Slide 1Slide 2OVERVIEW/Questions of the Dayi. What is the standard of living?GDP AND ECONOMIC WELL-BEINGEconomic Well-Being (cont)2013 Current Gross Domestic Product2013 Current GDP per capitaWhat’s wrong with GDP/capita?Slide 10GPD/capita and Economic Well-beingWhat is ‘right’ with GDP/person?ii. Calculating growth ratesCalculating Growth RatesHistorical U.S. Real GDP (2009 = Base)Quarterly Growth in U.S. Real GDPRule of 70Compounding: Small Changes Mean BIG Differences over Timeiii. Determinants of economic growthDETERMINANTS OF GROWTHDeterminants of growth (cont)Productivity DefinedPRODUCTIVITYProductivity (cont)Productivity (cont)Country Comparison in Productivity, 2010iv. Benefits and costs of economic growthBenefits/Costs of Economic GrowthBenefits/Costs of economic growthBenefits/Costs of economic growthBenefits/Costs of economic growthBenefits/Costs of Economic GrowthSlide 33Key Terms and ConceptsRule of 70 PracticeECONOMIC GROWTHHOW DO COUNTRIES GROW AND DOES IT HAVE TO BE SO BUMPY?Growth I: How Do Countries Grow?Growth II: Using Fiscal Policy to Smooth GrowthGrowth III: Using Monetary Policy to Smooth Growth1ECONOMIC GROWTH I:HOW DO ECONOMIES GROW?2“Why do some places prosper and thrive while others just suck?” P.J. O’Rourke, Eat the RichOVERVIEW/Questions of the DayWhat do policymakers mean by “standard of living”?•How do we measure this?•How do we measure economic growth?•Why do countries have such a variation in their standard of livings?•Why are some countries so rich and others so poor?•What are the determinants of growth?•Are there any costs of economic growth?3I. WHAT IS THE STANDARD OF LIVING?4GDP AND ECONOMIC WELL-BEING•GDP measure the value of a country’s output AND its national income•When looking at a nation’s income, GDP is used as a measure of a country’s standard of living•Economists use standard of living to measure a country’s economic well-being or general welfareSo what does a number like $17 trillion or $60 billion say about a country’s well-being?5Economic Well-Being (cont)•GDP (real or nominal) by itself doesn’t mean much for welfare•Real GDP per capita (below) is a measure of•This is considered a better measure than just real GDP when •Although far from perfect, real GDP per capita is often used by policy makers worldwide as a proxy for well-being or welfare62013 Current Gross Domestic Product$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000$18,0007Source: World Bank; World Development Indicators; numbers in billions$16.8 Trillion$60 BillionTop 10 World’s Largest Economies plus Mexico and Luxembourg2013 Current GDP per capita$0$20,000$40,000$60,000$80,000$100,000$120,000$53,150$6,800$38,500$45,075$41,425$39,350$11,200$14,600$34,625$1,500$10,300$111,150$10,5008Source: World Bank; World Development IndicatorsWhat’s wrong with GDP/capita?9“[GDP] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public official.It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans.”What’s wrong with using GDP as well-being?Robert F. Kennedy, 196810GPD/capita and Economic Well-beingGDP per person is not a perfect measure of economic well-beingSo why do we use it?•GDP/capita is •Therefore, GDP/capita is used as an aggregate measure, a general indicator that 11See Planet Money: Why GDP Matters for School kids; http://www.npr.org/blogs/money/2010/03/podcast_why_gdp_matters_for_ki.htmlWhat is ‘right’ with GDP/person?CountryGDP / capitaInfant mortalityLiteracy rateAccess to clean waterLife expectancyU.S. $53,1507 99 100 79Germany $45,1004 99 100 81South Korea$26,0004 98 100 81Chili $15,7508 99 99 80Mexico $10,30015 93 85 77China $6,800 13 95 65 75India $1,500 53 74 36 66Cambodia$1,000 38 74 37 71Ethiopia $500 64 39 24 6312GDP/person is correlated to other measures of well-beingII. CALCULATING GROWTH RATES13Calculating Growth Rates YearU.S. Nominal GDP (billions)U.S. Real GDP (billions)Growth in Real GDP2007 $14,475 $14,8752008 $14,725 $14,8252009 $14,425 $14,4252010 $14,950 $14,7752011 $15,525 $15,0252012 $16,150 $15,3752013 $16,775 $15,70014GDP Growth Rate = Real GDP Current - Real GDP PreviousReal GDP Previousx 100Source: Bureau of Economic Analysis; www.bea.gov; base year = 2009Historical U.S. Real GDP (2009 = Base)$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000$18,000U.S. Real GDP ($2009); in billions15Source: Bureau of Economic Analysis (www.bea.gov). Note: GDP in $billionsQuarterly Growth in U.S. Real GDP 2006-I 2006-III 2007-I 2007-III 2008-I 2008-III 2009-I 2009-III 2010-I 2010-III2011-I2011-III2012-I2012-III2013-I2013-III2014-I-10.0-8.0-6.0-4.0-2.00.02.04.06.0“Annualized” Quarterly Growth Rate16Source: Bureau of Economic Analysis; www.bea.gov Great RecessionRule of 70A quick estimation to calculate length of time to double•A 5% growth rate means that some beginning amount will •If you invest $500 in an account at 5% interest…•you will have •$2,000 after •$4,000 after17Compounding: Small Changes Mean BIG Differences over TimeGrowth RateDoubles Every…# of times doubles in 100 yearsValue of $100 after 100 years1% 70 years ≈ 1.4 ≈ $2702% 35 years ≈ 3 ≈ $7253% 23.3 years ≈ 4 ≈ $1,9254% 17.5 years ≈ 5 ≈ $5,05018“Compounding is the most powerful force in the universe”Albert EinsteinOver time, there is a large difference between growing at 1% and 2%, or 2% and 3%, and so on…III. DETERMINANTS OF ECONOMIC GROWTH19DETERMINANTS OF GROWTHEconomists use real GDP/capita as a measure of a country’s standard of living•If real GDP (output) grows faster than population over time•it leads to •If population grows faster than real GDP (output) over time•It leads to20Real GDP per capita =Determinants of growth (cont)Countries that are ‘rich’ today have consistently grown real GDP faster than population•Countries that are more poor have notLet’s focus on real GDP for now and not populationQ: So what affects growth of real GDP?A: •Labor Productivity: amount of goods/services produced by a Q. Why is the U.S. such