University:
California State University, Northridge
Course:
ECON 101 | Economics for Everyday Life
Academic year:

2024
Views:

152

Pages:

34
Author:

apriori479m48

Economic Development Why isn’t the whole world developed? • • • • Differences in resources Differences in culture Maybe part of the answer but not all of it Consider the next satellite photo of North and South Korea, countries with similar resources and culture Why do we care about economic growth? • Economic Growth is connected to well being • Correlation between GDP per capita and life expectancy and literacy GDP, Life Expectancy, and Literacy Copyright©2004 South-Western Cost of slow growth in India • Economic growth was slow in India prior to 1981 • After economic reforms were implemented in the 1980s, per capita growth increased from 1.4 % per year to 2.89 in the 1980s, 4.19% in 1990s and 6.78% from 2001-2006 • Swaminathan S. Anklesaria Aiyar estimates that if economic reforms had taken place 10 years earlier, 14.5 million infant deaths could have been avoided • In addition there would have bee 261 million fewer illiterates, and 109 million fewer poor people. No Easy Answers • Will look at growth and development from different perspectives • Before growth can be explained it must be measured. • How do we measure size of economy? Measurement Issues • When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning. • Before WWII there were no statistics to measure the size of the whole economy THE MEASUREMENT OF GROSS DOMESTIC PRODUCT • Gross domestic product (GDP) is a measure of the income and expenditures of an economy. • It is the total market value of all final goods and services produced within a country in a given period of time. Measurement of GDP • GDP is the Market Value . . .” – Output is valued at market prices. – Cannot add eggs to cars to oranges directly – GDP is a weighted average – When prices are determined in markets they reflect the marginal value people place on them. Measurement of GDP • Of All Final . . .” – It records only the value of final goods, not intermediate goods (the value is counted only once). – If a baker buys flour, it is not part of GDP, the bread produced from it is. If you buy flour in the supermarket it is part of GDP. Measurement of GDP • Goods and Services . . . “ – It includes both goods (food, clothing, cars) and services (haircuts, doctor visits). • Includes only those goods and services produced in market – Not those produced at home • A women marries her gardener and GDP falls • Important to remember because in developing countries many goods may be produced outside the market – No illegal goods • Prostitution is part of GDP in Nevada, not CA • Important to remember differences in legal structure when comparing different countries Measurement of GDP • “ . . . Within a Country . . .” – It measures the value of production within the geographic confines of a country. • GNP is a similar measure – total value of all final goods and services produced by a country’s citizens regardless of where produced. GDP and Welfare • GDP is the best single measure of the economic well-being of a society. • GDP per person tells us the income and expenditure of the average person in the economy. • Higher GDP per person indicates a higher standard of living. • GDP is not a perfect measure of the happiness or quality of life, however. GDP and Welfare • Some things that contribute to well-being are not included in GDP. – The value of leisure. – The value of a clean environment. – The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work Problems with GDP measurement for developing economies • Does not include non traded goods – Home production – Illegal activities • Data may not be accurate – Limited resources for data collection – Difficult to count production in agricultural area – Incentive to under report production to avoid taxes etc Growth vs Development • Growth rate of GDP may rise without development – Discovery of oil or other natural resources • Development measured by increases in literacy, health care etc. • Most of the time they are correlated but not always GDP per Capita • GDP per Capita is GDP per person – GDP/population • GDP and GDP per capita can be different – China vs. Switzerland • Which measure is best depends on the problem – Marketing Rolex watches vs. KFC Example Ghana year GDP (PPP) (billion GDP per capita dollars) (PPP) dollars 2007 32.56 1400 2008 34.94 1500 2009 36.58 1500 Real Vs. Nominal • Nominal GDP values the production of goods and services at current prices. • Real GDP values the production of goods and services at constant prices Real vs. Nominal • An accurate view of the economy requires adjusting nominal to real GDP by using a measure of inflation like the GDP deflator or the CPI. Nominal to Real GDP • Converting Nominal GDP to Real GDP – Nominal GDP is converted to real GDP as follows: Real GDP20XX Nominal GDP20XX = × 100 GDP deflator20XX Or CPI20xx • CPI is calculated by finding how the cost of purchasing a fixed basket of goods changes over time • Problems to be aware of include – Substitution bias (If relative prices change the composition of the basket shifts) – Quality changes • How do we compare GDP between different countries with different currencies? • Exchange rates – How much one currency trades for another – Determined by the supply and demand for currency which depends on traded goods only – Fluctuate daily • Many goods, like Big Macs are not traded between countries. – Services like haircuts, rents etc, • These tend to be much cheaper in poor countries than developed countries Purchasing Power Parity • If exchange rates are used to compare the size if these countries to developed countries will make them seem smaller than the really are. • Should use PPP to compare size of economies across countries – Calculated by taking a basket of goods and finding how much it costs in different countries How much difference does it make? • For Ghana in 2009 • GDP in official exchange rate was 14.76 billion dollars • GDP in PPP was 36.58 billion dollars Alternate Measures • Life expectancy, infant mortality, height by age can all be used to judge standard of living Growth Calculations • Growth rate for a year is calculated by (GDPt+1 –GDPt )/GDPt • Growth rate over N years is calculated by GDPt+N=GDPt(1+g)N Examples • Nominal GDP for Ghana was 16.7 billion dollars in 2008 and 14.9 billion in 2007. What was the rate of growth? • (16.7-14.9) /14.9 = .12 or 12% • Do you think these numbers are using exchange rates or PPP? • Real GDP growth in Ghana was 7.3%, what was happening to prices? • Prices were Rising Examples • If the GDP of Ghana is 16.7 billion dollars in 2008 and growth rate of GDP is 5% for 10 years, how much will GDP be in 2018? • GDP 2018=16.7(1+.05)10=27.2