ECON 101 Lecture Notes - Lecture 2: Gross Domestic Product, Potential Output, Capital Accumulation
1 May 2018
School
Department
Course
Professor
Economics 101
Lori Leachman
Part 2 • Lecture
• Goal 3#: ECONOMIC GROWTH
o GDP - Gross Domestic Product - everything produced in economy (domestic and foreign) pin a
given amount of time (typically one year)
▪ Market value in today’s currency - Nominal GDP
▪ Market value in base year currency - Real GDP
▪ Want actual = potential (want to be producing on PPC, shifting out over time)
• Shift in PPC due to technology, capital accumulation, change in worker
productivity
o Why GDP matters
▪ Increasing output and income
▪ Increase in government revenue, more tax revenue (more people working, more money
made)
▪ Keep up with debt burden/interest costs
▪ Budget formulated on potential GDP (assumes fully employed economic system)
▪ Growth with fewer or no opportunity costs
▪ Policy makers face fewer trade offs & hard choices
o Want steady real GDP growth, and more output
o Measure GDP
▪ Income approach - add all money earned
▪ Expenditure approach - add all money spent (maps into four sectors of economy)
• C: Consumption (65-70%)
• I: Investment - fixed & inventory investment (10-15%)
• G: Government - consolidated government (30-35%)
• Xn: Net Exports (negative 7-10% we export more)
o What GDP misses
▪ Value of do-it-yourself jobs
▪ Resale of used goods (assumes comes back into GDP thru Consumption)
▪ Excludes purely financial transactions (ex. stock sale on 2nd market)
▪ Excludes transfers & gifts
▪ Values delivery of goods/services @ cost (ex. police, fire... etc)
▪ Does not account for quality changes
▪ Does not account for changes in leisure
▪ Does not account for resource depletion
▪ Does not give any sense of distribution
o Sources of growth
▪ Innovation
▪ Capital accumulation
▪ Increased worker productivity
▪ Resource discovery
▪ Market reform (by introducing more competition or improving government)
o The Business Cycle (BC)
▪ GDP and growth create a business cycle over a period of time (around 10 years) in which
the economy passes thru four distinct phases of economic activity.
▪ Graph of Real GDP by Time
▪ Overall trend of increasing GDP
▪ Four phases
• Expansion & Peak
o Increasing and GDP potential
o Decreased unemployment and increased inflation
o Current account deficit increases - contractionary policy
• Recession & Trough
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