ECO100Y5 Lecture Notes - Lecture 28: Smokeless Powder, Output Gap, Potential Output

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Between one year and the next = rgdpt1 rgdpt0 / rgdp t0 x. On average over many years = (rgdpt / rgdp0 ) 1/t - 1. Real gdp per capita will double based on rule of 70. The republic of platinia is growing at an approximate rate of 14% per year. How many years will it take for the gdp of platinia to double? (use the rule of 70) Potential gdp the level of real gdp attained when all firms are producing at capacity (full employment) Output gap percentage difference in actual gdp and potential gdp. Period of expansion - if output gap > 0, rgdp > potential gdp. Period of recession if output gap < 0, rgdp < potential gdp. Above line = expansion = increased employment and price levels. Below line = recession = decreased employment and price levels. Economic growth occurs when there is increasing potential gdp. Better means of organizing and managing production.

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Assume the following problem is based on 2010 economic data for the following countries associated with the North American Free Trade Agreement (NAFTA):

United States	Mexico
Real GDP per capita $44,000	Real GDP per Capita $11,000

a. What is the definition and the formula for the rule of 70?
b. Assuming that real GDP per capita in Mexico grows at the rate of 5 percent per year, how long will it take for Mexico's economy to double?
c. How many years will it take for Mexico's economy to reach the level of the United States real GDP per capita in 2010?
d. Using economic growth theory, what has helped Developing Countries (DVCs) like the Asian Tigers of Singapore, South Korea, Thailand, Hong Kong, and Japan transform into Industrially Advanced Countries (IACs)? e. Based on our discussion in class, Superstar Economist Alan Greenspan classified the large transition economies of India and China as Elephants. Explain the meaning of this phrase

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Annual Growth Rates of Real GDP Per Capita (in percents)
Ending Year
1929
1933	-8.2
1939	0.2
1940	0.9
1945	3.7	10.3
1950	2.4	4.1	-1.8
1955	2.4	3.6	0.4	2.7
1960	2.2	2.9	0.6	1.7	0.8
1965	2.4	3.0	1.3	2.3	2.1	3.5
1970	2.3	2.9	1.5	2.3	2.2	2.9	2.3
1975	2.3	2.7	1.5	2.2	2.0	2.4	2.0	1.6
1980	2.3	2.7	1.7	2.2	2.1	2.5	2.2	2.1	2.6
1985	2.3	2.6	1.7	2.2	2.2	2.4	2.2	2.1	2.4	2.2
1990	2.3	2.6	1.8	2.2	2.2	2.4	2.2	2.2	2.4	2.2	2.3
1995	2.2	2.5	1.7	2.1	2.1	2.3	2.1	2.0	2.1	1.9	1.8	1.3
2001	2.3	2.5	1.9	2.2	2.2	2.3	2.2	2.2	2.3	2.2	2.2	2.1	2.8
	1929	1940	1945	1950	1955	1960	1965	1970	1975	1980	1985	1990	1995
Starting Year

Source: Economic Report of the President, various years.

This table keeps changes in real GDP from being overstated by adjusting for

Select one:

a. productivity.

b. inflation.

c. standard of living.

d. population growth.

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Per Capita GDP
Luxembourg	$33,609
United States	$33,586
Switzerland	$27,126
Japan	$23,311
Iceland	$23,230

Economists use numbers such as those in the table as a measure of

Select one:

a. net exports.

b. total dollar value of all final goods and services.

c. national income.

d. standard of living.

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Per Capita GDP
Luxembourg	$33,609
United States	$33,586
Switzerland	$27,126
Japan	$23,311
Iceland	$23,230

The numbers in this table were calculated by

Select one:

a. multiplying GDP by total population.

b. dividing GDP by total population.

c. adding the dollar value of all final goods and services produced in the nation.

d. subtracting net exports from GDP.

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A key gauge of future U.S. economic activity declined 0.5% last month, as the Sept. 11 terrorist attacks in New York and Washington weakened an already troubled economy.

The Conference Board said Monday its index of leading economic indicators fell to 109.2 in September,...the largest one-month decline since January 1996.... The index indicates where the overall U.S. economy is headed in the next three to six months....

The economy had been struggling for several months before the Sept. 11 attacks. Many economists have said they believe that a recession is unavoidable with the new uncertainties raised by the disaster.

