GDP data: C + I + G + X - M

Gross domestic product is the total value of final goods and services produces in the economy in a given time period (usually a year).

Gross Domestic Product = Consumption + Investment + Government Purchases + Exports - Imports

GDP = C + I + G + X - M

The Economic Report of the President provides U.S GDP data since 1959.

Table B-1 (Gross domestic product) provides nominal GDP data. They are not adjusted for inflation.
Table B-2 (Real gross domestic product) provides GDP data adjusted for inflation.

In both tables, consumption (C) and investment (I) data appear on the first page of the Excel spreadsheet. The data for government purchases (G), exports (X), and imports (M) are provided on page 2 of each spreadsheet.

Economic Growth - A Mind Map

Click on the image above to enlarge the mind map of economic growth from dineshbakshi.com.

Historial Economic Growth Data

...
Real Gross Domestic Product = Billions of chained (2005) dollars
(Output is valued in all years using the level of prices in 2005.)

...
Annual Rate of Economic Growth = Percent change in real gross domestic product from preceding period
...

U.S. ECONOMIC GROWTH SINCE 1962
YEAR	Real Gross Domestic Product	Annual Rate of Economic Growth
1962	3,072.4	6.1%
1963	3,206.7	4.4%
1964	3,392.3	5.8%
1965	3,610.1	6.4%
1966	3,845.3	6.5%
1967	3,942.5	2.5%
1968	4,133.4	4.8%
1969	4,261.8	3.1%
1970	4,269.9	0.2%
1971	4,413.3	3.4%
1972	4,647.7	5.3%
1973	4,917.0	5.8%
1974	4,889.9	-0.6%
1975	4,879.5	-0.2%
1976	5,141.3	5.4%
1977	5,377.7	4.6%
1978	5,677.6	5.6%
1979	5,855.0	3.1%
1980	5,839.0	-0.3%
1981	5,987.2	2.5%
1982	5,870.9	-1.9%
1983	6,136.2	4.5%
1984	6,577.1	7.2%
1985	6,849.3	4.1%
1986	7,086.5	3.5%
1987	7,313.3	3.2%
1988	7,613.9	4.1%
1989	7,885.9	3.6%
1990	8,033.9	1.9%
1991	8,015.1	-0.2%
1992	8,287.1	3.4%
1993	8,523.4	2.9%
1994	8,870.7	4.1%
1995	9,093.7	2.5%
1996	9,433.9	3.7%
1997	9,854.3	4.5%
1998	10,283.5	4.4%
1999	10,779.8	4.8%
2000	11,226.0	4.1%
2001	11,347.2	1.1%
2002	11,553.0	1.8%
2003	11,840.7	2.5%
2004	12,263.8	3.6%
2005	12,638.4	3.1%
2006	12,976.2	2.7%
2007	13,228.9	1.9%
2008	13,228.8	0.0%
2009	12,880.6	-2.6%
2010	13,248.7	2.9%
2011	...	...

Source: Economic Report of the President
Tables B-2 and B-4.

GDP: durable goods, nondurable goods, services, and structures.

Gross domestic product (GDP) can be divided into four categories: durable goods, nondurable goods, services, and structures.

Table B-8 (Gross domestic product by major type of product) of the Economic Report of the President provides annual data from 1959.

Limitations of Using GDP as a Measure of Quality of Life

Gross domestic product and its related concepts (such as real GDP, per capita GDP, and per capita real GDP) are incomplete measures of a country’s standard of living. There are many productive activities that are not included in GDP because it only measures output produced and sold in legal markets. It does not include productive activity that does not have a market transaction.

Although GDP and its related concepts are useful in measuring a country’s output, income, and standard of living, they are not perfect measures of quality of life. Quality of life refers to the amount of fulfillment people have in life. There are also many aspects of the quality of life that are not considered in the calculation of output, such as leisure, the environment, and the quality of people’s health.

Criticisms of GDP data as measurements of quality of life include:

1. GDP only measures the output produced and sold in legal markets.
It does not include productive activity that does not have a market transaction.

Some Economic Activity Does Not Occur in Legal Markets and thus is Not Included in GDP
Activities INCLUDED In Gross Domestic Product (GDP)	Activities NOT INCLUDED In Gross Domestic Product (GDP)
Hiring a lawn service to mow your yard.	Mowing the lawn yourself.
Taking your children to a day-care center.	Caring for your children yourself.
Hiring a plumber to fix a water leak at your house.	Fixing the water leak yourself.
Prostitution in some counties of Nevada (where it is legal).	Prostitution in most of the rest of the U.S. (where it is illegal).

2. GDP does not consider how output contributes to the quality of people’s lives.
It simply measures how much output a country produces. For example, people who live in urban areas spend a portion of their incomes on products to help them cope with urban problems. For example, urban residents buy more alarm systems for their homes and cars, self-defense classes, and stress medication. Some economists refer to these products as "bads" rather than "goods".

Suppose you live in a rural area. If you move into the city, you can change to a job that pays you $1000 more per year. Suppose urban life causes you to spend $1000 per year on things you did not need living in a rural environment. Even though your income is larger, has moving to the city improved the quality of your life?

3. GDP does not measure the quality of the environment.
A country might be able to increase its output (and GDP) if it eases pollution regulations. Yet, having higher per capita real GDP might not mean people have a better quality of life if the air, water, and other resources are more polluted.

4. GDP does not consider how leisure contributes to the quality of life.
A country could increase its output (and GDP) if its people worked 12 hours per day, seven days per week. However, having more products might not mean people are better off if they have no leisure time to enjoy it.

Virtually all data have limitations. Even though GDP data are not perfect measures of the quality of life in a country, they are still useful in measuring the standard of living.

Economic Growth - Topics

Real Gross Domestic Product (Real GDP)

Real Gross Domestic Product

Although GDP is the most common measure of a country’s output, it may not be the best measure. Real GDP measures the value of the total final output of a country's economy without the influence of inflation. Inflation is a general increase in the prices in an economy. Real GDP measures the output of a country’s final goods and services in constant dollars (i.e., using prices in a single base year to measure output in different years). (For example, it might measure output in 2003, 2004, and 2005 using prices from 2000.) When calculating real GDP, the base year is the year from which prices are used to calculate the value of output.

