Sunday, August 3, 2008

The Measurement of Economic Growth

The Measurement of Economic Growth

Standard of living is the value of the goods and services available to an individual, group, or country. For example, the average person in the United States has a higher standard of living than the average person in Ethiopia. The average person in the United States has plenty of food and clothing, a decent place to live, a car, a television, and many other luxuries. The average person in Ethiopia, however, has none of these things.

Economic growth attempts to measure changes in a country’s standard of living by measuring the rate at which the country’s output changes. Since people tend to be paid based on their productivity, the value of a country’s output is also the value of the country’s income. For example, if a baker makes 20 cakes in a day and sells them for $10 each, the value of the baker’s productive output that day is $200. Since the baker was paid $200 for the cakes, the baker’s income that day is also $200. Since income is equal to the value of output, economic growth also measures how people’s incomes are changing.

The most common way to measure economic growth is by examining changes in gross domestic product. Gross domestic product (GDP) is the total value of all final goods and services produced in a country during a given period (usually a year). Final products are goods and services that are not used to make other products. They are distinguished from intermediate products, which are inputs in the production of other goods and services. For example, some farmers in the United States grow wheat. Some of that wheat is used to make flour. Some of that flour is used to make bread. In this example, bread is a final product. The wheat and flour used to make the bread are intermediate products. Gross domestic product only measures the value of final products to avoid counting the same productive output more than once. The value of the bread includes the value of the flour used to make the bread. If GDP counted the value of the bread and the value of the flour, then the flour used to make the bread would be counted more than once.

GDP is sometimes referred to as nominal GDP or money GDP because it values the output of a particular year using prices from that year. For example, it measures 2003 output using 2003 prices and measures output in 2002 using the prices from 2002. The U.S. gross domestic product in 2003 was $11.003 trillion. U.S. GDP in 2002 was $10.487 trillion. The percentage change in U.S. GDP between 2002 and 2003, which measures economic growth, was 4.92%.

Economic Growth - Topics

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