Source: âLeading Indicators Decline,â USAToday.com, October 22, 2001.

The passage discusses a business fluctuation influenced by

Select one:

a. external shock.

b. monetary factors.

c. innovation.

d. capital expenditures.

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For all the recent talk of cutting taxes, Congress rarely cuts them when the economy is growing robustly, as it is now, and unemployment is low. The worry among economists is that the extra money in peopleâs pockets may make an already strong economy too strong, finally stoking inflation after a long period of relatively stable prices.

Source: The New York Times, July 14, 1999.

The passage describes rising inflation as a possible result of

Select one:

a. a booming economy.

b. rising unemployment.

c. tax cuts.

d. a prolonged period of stable prices.

Topic:
How would you explain the finding that people in high-income economies seem happier than people in low-income economies, but, over time, people in high-income economies do not seem to be any happier even if their country grows richer? Briefly discuss.

Optional Reading:

Income and Happiness

The Declaration of Independence in 1776 identified âcertain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness.â This did not guarantee happiness but did establish the pursuit of happiness as an âunalienableâ right, meaning that right cannot be taken away, given away, or sold. Eighteenth century philosopher and social reformer Jeremy Bentham argued that government policy should promote the greatest happiness for the greatest number of people.

Many people today apparently agree. In recent polls, 77 percent of Australians and 81 percent of Brits believed that a government's prime objective should be promoting the greatest happiness rather than the greatest wealth. The United Nations in 2007 sponsored an international conference on âHappiness and Public Policy.â Thailand now compiles a monthly Gross Domestic Happiness Index. Even China has joined in the fun reporting a happiness index based on polling results about living conditions, income, the environment, social welfare, and employment. Australia, Canada, and the United Kingdom are also developing happiness indexes.

Economists have long shied away from asking people how they feel, preferring instead to observe their behavior. But more now see some value in asking questions. In the most extensive of polls, the Gallup organization asked people in 130 countries: âHow satisfied are you with your life, on a scale of zero to ten?â The results, reported in 2007, are not surprising. Most people in the high income areas, such as the United States, Europe, and Japan, said they are happy. Most people in the poor areas, especially in Africa, said they are not. Also, within a given country, income and happiness are positively related. After evaluating all the results of the Gallup world poll, Angus Deaton of Princeton concluded: âThe very strong international relationship between per capita GDP and life satisfaction suggests that, on average, people have a good idea of how income, or the lack of it, affects their lives.â 8

So these results are no surprise. What does puzzle economists is that other surveys suggest that in affluent countries people do not seem any happier over time even though each generation became richer than the last. For example, in the United States, the proportion of people who say they are happy has stayed about the same despite 60 years of economic growth. In Japan, happiness responses actually declined despite a substantial increase in real income over the last 50 years.

Here are two possible explanations. First, people begin taking for granted those luxuries they most desired. For example, two generations ago color TVs, automobiles, and major appliances were luxuries, but now they are must-items for most households. Computers and flat screen HDTVs will soon move from luxuries to necessities. As each generation attains a higher standard of living, people become less sensitive to the benefits, they take them for granted, and thus they say they are no happier.

Second, research suggests that what matters is not just the absolute level of income but income relative other people in the reference group. Imagine you have a choice between (1) earning $50,000 a year while others in your reference group make $25,000 or (2) earning $100,000 a year while others make $250,000 (suppose, too, that prices remain the same, so $100,000 is double the real income of $50,000). Which would you prefer? Studies show that when people face this hypothetical choice, most pick the $50,000 option. That is, they prefer to make more than others even if that means a lower real income. Thus, if all incomes rise on average over time, this does not affect that aspect of happiness linked to oneâs relative standing. As the social critic H. L. Mencken long ago observed, "A wealthy man is one who earns $100 a year more than his wife's sister's husband."

SOURCES: Daniel Gilbert, Stumbling On Happiness, (New York: Knopf, 2006); Marina Kamenev, âRating Countries for the Happiness Factor,â Business Week, 11 October 2006; Angus Deaton, âIncome, Aging, Health, and Wellbeing Around the World: Evidence from the Gallup World Poll,â Princeton Working Paper, (August 2007); and âWhere Money Seems to Talk,â Economist, 12 July 200

ECO100Y5 Lecture Notes - Lecture 28: Smokeless Powder, Output Gap, Potential Output

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