Nominal GDP in year x = prices in year x outputs in year x
Real GDP in year x = prices in the base year outputs in year x

A Simple Example of an Economy with One Product

To illustrate the difference between nominal GDP and real GDP, consider a simple economy that only produces one product, widgets. Suppose this economy produces 100 widgets in 2003 and the price of widgets in 2003 is $1. Thus, the economy’s nominal GDP in 2003 is $100. Suppose the economy produces 100 widgets in 2004, but the price of widgets in 2004 is $2. Nominal GDP in 2004 is $200. If one uses nominal GDP to measure output, one might think this economy produced more output in 2004 than 2003 (since nominal GDP in 2004 is larger than nominal GDP in 2003). Yet output in this economy was the same in 2003 and 2004. The reason nominal GDP is larger in 2004 than in 2003 is because the price of widgets increased. Real GDP attempts to measure the real change in output without the influence of inflation. In this simple example, let 2003 be the base year. Thus real GDP in 2003 is calculated by multiplying the quantity of output in 2003 by the price of widgets in 2003 (since 2003 is the base year).

Real GDP in 2003 = $1 100 = $100

Real GDP in 2004 is calculated by multiplying the quantity of output in 2004 by the price of widgets in 2003 (since 2003 is the base year).

Real GDP in 2004 = $1 100 = $100

Since real GDP in 2003 and 2004 is the same, it indicates real output did not change. Thus changes in real GDP are a better measure of changes in real output than changes in nominal GDP.
Per capita real GDP measures the real value of a country’s output per person. It is calculated by dividing real GDP by the country’s population.
Many economists think the single best measure of a country's standard of living is per capita real GDP because it measures the income of an average person in a country without the influence of inflation.

Economic Growth - Topics

Gross National Product (GNP)

Gross National Product

Another measure of a country’s output is gross national product. Gross national product (GNP) is the total value of all final goods and services produced in a given period (usually a year) by businesses owned by citizens of a country.

Gross means total. Product means output. Both GDP and GNP measure the total output produced by a country. GDP measures the final output produced in a country, regardless of ownership of the businesses. Thus, the key to GDP is location, not ownership. The key to GNP is ownership, not location. For example, if a Japanese company operates in the United States, the value of its output in the U.S. is included in U.S. GDP and Japanese GNP. Yet, the output of a Japanese company’s operations in the U.S. would not be included in U.S. GNP or Japan’s GDP.

The U.S. Commerce Department used GNP to measure U.S. output from 1900 to 1991. Since then, GDP has been used. Most countries in the world use GDP to measure their output. A few countries in the world still use GNP, however.

Economic Growth - Topics

The Composition of U.S. Gross Domestic Product (GDP)

Source: The U.S. Economy: You Are Here

The Composition of GDP

A Closer Look at the Measurement of Economic Growth

The Composition of GDP

Gross domestic product can be broken down into several categories based on the type of goods and services produced. For example, the output of the country can be divided into durable goods, non-durable goods, services, and structures.

GDP = durable goods + non-durable goods + services + structures

Durable goods are products that are used over a long period of time. Refrigerators, washing machines, and cars are examples of durable goods. Non-durable goods are products that are consumed over a short period of time. Food and clothing are examples of non-durable goods. Services are products that typically do not create a tangible commodity. Banking services, haircuts, and entertainment are examples of services. Structures are buildings. Over half of U.S. GDP is services.

Durable goods orders are sometimes used as an indicator of the health of the U.S. economy.

Gross domestic product also can be broken down into several categories based on the purchaser of the newly produced goods and services. This alternative way to divide GDP involves separating it into consumption spending, investment spending, government purchases, exports, and imports.

Source: The U.S. Economy: You Are Here

An equation that illustrates this relationship is:

GDP = C + I + G + X - M
where:
C = consumption spending
I = investment spending
G = government purchases
X = exports
M = imports

Consumption is the purchase of final goods and services by households. Investment is the purchase of capital equipment, inventories, and structures. Most of this is done by businesses. The purchase of a home by a household, however, is also considered to be investment.
Government purchases are payments made in exchange for currently produced goods and services. This includes salaries of current government workers, vehicles purchased for government use, and supplies for government offices. Government purchases do not include transfer payments. A transfer payment is a government payment not made in exchange for a good or service. Social Security benefits, retirement checks paid to former government employees, and welfare benefits are examples of transfer payments. Exports are goods and services sold by domestic producers to foreign purchasers. For example, a jet fighter manufactured in the U.S. and purchased by the government of Egypt is an exported good. Imports are goods and services sold by foreign producers to domestic purchasers. The domestic purchasers might by households, businesses, or the government. For example, a Mercedes-Benz automobile manufactured in Germany and sold to an American consumer is an imported good.

The difference between exports and imports (X – M) is referred to as net exports (NE). Thus an alternative way to write the equation for gross domestic product is:

GDP = C + I + G + NE

Economic Growth - Topics

Sources of Economic Growth

Sources of Economic Growth

One way for an economy to produce more output is to obtain more resources. Even with the same resources, however, it is possible for an economy to produce more output if workers become more productive. Productivity is the quantity of goods and services produced from a typical hour of a worker’s labor. Improvements in productivity allow an economy to produce more output and thus earn more income. This increased income represents an improved standard of living. Thus an increased standard of living usually depends on increasing a country’s productivity. Thus, improved productivity is the key to economic growth.

Increases in productivity fall into three categories:

1. Investment in physical capital – “Build more machines.”
2. Investment in human capital (education and skills) – “Make workers more productive.”
3. Investment in technology – “Build more productive machines.”


Investment in physical capital

Physical capital is anything man-made that makes labor more productive. Fiscal policies to increase investment in physical capital include direct government spending on infrastructure (e.g., roads, bridges, hospitals) and tax incentives to encourage private businesses to invest (e.g., new factories or machinery). Monetary policies that achieve low interest rates also encourage businesses to invest more in physical capital by decreasing its opportunity cost.


Investment in human capital

Human capital is the education, training, and skills people acquire that makes them more productive. Fiscal policies to increase investment in human capital include direct government spending on education and job training or tax incentives to encourage education and skills training. Monetary polices that keep interest rates low may also make it easier for people to acquire more education by lowering the cost of loans to pay tuition and other expenses.


Investment in technology

Technological innovations usually create increases in productivity. For example, scientists have developed agricultural crops that are more disease-resistant and have thus increased the yields from our farmland. Fiscal policies that promote investment in technology include direct government spending on research and development [e.g., National Science Foundation (NSF) grants] and tax incentives to encourage private businesses to invest in discovering new technologies. Monetary policies that keep interest rates low also encourage businesses to invest in technology by decreasing the cost of borrowing money.

