Chapter 17 Output and Growth

8/6/2019 Chapter 17 Output and Growth

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ECONOMICSECONOMICS

YEAR 11YEAR 11CHAPTER 17CHAPTER 17

Output and GrowthOutput and Growth


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ObjectivesObjectives

Students should be able to:Students should be able to:

Define Gross Domestic Product (GDP)Define Gross Domestic Product (GDP)

Describe simple measures & indicators ofDescribe simple measures & indicators of

comparative living standards, such as GDP percomparative living standards, such as GDP perhead & Human Development Index (HDI)head & Human Development Index (HDI)


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Measuring OutputMeasuring Output

EconomistsEconomists need to measure the total orneed to measure the total or

national output of a country and track how itnational output of a country and track how it ss

over time.over time.

In marcoeconomyIn marcoeconomy the total value of output ofthe total value of output ofgoods & services producedgoods & services produced NATIONAL OUTPUTNATIONAL OUTPUT

Factors of productionsFactors of productions are used to produceare used to produce

national output.national output. The total amt of income earned in a macroeconomyThe total amt of income earned in a macroeconomy

is theis the NATIONAL INCOMENATIONAL INCOME


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Land,

Capital,Labour,

EnterpriseRent,

Wages,

Interest,

Dividend

Consumer

goods

Circular flow of incomeCircular flow of income


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The value of Total output is measured by how muchThe value of Total output is measured by how muchpeople pay for all the goods & services sopeople pay for all the goods & services so

TOTAL OUTPUT = NATIONAL EXPENDITURETOTAL OUTPUT = NATIONAL EXPENDITURE

What people spend on goods & services provides an incomeWhat people spend on goods & services provides an incometo those firm that make and supply goods & servicesto those firm that make and supply goods & services

SOSO

All 3 measures the Total Output of a macroeconomyAll 3 measures the Total Output of a macroeconomy

National Output = National Income = National ExpenditureNational Output = National Income = National Expenditure

In practice, the values do not add up as economic activity isIn practice, the values do not add up as economic activity isvery complexvery complex


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GDP to GNPGDP to GNP

It is the total value of output produced by all domesticIt is the total value of output produced by all domesticfirms in a countryfirms in a country

Figure are not conclusive as some incomes are fromFigure are not conclusive as some incomes are from

abroadabroad Some resources are owned by foreigners. As suchSome resources are owned by foreigners. As such

income will flow out to people overseas.income will flow out to people overseas. Such differences between flows of income coming intoSuch differences between flows of income coming into

a country and those paid overseasa country and those paid overseas known asknown as netnet

property income from abroadproperty income from abroad.. SO Gross National Product = GDP + Net propertySO Gross National Product = GDP + Net property

income from abroadincome from abroad


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GNP is the total value of output fromGNP is the total value of output from

resources owned by people who livedresources owned by people who lived

in a country wherever these resourcesin a country wherever these resourcesare locatedare located


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GNP to NNPGNP to NNP

All capital goods have depreciation or capitalAll capital goods have depreciation or capitalconsumption (worn out capital)consumption (worn out capital)

So NET NATIONAL PRODUCT (NNP) = GNPSo NET NATIONAL PRODUCT (NNP) = GNP DepreciationDepreciation

NNP consists of all goods & services becomingNNP consists of all goods & services becomingavailable = National Incomeavailable = National Income

Do exercise 1 page 323Do exercise 1 page 323 The amt of goods & services the national income canThe amt of goods & services the national income can

buybuy Real value of output or real national incomeReal value of output or real national income


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Using National Income figuresUsing National Income figures

If govt knows how resources are used & what they areIf govt knows how resources are used & what they aremaking. It is more able to try & change the allocationmaking. It is more able to try & change the allocationof resources. Ex: Changing from consumer to capitalof resources. Ex: Changing from consumer to capitalgoodsgoods

Allows comparison to be made of the standard of livingAllows comparison to be made of the standard of livingin 1 year compare to the next. Ex If the amt of goodsin 1 year compare to the next. Ex If the amt of goodsproduced has increased, assume that people are betterproduced has increased, assume that people are betteroffoff

Allow us to compare standard of livings with otherAllow us to compare standard of livings with othercountries.countries. Dividing national income by population, gives anDividing national income by population, gives an

indication of how much each person on average earnsindication of how much each person on average earns


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Economic GrowthEconomic Growth

Economic growthEconomic growth is the increase of per capitais the increase of per capita grossgrossdomestic productdomestic product (GDP) or other measure of aggregate(GDP) or other measure of aggregateincome, typically reported as the annual rate of changeincome, typically reported as the annual rate of changein real GDP.in real GDP.

