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Lecture 6 summary
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Lecture 6Economic growth
Economic growth:
Economic growth → continuous expansion in the productive capacity of a country,
compared between two periods
Economic development → process and polices by which a nation improves the
economic, political, and social well-being of its people.
- Implies growth and change in the standards of living/well-being experienced by
all citizens in a country (change in distribution of income and access to resources
etc.)
Growth performance → measured in terms of growth in real GDP or real GDP per capita
- Nominal GDP (current-price GDP) cannot be used → changes in nominal GDP
reflect changes in prices (inflation) as well as changes in the volume of economic
activity
o Nominal GDP → has to be adjusted to obtain real GDP (GDP at constant
prices) before economic growth can be measured
Calculating rates of change
Annual growth rate → calculated over a period of less than a year
- Indicates what will happen if that pace were to be sustained for a full 12 months.
Growth rate between 2 periods (1 year or less):
𝐼𝑡
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡 − 1 𝑎𝑛𝑑 𝑡 = [( ) − 1] × 100
𝐼𝑡−1
- Where 𝐼 = 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒, 𝑡 − 1 = 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑒𝑟𝑖𝑜𝑑 and 𝑡 = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
Growth rate between 2 periods (more than 1 year):
1
𝐼𝑡 𝑘
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡 𝑎𝑛𝑑 𝑡 − 𝑘 = [( ) − 1] × 100
𝐼𝑡−𝑘
- Where 𝐼 = 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒, 𝑡 − 𝑘 = 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑒𝑟𝑖𝑜𝑑 and 𝑡 = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
- 𝑘 = number of years/number of intervals between the observations over which
the rate is calculated
NOTE! Always use constant prices
Always compare the same quarter of different years
Negative growth rate → indicates the economy has contracted
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, Choosing the base for calculating economic growth
GDP → measures the total value of economic activity within the geographic boundaries
of a country
- Better measure if interested in production volume and growth of the country
- Excludes imports → can underestimate or overestimate growth
o Example: price of gold increases → value of gold production is adjusted for
the price increase when real GDP is calculated.
▪ If gold price increases but volume of gold production does not
change → nominal GDP increases but real GDP is unchanged
▪ If import prices are constant → higher nominal value of exports will
enable the country to afford a greater volume of imports than
before = increase in volume of goods available for domestic
consumption
▪ If export prices rise rapidly in comparison to import prices → growth is
overestimated
▪ If import prices rise rapidly in comparison to export prices → growth is
underestimated
GNI → measures the total income of the residents of a country
- Better measure if interested in economic welfare of residents → impact growth
has had on the residents of a country
- May gives better indication of economic growth
- Accounts for terms of trade fluctuations
o Terms of trade (tot) = ratio between export and import prices
▪ Tot improve = export price increase faster than import prices (and
vice versa)
- GDP excludes Z, so if Pz increases relative to Px → not captured and growth is
overestimated
GDP vs GNI → difference = net primary income to RoW and GNI has adjustments for ToT
GDP vs capita and GNI per capita → population data is erratic and it represents an
average, not how it is distributed
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