Economic Growth - Topics

GDP per capita

Gross domestic product (GDP) per capita (also called per capita GDP) is a country's GDP divided by its population. It provides an estimate of the average annual income of a person living in that country. If one is interested in estimating a nation's standard-of-living, GDP per capita is generally preferable to GDP.

Gross domestic product measures the total output produced in a country. It does not consider the country’s population, however. China has the second largest national GDP (behind the United States). Because China’s population is so large, however, the GDP data do not accurately represent the average value of the goods and services available to each person. Most economists suggest a better measurement of standard-of-living is per capita GDP.

Per capita GDP measures the nominal value of a country’s output per person. It is calculated by dividing nominal GDP by the country’s population. It is a measure of the income of an average person in the country.
U.S. GDP in 2003 was $11.003 trillion. The U.S. Census Bureau’s estimate of the U.S. population on July 1, 2003 is 290,809,777. Thus, an estimate of per capita GDP in the United States in 2003 is $37,836.

per capita GDP = nominal GDP / population
= $11.003 trillion /290,809,777 = $37,836 per person

Test your understanding of the difference between GDP and per capita GDP

Per capita GDP is more useful than GDP when comparing the standard of living in various countries. To illustrate this, consider two economies. Country A has a nominal GDP of $1 billion. Country B has a nominal GDP of $100 million. Which country has the higher standard of living?

The answer depends on each country’s population:

If country A has a population of 1 billion people, then its per capital GDP is $1 per person.

per capita GDP = nominal GDP / population
= $1 billion / 1 billion people = $1 per person

If country B has a population of 1,000 people, then its per capita GDP is $100,000 per person.

per capita GDP = nominal GDP / population
= $100 million / 1,000 people = $100,000 per person


GDP per capita

The following table ranks the countries of the world by per capita GDP using the data available from the U.S. Central Intelligence Agency (CIA) in May 2009. Notice that China’s ranking by per capita GDP (133rd) is significantly lower than its ranking by GDP (2nd).

Economic Growth - Topics

Hungry Planet: What the World Eats

Hungry Planet: What the World Eats by Peter Menzel provides insight into the vast differences in the standard-of-living around the globe by photographing what a typical family eats over the course of a week.

National Public Radio (NPR) featured the book in an audio story on November 9, 2005 (Click to listen.).

CLICK ON THE PHOTOS TO ENLARGE THEM.

Chad: 2008 GDP per capita = $1,600.


Mongolia: 2008 GDP per capita = $3,200.


Egypt: 2008 GDP per capita = $5,400.


Bhutan: 2008 GDP per capita = $5,600.


China: 2008 GDP per capita = $6,000.


Ecuador: 2008 GDP per capita = $7,500.


Mexico: 2008 GDP per capita = $14,200.


Poland: 2008 GDP per capita = $17,300.



Italy: 2008 GDP per capita = $31,000.

Japan: 2008 GDP per capita = $34,200.


Germany: 2008 GDP per capita = 34,800.


Great Britain: 2008 GDP per capita = $36,600.


United States: 2008 GDP per capita = $47,000.


United States: 2008 GDP per capita = $47,000.


Kuwait: 2008 GDP per capita = $57,400.

The book, Hungry Planet: What the World Eats, is available from Amazon.com.

The Amazon.com review states:

It's an inspired idea--to better understand the human diet, explore what culturally diverse families eat for a week. That's what photographer Peter Menzel and author-journalist Faith D'Alusio, authors of the equally ambitious Material World, do in Hungry Planet: What the World Eats, a comparative photo-chronicle of their visits to 30 families in 24 countries for 600 meals in all. Their personal-is-political portraits feature pictures of each family with a week's worth of food purchases; weekly food-intake lists with costs noted; typical family recipes; and illuminating essays, such as "Diabesity," on the growing threat of obesity and diabetes. Among the families, we meet the Mellanders, a German household of five who enjoy cinnamon rolls, chocolate croissants, and beef roulades, and whose weekly food expenses amount to $500. We also encounter the Natomos of Mali, a family of one husband, his two wives, and their nine children, whose corn and millet-based diet costs $26.39 weekly.
We soon learn that diet is determined by largely uncontrollable forces like poverty, conflict and globalization, which can bring change with startling speed. Thus cultures can move--sometimes in a single jump--from traditional diets to the vexed plenty of global-food production. People have more to eat and, too often, eat more of nutritionally questionable food. Their health suffers.

Because the book makes many of its points through the eye, we see--and feel--more than we might otherwise. Issues that influence how the families are nourished (or not) are made more immediate. Quietly, the book reveals the intersection of nutrition and politics, of the particular and universal. It's a wonderful and worthy feat. --Arthur Boehm

The Publishers Weekly review adds:

For their enormously successful Material World, photojournalist Menzel and writer D'Aluisio traveled the world photographing average people's worldly possessions. In 2000, they began research for this book on the world's eating habits, visiting some 30 families in 24 countries. Each family was asked to purchase—at the authors' expense—a typical week's groceries, which were artfully arrayed—whether sacks of grain and potatoes and overripe bananas, or rows of packaged cereals, sodas and take-out pizzas—for a full-page family portrait. This is followed by a detailed listing of the goods, broken down by food groups and expenditures, then a more general discussion of how the food is raised and used, illustrated with a variety of photos and a family recipe. A sidebar of facts relevant to each country's eating habits (e.g., the cost of Big Macs, average cigarette use, obesity rates) invites armchair theorizing. While the photos are extraordinary—fine enough for a stand-alone volume—it's the questions these photos ask that make this volume so gripping. After considering the Darfur mother with five children living on $1.44 a week in a refugee camp in Chad, then the German family of four spending $494.19, and a host of families in between, we may think about food in a whole new light. This is a beautiful, quietly provocative volume.

Material World: A Global Family Portrait

Material World: A Global Family Portrait by Peter Menzel is available from Amazon.com.

It provides insights into the differences in economic growth around the world by photographing the material possessions of a typical family in various countries.

CLICK ON THE PHOTOS TO ENLARGE THEM.

A few of the families were highlighted on the PBS website:

Mali: The Natomo Family
It is not unusual in this West African country for men to have two wives, as 39-year-old Soumana Natomo does. More wives mean more progeny—and a greater chance you will be supported in old age. Soumana now has eight children, and his wives, Pama Kondo (28) and Fatouma Niangani Toure (26), will likely have more. How many of these children will survive, though, is uncertain: Mali's infant mortality rate ranks among the ten highest in the world. Some of the family's possessions are not included in this photo—another mortar and pestle for pounding grain, two wooden mattress platforms, 30 mango trees, and old radio batteries that the children use as toys. (Note: The Natomos appear on the adobe roof of their house in Kouakourou. An infant son is nestled in his mother's arms. One daughter is absent.)