Economic growth is primarily driven by improvementsEconomic growth is primarily driven by improvementsinin productivityproductivity, which involves producing more goods, which involves producing more goodsand services with the same inputs of labor, capital,and services with the same inputs of labor, capital,energy and materials. Economists draw a distinctionenergy and materials. Economists draw a distinctionbetween shortbetween short--term economic stabilization and longterm economic stabilization and long--

term economic growth. The topic of economic growthterm economic growth. The topic of economic growthis primarily concerned with the long run. The shortis primarily concerned with the long run. The short--runrunvariation of economic growth is termed thevariation of economic growth is termed the businessbusinesscyclecycle..


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The Big PictureThe Big Picture Economic GrowthEconomic Growth

This is measured by the yearly change in GrossThis is measured by the yearly change in Gross

Domestic Product (GDP). It is usually expressedDomestic Product (GDP). It is usually expressed

as a % change.as a % change.

Example Year 1 Tinseltown produces 1,000Example Year 1 Tinseltown produces 1,000

worth of goodsworth of goods

Year 2 Tinseltown produces 1,100 worth ofYear 2 Tinseltown produces 1,100 worth of

goodsgoods

Economic growth would be 10%Economic growth would be 10%


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It (GDP) can be measured in 3 ways. Each isIt (GDP) can be measured in 3 ways. Each is

identicalidentical

The total production (output) of all businesses The total production (output) of all businesses

The total incomes and profits in the country The total incomes and profits in the country

The total of all spending by individuals and The total of all spending by individuals andbusinessesbusinesses


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GROWTH RATE VS BOND RATE


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Measuring GrowthMeasuring Growth

Measured by in National Income or GDP each yearMeasured by in National Income or GDP each year

in a countryin a country

However if pricesHowever if prices due to inflation, there might bedue to inflation, there might be

NO REAL GROWTHNO REAL GROWTH

Economists term this a a rise in NOMINAL GDPEconomists term this a a rise in NOMINAL GDP

(without growth in real GDP) see(without growth in real GDP) see example Pg 325example Pg 325

To be better off, we should see theTo be better off, we should see the REAL GDP perREAL GDP percapitacapita real income per headreal income per head (calculated by GDP(calculated by GDP

of an economy by population size)of an economy by population size)


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Per capita incomePer capita income weaknessweakness

Economic activity that does not involved in monetaryEconomic activity that does not involved in monetaryincome such as services provided within the family orincome such as services provided within the family orfor barterfor barter

Distribution of an income is lopsided. A small wealthyDistribution of an income is lopsided. A small wealthygroup can increase per capital income above the rest ofgroup can increase per capital income above the rest ofthe populationthe population

International comparisons can be distorted by distortedInternational comparisons can be distorted by distorted

exchange rateexchange rate same goods but twice as expensive insame goods but twice as expensive incountry with twice the per capital income.Does thatcountry with twice the per capital income.Does thatmake them equally richmake them equally rich


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GD

P per capital2010

Data from

http://topmauirestaurant.com/wp-threads/?tag=Countries-

by-gdp-per-capita


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Does Economic Growth make usDoes Economic Growth make us

Better Off?Better Off?

Lopsided incomeLopsided income InequalityInequality

If Population and goods are shared by moreIf Population and goods are shared by more

people, Real GDP per capita will causingpeople, Real GDP per capita will causingnegative growthnegative growth

Depending on which goods & services haveDepending on which goods & services have

increased in supply (building infrastructure inincreased in supply (building infrastructure in

KL. Output would but people in other thanKL. Output would but people in other than

KL will not view themselves as better offKL will not view themselves as better off


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WHAT CAUSES ECONOMIC GROWTH?WHAT CAUSES ECONOMIC GROWTH?

Anything which allows the country to produce moreAnything which allows the country to produce moregoods and services.goods and services.

