ECON 1000 Lecture Notes - Lecture 6: Gross Domestic Product, Hyperinflation, Human Capital

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30 Aug 2018
Chapters 7 and 9: Measuring Macroeconomic Outcomes and Economic Growth
1. Gross domestic product (GDP) is
a. Total market value: the price an asset would fetch in the marketplace
b. Of all final: to avoid “double counting,” only consider the value of items at their
“final stage” and not all “intermediate stages”
c. Goods and services: include both tangible items (e.g. food, cars, computers) &
intangible items (e.g. cleaning services, legal services)
d. Produced: don’t include items sold today, but rather produced today
e. Within a society: all economic activity which takes place within and only within
the geographic confines of society (e.g. production within US by foreign-owned
firms is included in GDP; production in foreign countries by US owned companies
are excluded from GDP)
f. Over a certain period of time: usually a year
g. GDP can increase due to:
i. A greater amount of stuff being produced
ii. A general increase in the price at which stuff is graded
iii. Real GDP vs. nominal GDP
1. Nominal GDP: value of GDP computed during current prices
2. Real GDP: answers the hypothetical question: what would be the
value of G&S produced in a particular year, if we valued them at
the prices which prevailed in some other base year?
3. Main difference between “nominal” and “real” values: real values
are adjusted for inflation, while nominal values are not. Note:
subtract inflation from nominal GDP and you get real GDP
a. Result: nominal GDP will often appear higher than real
iv. Real GDP per capita: the value of real GDP divided by total population
1. Historical values of real GDP in US (in 2009 dollars)
a. 1915: $614.6 billion
b. 1942: $1,771.8 billion => 2.9 times larger than 1915
c. 1970: $4,772 billion => 7.7 times larger than 1915
d. 1998: $11,525.9 billion => 18.8 times larger than 1915
e. 2015: $16.348.9 billion => 26.6 times larger than 1915
f. This is because the population was larger in these years
i. 1915: 100.5 million people => $6,113 per capita
ii. 1942: 134.9 million people => $13.138 per capita
(2.1 times larger than 1915)
iii. 1970: 205.1 million people => $23,024 per capita
(3.8 times larger than 1915)
iv. 1998: 276.2 million people => $41.737 per capita
(6.8 times larger than 1915)
v. 2015: 321.7 million people => $50,820 (8.3 times
larger than 1915)
v. Differences in GDP across countries
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1. Industrially advanced countries (IACs)
a. High income countries with primarily market based
b. Large stocks of technologically advanced industrial capital
c. A highly educated and skilled workforce
d. E.g. US, Norway, Australia, Germany, Japan
2. Less developed countries (LDCs)
a. Lower income countries, held back by some combination
of poor economic institutions
b. Undeveloped industrial capital
c. An uneducated and unskilled workforce
d. E.g. India, Ghana, Bangladesh, and the Democratic
Republic of the Congo
3. Note: there are tremendous difference in GDP between the…
a. Most prosperous and least prosperous IACs
b. Between the most prosperous and least prosperous LDCs
4. It is NOT the case that there are simply extremes of “haves” and
“have notes”
5. The differences in cost of living (namely the PPP) between
countries lead actual values of GDP to vary almost continually
across countries
a. Purchasing power parity (PPP): theory that residents of
one country should be able to buy G&S at the same price
as residents of any other nation over time
6. To compare across countries: GDP (at PPP) per capita subtracts
the effects of differences in costs of living out of GDP figures
across countries
2. Circular flow diagram shows goods and services are produced and purchased
a. Expenditures can be deconstructed into 4 different categories
i. Consumption (C): purchases of newly produced G&S by households
ii. Private investment (I): purchases of newly produced G&S by firms (e.g.
new plants and equipment)
iii. Government (G): purchases of newly produced G&S by local, state, or
federal government
iv. Net exports (NX): exports minus imports
1. Trade deficitthe excess of import over exports
2. Surplusthe excess of exports over imports
b. GDP (Y) can be expressed as: Y=C+I+G+NX
c. Government and foreign sectorsimplified representation of the roles played by
government and the foreign sector
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