Mali Stats
Population: 12 million
Population density: 9.1 people per sq. km.
Total fertility rate: 7.0 children per woman
Population doubling time: 23 years
Percentage urban/rural: 26% urban, 64% rural
Per capita energy use: 22 kg. oil equivalent
Infant mortality: 118.7 deaths per 1,000 births
Life expectancy: 48 (male), 49 (female)
Adult illiteracy: 64% (male), 84% (female)
Internet users: 30,000

......................................................................

India: The Yadev Family
At age 25, Mashre Yadev is already mother to four children, the oldest of whom was born when she was 17. Each morning at their home in rural Uttar Pradesh, she draws water from a well so that her older children can wash before school. She cooks over a wood fire in a windowless, six-by-nine-foot kitchen, and such labor-intensive domestic work keeps her busy from dawn to dusk. Her husband Bachau, 32, works roughly 56 hours a week, when he can find work. In rough times, family members have gone more than two weeks with little food. Everything they own—including two beds, three bags of rice, a broken bicycle, and their most cherished belonging, a print of Hindu gods—appears in this photograph.

India Stats
Population: 1.0 billion
Population density: 318 people per sq. km.
Total fertility rate: 3.0 children per woman
Population doubling time: 36 years
Percentage urban/rural: 28% urban, 72% rural
Per capita energy use: 494 kg. oil equivalent
Infant mortality: 66 deaths per 1,000 births
Life expectancy: 62 (male), 64 (female)
Adult illiteracy: 32% (male), 55% (female)
Internet users: 7 million

......................................................................

China: The Wu Family
The nine members of this extended family—father Wu Ba Jiu (59), mother Guo Yu Xian (57), their sons, daughters-in-law, and three grandchildren—live in a three-bedroom, 600-square-foot dwelling in rural Yunnan Province. While they have no telephone, they get news and images of a wider world through two radios and the family's most prized possession, a television. In the future, they hope to get one with a 30-inch screen as well as a VCR, a refrigerator, and drugs to combat diseases in the carp they raise in their ponds. Not included in the photo are their 100 mandarin trees, vegetable patch, and three pigs.

China Stats
Population: 1.3 billion
Population density: 627 people per sq. km.
Total fertility rate: 1.7 children per woman
Population doubling time: 67 years
Percentage urban/rural: 37% urban, 63% rural
Per capita energy use: 905 kg. oil equivalent
Infant mortality: 32 deaths per 1,000 births
Life expectancy: 69 (male), 73 (female)
Adult illiteracy: 7.9% (male), 22.1% (female)
Internet users: 46 million

......................................................................

Japan: The Ukita Family
Like many Japanese women, 43-year-old Sayo Ukita had children relatively late in life. Her youngest daughter is now in kindergarten, not yet burdened by the pressures of exams and Saturday "cram school" that face her nine-year-old sister. Sayo is supremely well-organized, which helps her manage the busy schedules of her children and maintain order in their 1,421-square-foot Tokyo home stuffed with clothes, appliances, and an abundance of toys for both her daughters and dog. She and her husband Kazuo, 45, have all the electronic and gas-powered conveniences of modern life, but their most cherished possessions are a ring and heirloom pottery. The family's wish for the future: a larger house with more storage space.

Japan Stats
Population: 128 million
Population density: 336 people per sq. km.
Total fertility rate: 1.3 children per woman
Population doubling time: 289 years
Percentage urban/rural: 79% urban, 21% rural
Per capita energy use: 4,316 kg. oil equivalent
Infant mortality: 3 deaths per 1,000 births
Life expectancy: 78 (male), 85 (female)
Adult illiteracy: 1% (male), 1% (female)
Internet users: 56 million

......................................................................

United States: The Skeen Family
Rick and Pattie Skeen's 1,600-square-foot house lies on a cul-de-sac in Pearland, Texas, a suburb of Houston. The fire hydrant in this photo is real, but not working—a souvenir from Rick's days as a firefighter. Rick, 36, now splices cables for a phone company. Pattie, 34, teaches school at a Christian academy. To get the picture, photographers hoisted the family up in a cherry picker. Yet the image still leaves out a refrigerator-freezer, camcorder, woodworking tools, computer, glass butterfly collection, trampoline, fishing equipment, and the rifles Rick uses for deer hunting, among other things. Though rich with possessions, nothing is as important to the Skeens as their Bible. For this devoutly Baptist family, like many families around the world, it is a spiritual—rather than material—life that matters most.

U.S. Stats
Population: 292 million
Population density: 29 people per sq. km.
Total fertility rate: 2.0 children per woman
Population doubling time: 116 years
Percentage urban/rural: 78% urban, 22% rural
Per capita energy use: 8,148 kg. oil equivalent
Infant mortality: 6.7 deaths per 1,000 births
Life expectancy: 74 (male), 80 (female)
Adult illiteracy: 3% (male), 3% (female)
Internet users: 165 million

......................................................................

The Importance of Economic Growth – from a photographic perspective

Two excellent books by Peter Menzel provide photographic evidence of the importance of economic growth.

Material World: A Global Family Portrait (1995)
Hungry Planet: What the World Eats (2005)

Economic Growth - Topics

The Importance of Economic Growth – from a Geographical Perspective

Would you want to trade places with the average resident of most African countries?
Why not? Your answer probably has something to do with standard of living.
One measure of standard of living is gross domestic product (GDP). GDP is the total value of all final goods and services produced in a country during a given period. The following table ranks the countries of the world by GDP using the data available from the U.S. Central Intelligence Agency (CIA) in May 2009.

