Lecture 14Outline of Last Lecture I. GDP ComparisonsA. Definition of Exchange RateB. Example ProblemII. GDP per CapitaA. Country Comparison Outline of Current Lecture I. GDP per Capita MeasurementsII. Economic GrowthA. What Drives Economic Growth?B. Human and Physical CapitalIII. The Aggregate Production FunctionCurrent LectureThe question this lecture started out with was “does GDP per capita measure well-being?” This can be answered by a series of general statements. GDP per capita does not include leisure time. It does measure money spent. It does not measure inequality. It should also be noted that some spending is related to so-called“undesirable activities.” An example of this would be buying more locks due to a city’s increased crime rates. The next question is why do economists still use real GDP per capita? It encompasses a large area of goods andservices. Economists have seen a fairly strong relationship between a person’s quality of life and how much money they spend. Of course it also can be said that no measure is perfect. The rest of this lecture moves onto chapter 7, which focuses on economic growth. It has only been within the last couple of hundreds of years that economists have seen rapid economic growth. This is called the period of modern economic growth. Economic institutions help drive this growth. One such is called the “Rule of Law”, which protects property rights through the enacting of laws. Labor productivity also drives this growth. Labor productivity refers to the value created by an average worker per a certain period. This value is based upon multiple factors. Monetary incentives such as a raise will increase productivity. The working conditions of an employee also influences it. It is based upon human capital, which includes education, experience, and skills. Finally, it is based upon physical capital, which includes technology and machinery. Economists also use a formula to predict a country’s GDP in the future. This is called the aggregate production function. It says that workforce plus human and physical capital plus technology is equal to the total GDP. The formula is given by:GDPT= GDP0 (1 + δ)T GDP0 is equal to the GDP of a country during a given year. T is equal to the amount of years that have passed since the initial GDP. δ is equal to the growth rate as a percentage. AGEC 217 1nd EditionOver time when human and/or physical capital increases per capita, it is known as capital
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