More business investmentMore business investment

Better productivityBetter productivity

Better machineryBetter machinery Improved trainingImproved training

BBetter skillsetter skills

New technologyNew technology

New ideasNew ideas

Increased efficiencyIncreased efficiency


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COSTS AND BENEFITS OF ECONOMIC GROWTHCOSTS AND BENEFITS OF ECONOMIC GROWTH

BENEFITSBENEFITS::

More income for society,More income for society,

Should create jobs,Should create jobs,

Could reduce the number of poor people,Could reduce the number of poor people, More goods produced and probably more choice forMore goods produced and probably more choice for

customers and businesses,customers and businesses,

Higher standard of living,Higher standard of living,

FeelFeel good factor in societygood factor in society


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COSTSCOSTS::

Extra production could cause extra pollutionExtra production could cause extra pollution

Exhaustion of non renewable resources like oil,Exhaustion of non renewable resources like oil,

Only the rich may gain the benefitsOnly the rich may gain the benefits

The poor stay poor and inequality increases,The poor stay poor and inequality increases,

Greater stress on workers to produce more goodsGreater stress on workers to produce more goods

Do exercise 2 Page 329


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ACTIONACTION

For each cause of economic growth. Try to think why itFor each cause of economic growth. Try to think why itwould allow businesses and the economy to produce awould allow businesses and the economy to produce agreater number of goods and services.greater number of goods and services.

B For each cost and benefit. Try to think through whyB For each cost and benefit. Try to think through whyit is in reality a cost or benefitit is in reality a cost or benefit

C Are you in favour of economic growth? Explain yourC Are you in favour of economic growth? Explain youranswer.answer.

SMART THINKINGSMART THINKING DDWhat is human capital? How can an economyWhat is human capital? How can an economy

improve its stock of human capital? Why is it important?improve its stock of human capital? Why is it important?


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Growth CyclesGrowth Cycles

Economic growthEconomic growth Real output (total amt ofReal output (total amt of

goods produced) increases over time.goods produced) increases over time.

Result: National income will grow (incomes canResult: National income will grow (incomes canbuy more)buy more)

However through time, there will be many upsHowever through time, there will be many ups

& downs& downs


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The concept of Economic Cycles, is a theoryThe concept of Economic Cycles, is a theorythat attempts to explain changes in economicthat attempts to explain changes in economic

activity that vary from a long term growth trendactivity that vary from a long term growth trendas observed in a developed market economyas observed in a developed market economy..

Factors considered in defining an economicFactors considered in defining an economiccycle include growth of GDP, householdcycle include growth of GDP, householdincome, employment rates, etc.income, employment rates, etc.

Economic Cycles are divided into two mainEconomic Cycles are divided into two maincategories:categories: boomsboomsandand recessionsrecessions. Booms are. Booms are

associated with a strong economy, whileassociated with a strong economy, whilerecessions are characterized by belowrecessions are characterized by below--trendtrendeconomic growth.economic growth.


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TIME


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In periods of BOOMIn periods of BOOM

High level of spendingHigh level of spending Aggregate demand > National OutputAggregate demand > National Output

Firms outputFirms output using all available factors ofusing all available factors of

productionproduction ResultResult Prices Prices -- Inflation steps in as firmsInflation steps in as firms

cannot meet demandcannot meet demand

BOOM

associates with high level of spending/BOOM

associates with high level of spending/low unemployment/ rising prices & profitslow unemployment/ rising prices & profits

high level of outputhigh level of output


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People then started to buy imported goods asPeople then started to buy imported goods as

demand greater than supplydemand greater than supply

In turn, prices for production willIn turn, prices for production will making making

exports expensive. Overseas demand will then exports expensive. Overseas demand will then

Rising prices at home will curb consumersRising prices at home will curb consumers

expenditure.expenditure.

Aggregate demand BOOM cycles breaksAggregate demand BOOM cycles breaks

Continuous falling total demand will result inContinuous falling total demand will result in

RECESSIONRECESSION


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Firms no longer will invest & spending fallsFirms no longer will invest & spending falls

Employment falls as demand fallsEmployment falls as demand falls

UnemploymentUnemployment and National Incomeand National Income

Possibility of deflation as Price Possibility of deflation as Price

Profits fall, Business failedProfits fall, Business failed

BUT in prices will cause demand for exportsBUT in prices will cause demand for exports

Firms producing exports will output and employmentFirms producing exports will output and employment

Slowly income will Spending will also Slowly income will Spending will also Then the economy is out of recessionThen the economy is out of recession to recoveryto recovery


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The growth cycles will goes on and

on powered by s in the level of

demand in the economy

Do exercise 3 Page 331


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Chapter 17 Output and Growth

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