GROSS DOMESTIC PRODUCT in 2008 (Purchasing Power Parity)
RANK	COUNTRY	GDP (PPP)
1	World	$69,490,000,000,000
2	European Union	$14,820,000,000,000
3	United States	$14,290,000,000,000
4	China	$7,800,000,000,000
5	Japan	$4,348,000,000,000
6	India	$3,267,000,000,000
7	Germany	$2,863,000,000,000
8	United Kingdom	$2,231,000,000,000
9	Russia	$2,225,000,000,000
10	France	$2,097,000,000,000
11	Brazil	$1,990,000,000,000
12	Italy	$1,821,000,000,000
13	Mexico	$1,559,000,000,000
14	Spain	$1,378,000,000,000
15	Canada	$1,307,000,000,000
16	Korea, South	$1,278,000,000,000
17	Indonesia	$915,900,000,000
18	Turkey	$906,500,000,000
19	Iran	$842,000,000,000
20	Australia	$800,500,000,000
21	Taiwan	$738,800,000,000
22	Netherlands	$670,200,000,000
23	Poland	$667,400,000,000
24	Saudi Arabia	$582,800,000,000
25	Argentina	$575,600,000,000
26	Thailand	$553,400,000,000
27	South Africa	$489,700,000,000
28	Pakistan	$452,700,000,000
29	Egypt	$442,600,000,000
30	Colombia	$399,400,000,000
31	Belgium	$390,500,000,000
32	Malaysia	$386,600,000,000
33	Venezuela	$357,900,000,000
34	Sweden	$348,600,000,000
35	Greece	$343,600,000,000
36	Nigeria	$338,100,000,000
37	Ukraine	$337,000,000,000
38	Austria	$325,000,000,000
39	Philippines	$320,600,000,000
40	Switzerland	$309,900,000,000
41	Hong Kong	$307,600,000,000
42	Romania	$271,200,000,000
43	Czech Republic	$266,300,000,000
44	Norway	$256,500,000,000
45	Chile	$245,300,000,000
46	Vietnam	$241,800,000,000
47	Singapore	$240,000,000,000
48	Peru	$238,900,000,000
49	Portugal	$237,300,000,000
50	Algeria	$235,500,000,000
51	Bangladesh	$224,000,000,000
52	Hungary	$205,700,000,000
53	Denmark	$204,900,000,000
54	Israel	$200,700,000,000
55	Finland	$195,200,000,000
56	Ireland	$191,900,000,000
57	United Arab Emirates	$184,600,000,000
58	Kazakhstan	$176,900,000,000
59	Kuwait	$149,100,000,000
60	Morocco	$137,300,000,000
61	Slovakia	$119,500,000,000
62	New Zealand	$116,600,000,000
63	Belarus	$114,100,000,000
64	Iraq	$112,800,000,000
65	Angola	$110,300,000,000
66	Cuba	$108,200,000,000
67	Ecuador	$107,100,000,000
68	Syria	$95,360,000,000
69	Bulgaria	$93,780,000,000
70	Sri Lanka	$91,900,000,000
71	Libya	$88,860,000,000
72	Sudan	$87,270,000,000
73	Qatar	$85,350,000,000
74	Tunisia	$81,880,000,000
75	Serbia	$80,740,000,000
76	Dominican Republic	$77,430,000,000
77	Azerbaijan	$73,650,000,000
78	Croatia	$73,360,000,000
79	Uzbekistan	$71,630,000,000
80	Puerto Rico	$70,590,000,000
81	Guatemala	$68,020,000,000
82	Oman	$67,000,000,000
83	Ethiopia	$66,290,000,000
84	Lithuania	$63,250,000,000
85	Kenya	$61,830,000,000
86	Slovenia	$59,140,000,000
87	Yemen	$55,290,000,000
88	Burma	$55,040,000,000
89	Tanzania	$54,260,000,000
90	Costa Rica	$48,480,000,000
91	Lebanon	$44,070,000,000
92	El Salvador	$43,940,000,000
93	Bolivia	$43,080,000,000
94	Cameroon	$42,760,000,000
95	Uruguay	$42,460,000,000
96	Korea, North	$40,000,000,000
97	Luxembourg	$39,420,000,000
98	Latvia	$38,980,000,000
99	Panama	$38,490,000,000
100	Uganda	$35,880,000,000
101	Ghana	$34,040,000,000
102	Cote d'Ivoire	$34,000,000,000
103	Honduras	$33,630,000,000
104	Nepal	$31,090,000,000
105	Jordan	$30,760,000,000
106	Bosnia and Herzegovina	$29,900,000,000
107	Turkmenistan	$29,650,000,000
108	Paraguay	$28,710,000,000
109	Cambodia	$27,950,000,000
110	Estonia	$27,720,000,000
111	Bahrain	$26,700,000,000
112	Botswana	$26,040,000,000
113	Trinidad and Tobago	$24,190,000,000
114	Afghanistan	$23,030,000,000
115	Cyprus	$22,690,000,000
116	Senegal	$21,900,000,000
117	Albania	$21,820,000,000
118	Georgia	$21,600,000,000
119	Gabon	$21,440,000,000
120	Congo, Democratic Republic of the	$21,050,000,000
121	Jamaica	$20,880,000,000
122	Madagascar	$20,760,000,000
123	Brunei	$20,250,000,000
124	Equatorial Guinea	$19,370,000,000
125	Mozambique	$18,950,000,000
126	Armenia	$18,920,000,000
127	Macedonia	$18,520,000,000
128	Macau	$18,140,000,000
129	Burkina Faso	$17,820,000,000
130	Zambia	$17,390,000,000
131	Nicaragua	$16,830,000,000
132	Chad	$16,260,000,000
133	Congo, Republic of the	$15,600,000,000
134	Tajikistan	$15,400,000,000
135	Mauritius	$15,360,000,000
136	Mali	$14,480,000,000
137	Laos	$13,990,000,000
138	Papua New Guinea	$13,290,000,000
139	Benin	$12,840,000,000
140	Iceland	$12,150,000,000
141	Gaza Strip	$11,950,000,000
142	West Bank	$11,950,000,000
143	Haiti	$11,590,000,000
144	Malawi	$11,560,000,000
145	Kyrgyzstan	$11,410,000,000
146	Namibia	$11,230,000,000
147	Moldova	$10,630,000,000
148	Guinea	$10,440,000,000
149	Malta	$9,801,000,000
150	Niger	$9,784,000,000
151	Mongolia	$9,557,000,000
152	Rwanda	$9,061,000,000
153	Bahamas, The	$8,779,000,000
154	Montenegro	$6,600,000,000
155	Mauritania	$6,310,000,000
156	Swaziland	$5,703,000,000
157	Somalia	$5,524,000,000
158	Barbados	$5,466,000,000
159	Togo	$5,105,000,000
160	Jersey	$5,100,000,000
161	Kosovo	$5,000,000,000
162	French Polynesia	$4,718,000,000
163	Bermuda	$4,500,000,000
164	Sierra Leone	$4,307,000,000
165	Suriname	$4,256,000,000
166	Liechtenstein	$4,160,000,000
167	Eritrea	$3,946,000,000
168	Bhutan	$3,789,000,000
169	Andorra	$3,660,000,000
170	Fiji	$3,616,000,000
171	Lesotho	$3,370,000,000
172	Central African Republic	$3,239,000,000
173	New Caledonia	$3,158,000,000
174	Burundi	$3,103,000,000
175	Guyana	$3,010,000,000
176	Netherlands Antilles	$2,800,000,000
177	Guernsey	$2,742,000,000
178	Isle of Man	$2,719,000,000
179	Timor-Leste	$2,713,000,000
180	Belize	$2,577,000,000
181	Guam	$2,500,000,000
182	Gambia, The	$2,264,000,000
183	Aruba	$2,258,000,000
184	Zimbabwe	$1,959,000,000
185	Cayman Islands	$1,939,000,000
186	Djibouti	$1,889,000,000
187	Saint Lucia	$1,801,000,000
188	Maldives	$1,738,000,000
189	San Marino	$1,662,000,000
190	Cape Verde	$1,635,000,000
191	Antigua and Barbuda	$1,610,000,000
192	Virgin Islands	$1,577,000,000
193	Liberia	$1,532,000,000
194	Seychelles	$1,473,000,000
195	Grenada	$1,211,000,000
196	Saint Vincent and the Grenadines	$1,103,000,000
197	Greenland	$1,100,000,000
198	Solomon Islands	$1,078,000,000
199	Gibraltar	$1,066,000,000
200	Samoa	$1,057,000,000
201	Faroe Islands	$1,000,000,000
202	Vanuatu	$983,200,000
203	Monaco	$976,300,000
204	Mayotte	$953,600,000
205	Northern Mariana Islands	$900,000,000
206	Western Sahara	$900,000,000
207	Guinea-Bissau	$857,000,000
208	British Virgin Islands	$853,400,000
209	Saint Kitts and Nevis	$784,900,000
210	Comoros	$741,400,000
211	Dominica	$719,800,000
212	American Samoa	$575,300,000
213	Tonga	$549,100,000
214	Kiribati	$357,400,000
215	Sao Tome and Principe	$276,600,000
216	Micronesia, Federated States of	$238,100,000
217	Turks and Caicos Islands	$216,000,000
218	Cook Islands	$183,200,000
219	Palau	$164,000,000
220	Marshall Islands	$133,500,000
221	Anguilla	$108,900,000
222	Falkland Islands (Islas Malvinas)	$105,100,000
223	Nauru	$60,000,000
224	Wallis and Futuna	$60,000,000
225	Saint Pierre and Miquelon	$48,300,000
226	Montserrat	$29,000,000
227	Saint Helena	$18,000,000
228	Tuvalu	$14,940,000
229	Niue	$10,010,000
230	Tokelau	$1,500,000

