UIUC Econ 303 Section I Growth theory Chapter 2 7 4 GDP growth and Production function Price index Base year price index 100 Price index compares prices of a basket of goods in current year with prices of a similar basket of goods in the base year Price index shows the changes of purchasing power of money over time Say base year is 2000 Price index 2015 150 means Price index 1980 40 means Inflation Rate Calculated from the CPI and from the GDP Deflator We use CPI to adjust for cost of living We use GDP deflator to adjust national accounts Intermediate Macro Zhao 1 UIUC Econ 303 CPI vs GDP deflator In each scenario determine the effects on the CPI and the GDP deflator A Starbucks raises the price of Frappuccinos B Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory C Armani raises the price of the Italian jeans it sells in the U S D Price of Airbus which is made in France and sold to the US falls Another look at the CPI calculation Fixed at the base year CPI is expenditure weighted average of individual price change Motor fuel 7 Apparel 4 Transportation 13 Medical care 5 Housing 40 Recreation 5 Education and communication Other goods 6 and services 4 Intermediate Macro Zhao Food and beverages 16 2 UIUC Econ 303 Current dollar vs constant 2010 dollar real income nominal income year lower limit of top 5 current dollars constant dollars upper limit of bottom 20 current dollars CPI constant dollars 2010 180810 180810 20000 20000 100 2000 145220 183865 17920 22689 79 1990 94748 153224 12500 20215 62 1980 50661 127629 7478 18839 40 1970 23175 116129 3688 18480 20 In 2010 dollars Cost of living adjustments page 16 History of US federal minimum wage increases Raise to 10 10 Intermediate Macro Zhao 3 UIUC Econ 303 Core inflation Long Run Economic Growth Long run economic growth is the sustained upward trend in the economy s output real GDP over time A country can achieve a permanent increase in the standard of living of its citizens only through long run growth of real GDP per capita Once one starts to think about them growth it is hard to think about anything else Robert E Lucas The power of compounding Linear and Exponential both have real GDP per capita 1 000 in 2011 In country Linear GDP per capita increases on average 50 per year In country Exponential GDP per capita grows on average 5 per year Year Country Linear Country Exponential 2014 1000 1000 2015 1000 50 1000 1000 5 1000 50 2016 1000 50 50 1000 50 1000 50 5 1000 50 50 50 5 2014 n Intermediate Macro Zhao 4 UIUC Econ 303 4500 Power of compounded growth I 4000 Exponentia l 3500 3000 2500 Linear 2000 1500 1000 500 0 2010 2015 2020 2025 2030 2035 2040 2045 Real GDP per Capita of the United States Year Percentage of 1907 real GDP per capita Percentage of 2007 real GDP per capita 1907 100 16 1927 129 21 1947 175 28 1967 283 46 1987 430 69 2007 620 100 Average annual growth rate How did the United States manage to produce over six times as much per person in 2007 than in 1907 A little bit at a time From 1907 to 2007 real GDP per capita in the United States increased an average of 1 8 each year Intermediate Macro Zhao 5 UIUC Econ 303 In general average annual growth rate over n year period Exact method Approximately Some algebra with growth rate page 17 Property of natural log function Intermediate Macro Zhao 6 UIUC Econ 303 Based on the property of log function Three variables x y and z Three variables x y and z For a constant and two variables x and z The Rule of 70 The time it takes GDP that grows gradually over time to double is approximately 70 divided by the annual growth rate Annual growth rate Years to double 0 70 2 4 5 8 100 35 17 5 14 8 75 US 2006 10 US 1965 2005 South Korea 1996 2010 India 1996 2010 China 1980 2010 Solve for unknowns page 18 Intermediate Macro Zhao 7 UIUC Econ 303 Power of growth page 19 Income Around the World 2007 Intermediate Macro Zhao 8 UIUC Econ 303 Big disparity in growth rate Economists very abstract description of production process Output GDP Y Inputs factors land labor and capital A function that describe the relationship between input and output is called production function The Cobb Douglas production function capital labor Function that describes the US aggregate production GDP thousands 1985 Labor force thousands Capital thousands 1985 Total Factor productivity 1965 2 263 505 500 80 693 1 412 683 700 918 z TFP Solow residual Intermediate Macro Zhao 9
View Full Document
Unlocking...