WEEK 5
CHAPTER 26 - GDP AND THE MEASUREMENT OF PROGRESS
INTRODUCTION
– The world today is recovering from the Great Recession with low levels of economic
growth
– Rate of convergence across Europe and the world is slowing down
– Policies for macroeconomic stability do not seem to work effectively anymore
– Covid-19 causes both supply and demand shifts with strong macroeconomic implications
Macroeconomic concerns:
– Why is economic growth slowing down?
– What are the causes of macroeconomic imbalances?
– What is the role of institutions, such as central banks?
– What is the macroeconomic impact of Covid-19?
Goals:
– Understanding of mechanism that lead to (or hamper) economic growth
– Understanding of business fluctuations (such as recessions and economic booms) - with
special attention to the effects of Covid-19
– Understanding the role of institutions and policy to foster economic growth and
macroeconomic stability
OUTPUT MEASUREMENT
GDP is the measurement of growth progress
= the market value of all final goods and services produced in a country per year
– Uses market values to determine how much each good or service is worth and then sums
the total
– Only final goods are included to avoid double counting
– (New-old)/old x 100
GNP = the market value of all final goods and services produced by a country’s permanent
rescinds, wherever located, in a year
Nominal growth rate = the rate of growth just calculated not adjusted for price changes
– Calculated using prices at the time of sale (so different for each year)
– Nominal variables = measured at the year they occurred
Real GDP variables have been adjusted for price changes by using the same set of prices in
all time periods
GDP deflator = a price index that can be used to measure inflation
= nominal GDP / real GDP x 100
Growth in real GDP does not account for changes in population
– Real GDP per capita is the best reflection of changing living standards
– There can be large differences for countries with goring populations
, Countries can be compared by using an index (e.g. OECD)
– Shows recoveries and recessions and compare how hard a country is hit by shocks or
how well it fares in good times
Splitting GDP:
. National spending approach - components of spending
– Y = C (consumption) + I (investment) + G (government spending) + NX (net
exports)
– Useful for economists who study business fluctuations
– If a country sells more goods than it buys abroad - NX positive
. Factor income approach - income generated by production of goods and services
– Y = wages + rent + interest + profits
– Useful if we are thinking about how economic growth is divided between employee
compensation, rent, interest and profits
Splitting GDP in different ways highlights a different part of the economy
Recession = a significant decline in economic activity spread across the economy, lasting
more than a few months, normally visible in real GDP, real income, employment, industrial
population and wholesale-retail sales
Business fluctuations or business cycles = the fluctuations of real GDP around its normal
growth rate
Problems with GDP:
– Doesn’t count the underground economy
– Doesn’t count non-priced production (no explicit monetary payment made)
– Doesn’t count leisure
– Doesn’t count economic “bads” - environmental costs
– Doesn’t measure the distribution of income
GDP could evolve to measure valuable non market activities
– Then we could account for “public health services” that were not paid during the
pandemic - implies that collective output has not fallen just shifted
– Then immense value of social distancing and lives saved would be captured
CHAPTER 28 - GROWTH, CAPITAL ACCUMULATION AND THE ECONOMICS OF
IDEAS
Catching-up growth is due to capital accumulation
Cutting-edge growth is due to new ideas
SOLOW GROWTH MODEL
= model to understand why GDP grows over time and what the limits of growth are
Y = F(A, K, eL)
-> a production function expresses a relationship between output and factors of production
– Y = total output of an economy (depends on:)
CHAPTER 26 - GDP AND THE MEASUREMENT OF PROGRESS
INTRODUCTION
– The world today is recovering from the Great Recession with low levels of economic
growth
– Rate of convergence across Europe and the world is slowing down
– Policies for macroeconomic stability do not seem to work effectively anymore
– Covid-19 causes both supply and demand shifts with strong macroeconomic implications
Macroeconomic concerns:
– Why is economic growth slowing down?
– What are the causes of macroeconomic imbalances?
– What is the role of institutions, such as central banks?
– What is the macroeconomic impact of Covid-19?
Goals:
– Understanding of mechanism that lead to (or hamper) economic growth
– Understanding of business fluctuations (such as recessions and economic booms) - with
special attention to the effects of Covid-19
– Understanding the role of institutions and policy to foster economic growth and
macroeconomic stability
OUTPUT MEASUREMENT
GDP is the measurement of growth progress
= the market value of all final goods and services produced in a country per year
– Uses market values to determine how much each good or service is worth and then sums
the total
– Only final goods are included to avoid double counting
– (New-old)/old x 100
GNP = the market value of all final goods and services produced by a country’s permanent
rescinds, wherever located, in a year
Nominal growth rate = the rate of growth just calculated not adjusted for price changes
– Calculated using prices at the time of sale (so different for each year)
– Nominal variables = measured at the year they occurred
Real GDP variables have been adjusted for price changes by using the same set of prices in
all time periods
GDP deflator = a price index that can be used to measure inflation
= nominal GDP / real GDP x 100
Growth in real GDP does not account for changes in population
– Real GDP per capita is the best reflection of changing living standards
– There can be large differences for countries with goring populations
, Countries can be compared by using an index (e.g. OECD)
– Shows recoveries and recessions and compare how hard a country is hit by shocks or
how well it fares in good times
Splitting GDP:
. National spending approach - components of spending
– Y = C (consumption) + I (investment) + G (government spending) + NX (net
exports)
– Useful for economists who study business fluctuations
– If a country sells more goods than it buys abroad - NX positive
. Factor income approach - income generated by production of goods and services
– Y = wages + rent + interest + profits
– Useful if we are thinking about how economic growth is divided between employee
compensation, rent, interest and profits
Splitting GDP in different ways highlights a different part of the economy
Recession = a significant decline in economic activity spread across the economy, lasting
more than a few months, normally visible in real GDP, real income, employment, industrial
population and wholesale-retail sales
Business fluctuations or business cycles = the fluctuations of real GDP around its normal
growth rate
Problems with GDP:
– Doesn’t count the underground economy
– Doesn’t count non-priced production (no explicit monetary payment made)
– Doesn’t count leisure
– Doesn’t count economic “bads” - environmental costs
– Doesn’t measure the distribution of income
GDP could evolve to measure valuable non market activities
– Then we could account for “public health services” that were not paid during the
pandemic - implies that collective output has not fallen just shifted
– Then immense value of social distancing and lives saved would be captured
CHAPTER 28 - GROWTH, CAPITAL ACCUMULATION AND THE ECONOMICS OF
IDEAS
Catching-up growth is due to capital accumulation
Cutting-edge growth is due to new ideas
SOLOW GROWTH MODEL
= model to understand why GDP grows over time and what the limits of growth are
Y = F(A, K, eL)
-> a production function expresses a relationship between output and factors of production
– Y = total output of an economy (depends on:)