Source: CIA World Factbook, 2008. These calculations were made using the purchasing power parity (PPP) technique. This is designed to make the numbers more comparable by adjusting for differences in the cost of products in different countries.

A note in The World Factbook provides a more detailed explanation:

This entry gives the gross domestic product (GDP) or value of all final goods and services produced within a nation in a given year. A nation's GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States. This is the measure most economists prefer when looking at per-capita welfare and when comparing living conditions or use of resources across countries. The measure is difficult to compute, as a US dollar value has to be assigned to all goods and services in the country regardless of whether these goods and services have a direct equivalent in the United States (for example, the value of an ox-cart or non-US military equipment); as a result, PPP estimates for some countries are based on a small and sometimes different set of goods and services. In addition, many countries do not formally participate in the World Bank's PPP project that calculates these measures, so the resulting GDP estimates for these countries may lack precision. For many developing countries, PPP-based GDP measures are multiples of the official exchange rate (OER) measure. The differences between the OER- and PPP-denominated GDP values for most of the wealthy industrialized countries are generally much smaller.

Economic Growth - Topics

The 1900 House

The 1900 House

Six Weeks in

The Importance of Economic Growth – from an Historical Perspective

The Time Machine, by H.G. Wells, was published in 1895. In this novella, a scientist builds a machine that allows him to travel into the past or future. If you could travel back to the end of the 19th century, would you do it? Would you prefer to live in the United States in 1900 rather than now? Consider the following facts about the U.S. in 1900:

U.S. Standard of Living in 1900
· The average life expectancy in the United States was forty-seven.
· Only 14 percent of the homes in the Unites States had a bathtub.
· Only 8 percent of the homes had a telephone. A three-minute call from Denver to New York City cost eleven dollars.
· The average wage in the U.S. was twenty-two cents per hour. The average U.S. worker earned between $200 and $400 per year.
· A competent accountant could expect to earn $2000 per year, a dentist $2500 per year, a veterinarian between $1500 and $4000 per year, and a mechanical engineer about $5000 per year.
· There were only 8,000 cars in the U.S. and only 144 miles of paved roads.
· The maximum speed limit in most cities was ten miles per hour.
· Alabama, Mississippi, Iowa, and Tennessee were each more heavily populated than California. With a mere 1.4 million residents, California was only the twenty-first most populous state in the Union.
· The tallest structure in the world was the Eiffel Tower.
· More than 95 percent of all births in the United States took place at home.
· Ninety percent of all U.S. physicians had no college education. Instead, they attended medical schools, many of which were condemned in the press and by the government as “substandard.”
· Sugar cost four cents a pound. Eggs were fourteen cents a dozen. Coffee cost fifteen cents a pound.
· Most women only washed their hair once a month and used borax or egg yolks for shampoo.
· Canada passed a law prohibiting poor people from entering the country for any reason, either as travelers or immigrants.
· The five leading causes of death in the U.S. were: 1. Pneumonia and influenza 2. Tuberculosis 3. Diarrhea 4. Heart disease 5. Stroke
· The American flag had 45 stars. Arizona, Oklahoma, New Mexico, Hawaii and Alaska had not been admitted to the Union yet.
· Drive-by shootings – in which teenage boys galloped down the street on horses and randomly shot at houses, carriages, or anything else that caught their fancy – were an ongoing problem in Denver and other cities in the West.
· The population of Las Vegas, Nevada, was thirty. The remote desert community was inhabited by only a handful of ranchers and their families.
· Plutonium, insulin, and antibiotics had not been discovered yet. Scotch tape, crossword puzzles, canned beer, and iced tea had not been invented yet.
· There was no Mother’s Day or Father’s Day.
· One in ten U.S. adults could not read or write. Only six percent of all Americans had graduated from high school.
· Marijuana, heroin, and morphine were available over the counter at corner drugstores. According to one pharmacist, “Heroin clears the complexion, gives buoyancy to the mind, regulates the stomach and the bowels, and is, in fact, a perfect guardian of health.”
· Coca-Cola contained cocaine instead of caffeine.
· Punch card data processing had recently been developed, and early predecessors of the modern computer were used for the first time by the government to help compile the 1900 census.
· Eighteen percent of households in the United States had at least one full-time servant or domestic.
· There were about 230 reported murders in the U.S. annually.

