr 1) Year (1) Units of Output (2) Price of Pizza per Unit (3) Price Index (Year 1 = 100) (4) Unadjusted, or Nominal, GDP (1) × (2) (5) Adjusted, or Real, GDP 15$10100$ 50 2720200 14070 3825250 20080 41030___ 51128___ LO2

12. 5-12 Economic Growth Increase in real GDP or real GDP per capita over some time period Percentage rate of growth Growth as a goal Arithmetic of growth: Rule of 70 Approximate number of years required to double real GDP = 70 Annual percentage rate of growth LO3

13. 5-13 Economic Growth Growth in U.S. real GDP 1950–2009 Increased sixfold 3.2 percent per year Growth in U.S. real GDP per capita Increased more than threefold 2 percent per year Qualifications Improved products and services Added leisure Other impacts LO3

14. 5-14 Economic Growth (1) Year (2) Real GDP, Billions of 2005 $ (3) Population, Millions (4) Real GDP, per Capita, 2005 $ (2) ÷ (3) 1950$ 2,006152$13,197 19602,83118115,640 19704,27020520,829 19805,83922825,610 19908,03425032,136 200011,22628239,809 201013,24830943,456 Source: Bureau of Economic Analysis, www.bea.gov and U.S. Census Bureau, www.census.govwww.bea.gov www.census.gov Real GDP and Real GDP per Capita LO3

15. 5-15 Average Annual Growth Rates LO3

16. 5-16 Determinants of Growth Supply factors Increases in quantity and quality of natural resources Increases in quality and quantity of human resources Increases in the supply (or stock) of capital goods Improvements in technology LO4

17. 5-17 Determinants of Growth Demand factor Households, businesses, and government must purchase the economy’s expanding output Efficiency factor Must achieve economic efficiency and full employment LO4

18. 5-18 a Economic growth b D Production Possibilities LO4 B A C Consumer goods Capital goods c

19. 5-19 Inputs and Productivity Size of employed labor force Average hours of work Labor inputs (hours of work) Technological advance Quantity of capital Education and training Allocative efficiency Other Labor productivity (average output per hour) Real GDP Real GDP = Hours of work × labor productivity x = LO5

20. 5-20 Accounting for Growth Item 1953 Q2 to 1973 Q4 1973 Q4 to 1995 Q4 1995 Q4 to 2001 Q1 2001 Q1 to 2007 Q3 Projected 2010 Q1 to 2021 Q4 Increase in real GDP3.62.83.82.62.5 Increase in quantity of labor1.11.31.4-0.10.2 Increase in labor productivity2.51.52.42.72.3 Accounting for the Growth of U.S. Real GDP, 1953–2007, Plus Projection from 2009–2021 (average percentage changes) Source: Derived from Economic Report of the President, 2008, p. 45; and Economic Report of the President, 2011, p. 82 LO5

21. 5-21 Accounting for Growth Factors affecting productivity growth Technological advance (40 percent) Quantity of capital (30 percent) Education and training (15 percent) Economies of scale and resource allocation (15 percent) LO5

22. 5-22 Education and Training LO4

23. 5-23 Institutional Structures Strong property rights Patents and copyrights Efficient financial institutions Free trade A competitive market system LO5

24. 5-24 Productivity Growth Microchip/information technology New firms and increasing returns Sources of increasing returns More specialized inputs Spreading of development costs Simultaneous consumption Network effects Learning by doing Global competition LO6

25. 5-25 Productivity Growth LO6

26. 5-26 Economic Growth Is economic growth desirable and sustainable? The antigrowth view Environmental and resource issues In defense of economic growth Higher standard of living Human imagination can solve environmental and resource issues LO7

27. 5-27 Economic Growth Growth is the path to greater material abundance Results in higher standards of living Increases leisure time Allows for the expansion and application of human knowledge LO7

28. 5-28 Global Snapshot LO7 Country Global Competitiveness Ranking, 2011-2012 Switzerland1 Singapore2 Sweden3 Finland4 United States5 Germany6 Netherlands7 Denmark8 Japan9 United Kingdom10