Source: When My Grandmother Was a Child by Leigh W. Rutledge

Most people would prefer to live in the present day. Life in 1900 was extremely hard. This point was vividly illustrated in a PBS television series entitled The 1900 House. PBS describes the series as:

a new four-part documentary that "transports" an actual modern family from 1999 back to life in 1900. Public television viewers will have the chance to vicariously experience a time-travel journey back to everyday, middle-class life in Victorian London. The adventurous Bowler Family spent three months living in a townhouse carefully restored to reproduce the ambiance and amenities of the turn of the century. As a result, THE 1900 HOUSE explores the radical changes in family and domestic life that have occurred over the past 100 years through scientific and technological innovations.

Economic growth generally creates an improved standard of living over time. Most people have more material possessions than their grandparents (or even their parents) had at their same age.

Economic Growth - Topics

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

Economic Growth - Learning Objectives

After studying the portion of this blog devoted to the macroeconomic policy goal of economic growth, you should be able to:

· define macroeconomics and macroeconomic policy.
· list the three primary goals of macroeconomic policy.
· list the two primary tools of macroeconomic policy.
· define monetary policy and fiscal policy.
· define and explain the relationship between standard of living and economic growth.
· define gross domestic product (GDP), which is also called nominal GDP or money GDP.
· define and explain the difference between final products and intermediate products.
· explain why economic growth is important, from an historical perspective and a geographical perspective.
· state how U.S. GDP compares to other countries in the world. (U.S. GDP is larger.)
· define per capita GDP, explain how it is calculated, and explain why it is a better measure of standard of living than GDP.
· state how U.S. per capita GDP compares to other countries in the world. (Luxembourg is the only country with a higher per capita GDP.)
· state the equation that relates the present and future values of GDP based on the growth rate and the number of years and use it to calculate economic growth.
· calculate the future value of gross domestic product (GDP) from the present value, rate of growth, and number of years.
· state the rule of 70 and use it to approximate the amount of time it takes for an economy’s GDP to double.
· list and explain the sources of economic growth.
· define productivity, physical capital, human capital, and technology.
· list and explain the composition of GDP based on the types of goods and services produced.
· define durable goods, non-durable goods, services, and structures.
· list and explain the composition of GDP based on the purchaser of the newly produced goods and services.
· define consumption, investment, government purchases, transfer payments, exports, imports, and net exports.
· define gross national product (GNP) and explain how it differs from GDP.
· define real GDP and explain its relationship to nominal GDP and the inflation rate.
· define base year.
· define per capita real GDP and explain how it is calculated
· calculate nominal GDP from a table of prices and outputs of one or more products from one or more years.
· calculate real GDP from a table of prices and outputs of one or more products from one or more years.
· list and explain at least five criticisms of using GDP as a measure of economic welfare.
· explain how the government can use monetary policy to promote economic growth.
· explain how the government can use fiscal policy to promote economic growth.

Economic Growth - Topics

Economic Growth - Complete

Economic growth occurs when a society produces more goods and services than in the previous time period. It is typically measured as the percentage change in gross domestic product (GDP) or a similar measure (such as real GDP or per capita GDP). The primary benefit of economic growth is that increases in output may allow more of society´s needs and wants for material possessions to be satisfied.

Objectives

After studying this chapter, you should be able to:
· define macroeconomics and macroeconomic policy.
· list the three primary goals of macroeconomic policy.
· list the two primary tools of macroeconomic policy.
· define monetary policy and fiscal policy.
· define and explain the relationship between standard of living and economic growth.
· define gross domestic product (GDP), which is also called nominal GDP or money GDP.
· define and explain the difference between final products and intermediate products.
· explain why economic growth is important, from an historical perspective and a geographical perspective.
· state how U.S. GDP compares to other countries in the world. (U.S. GDP is larger.)
· define per capita GDP, explain how it is calculated, and explain why it is a better measure of standard of living than GDP.
· state how U.S. per capita GDP compares to other countries in the world. (Luxembourg is the only country with a higher per capita GDP.)
· state the equation that relates the present and future values of GDP based on the growth rate and the number of years and use it to calculate economic growth.
· calculate the future value of gross domestic product (GDP) from the present value, rate of growth, and number of years.
· state the rule of 70 and use it to approximate the amount of time it takes for an economy’s GDP to double.
· list and explain the sources of economic growth.
· define productivity, physical capital, human capital, and technology.
· list and explain the composition of GDP based on the types of goods and services produced.
· define durable goods, non-durable goods, services, and structures.
· list and explain the composition of GDP based on the purchaser of the newly produced goods and services.
· define consumption, investment, government purchases, transfer payments, exports, imports, and net exports.
· define gross national product (GNP) and explain how it differs from GDP.
· define real GDP and explain its relationship to nominal GDP and the inflation rate.
· define base year.
· define per capita real GDP and explain how it is calculated
· calculate nominal GDP from a table of prices and outputs of one or more products from one or more years.
· calculate real GDP from a table of prices and outputs of one or more products from one or more years.
· list and explain at least five criticisms of using GDP as a measure of economic welfare.
· explain how the government can use monetary policy to promote economic growth.
· explain how the government can use fiscal policy to promote economic growth.


Macroeconomic Policy

Macroeconomics studies issues of resource allocation that affect the entire economy, such as economic growth, unemployment, and inflation.

Macroeconomic policy refers to the government’s attempts to influence the whole economy.

The economy can be compared to a bus traveling down the highway. The government is the bus driver for the economy, trying to keep it on the road to prosperity. The government can cause the economy to speed up, slow down, stop, or even go backwards. The economy can be driven off the road and crash, or it can be kept traveling comfortably forward. It is possible to go too fast or too slow, to run over other things, to scare the passengers or make them carsick. Since people never seem to satisfy all their needs and wants, we stay on the bus and hope it will take us to greater wealth and prosperity, with as much comfort and little inconvenience as possible.


Macroeconomic Policy Goals and Tools

There are three primary macroeconomic policy goals: economic growth, low unemployment, and low inflation.

There are two primary macroeconomic policy tools that are used to achieve these goals: monetary policy and fiscal policy. Monetary policy is the Federal Reserve System’s use of the money supply, interest rates, and the banking system to influence the economy. Monetary policy is the most commonly used tool of macroeconomic policy. Fiscal policy is taxing and spending by the government. Fiscal policy has a political bias and is difficult to use when the economy needs a reduction in overall spending.

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%.


The Importance of Economic Growth – from an historical perspective

The Time Machine: An Invention, by H.G. Wells, was published in 1898. In this novel, a scientist builds a machine that allows him to travel into the past or future. If you could travel back to the end of the 19th century, would you do it? Would you prefer to live in the United States in 1900 rather than now? Consider the following facts about the U.S. in 1900[1]:

· The average life expectancy in the United States was forty-seven.
· Only 14 percent of the homes in the Unites States had a bathtub.
· Only 8 percent of the homes had a telephone. A three-minute call from Denver to New York City cost eleven dollars.
· The average wage in the U.S. was twenty-two cents per hour. The average U.S. worker earned between $200 and $400 per year.
· A competent accountant could expect to earn $2000 per year, a dentist $2500 per year, a veterinarian between $1500 and $4000 per year, and a mechanical engineer about $5000 per year.
· There were only 8,000 cars in the U.S. and only 144 miles of paved roads.
· The maximum speed limit in most cities was ten miles per hour.
· Alabama, Mississippi, Iowa, and Tennessee were each more heavily populated than California. With a mere 1.4 million residents, California was only the twenty-first most populous state in the Union.
· The tallest structure in the world was the Eiffel Tower.
· More than 95 percent of all births in the United States took place at home.
· Ninety percent of all U.S. physicians had no college education. Instead, they attended medical schools, many of which were condemned in the press and by the government as “substandard.”
· Sugar cost four cents a pound. Eggs were fourteen cents a dozen. Coffee cost fifteen cents a pound.
· Most women only washed their hair once a month and used borax or egg yolks for shampoo.
· Canada passed a law prohibiting poor people from entering the country for any reason, either as travelers or immigrants.
· The five leading causes of death in the U.S. were:
1. Pneumonia and influenza
2. Tuberculosis
3. Diarrhea
4. Heart disease
5. Stroke
· The American flag had 45 stars. Arizona, Oklahoma, New Mexico, Hawaii and Alaska had not been admitted to the Union yet.
· Drive-by shootings – in which teenage boys galloped down the street on horses and randomly shot at houses, carriages, or anything else that caught their fancy – were an ongoing problem in Denver and other cities in the West.
· The population of Las Vegas, Nevada, was thirty. The remote desert community was inhabited by only a handful of ranchers and their families.
· Plutonium, insulin, and antibiotics had not been discovered yet. Scotch tape, crossword puzzles, canned beer, and iced tea had not been invented yet.
· There was no Mother’s Day or Father’s Day.
· One in ten U.S. adults could not read or write. Only six percent of all Americans had graduated from high school.
· Marijuana, heroin, and morphine were available over the counter at corner drugstores. According to one pharmacist, “Heroin clears the complexion, gives buoyancy to the mind, regulates the stomach and the bowels, and is, in fact, a perfect guardian of health.”
· Coca-Cola contained cocaine instead of caffeine.
· Punch card data processing had recently been developed, and early predecessors of the modern computer were used for the first time by the government to help compile the 1900 census.
· Eighteen percent of households in the United States had at least one full-time servant or domestic.
· There were about 230 reported murders in the U.S. annually.


Most people would prefer to live in the present day. Life in 1900 was extremely hard. This point was vividly illustrated in a PBS television series entitled The 1900 House. PBS describes the series as:

a new four-part documentary that "transports" an actual modern family from 1999 back to life in 1900. Public television viewers will have the chance to vicariously experience a time-travel journey back to everyday, middle-class life in Victorian London. The adventurous Bowler Family spent three months living in a townhouse carefully restored to reproduce the ambiance and amenities of the turn of the century. As a result, THE 1900 HOUSE explores the radical changes in family and domestic life that have occurred over the past 100 years through scientific and technological innovations.[2]

Economic growth generally creates an improved standard of living over time. Most people have more material possessions than their grandparents (or even their parents) had at their same age.




Sources of Economic Growth

One way for an economy to produce more output is to obtain more resources. Even with the same resources, however, it is possible for an economy to produce more output if workers become more productive. Productivity is the quantity of goods and services produced from a typical hour of a worker’s labor. Improvements in productivity allow an economy to produce more output and thus earn more income. This increased income represents an improved standard of living. Thus an increased standard of living usually depends on increasing a country’s productivity. Thus, improved productivity is the key to economic growth.

Increases in productivity fall into three categories:

1. Investment in physical capital – “Build more machines.”
2. Investment in human capital (education and skills) – “Make workers more productive.”
3. Investment in technology – “Build more productive machines.”


Investment in physical capital

Physical capital is anything man-made that makes labor more productive. Fiscal policies to increase investment in physical capital include direct government spending on infrastructure (e.g., roads, bridges, hospitals) and tax incentives to encourage private businesses to invest (e.g., new factories or machinery). Monetary policies that achieve low interest rates also encourage businesses to invest more in physical capital by decreasing its opportunity cost.


Investment in human capital

Human capital is the education, training, and skills people acquire that makes them more productive. Fiscal policies to increase investment in human capital include direct government spending on education and job training or tax incentives to encourage education and skills training. Monetary polices that keep interest rates low may also make it easier for people to acquire more education by lowering the cost of loans to pay tuition and other expenses.


Investment in technology

Technological innovations usually create increases in productivity. For example, scientists have developed agricultural crops that are more disease-resistant and have thus increased the yields from our farmland. Fiscal policies that promote investment in technology include direct government spending on research and development [e.g., National Science Foundation (NSF) grants] and tax incentives to encourage private businesses to invest in discovering new technologies. Monetary policies that keep interest rates low also encourage businesses to invest in technology by decreasing the cost of borrowing money.


A Closer Look at the Measurement of Economic Growth

The Composition of GDP

Gross domestic product can be broken down into several categories based on the type of goods and services produced. For example, the output of the country can be divided into durable goods, non-durable goods, services, and structures.

GDP = durable goods + non-durable goods + services + structures

Durable goods are products that are used over a long period of time. Refrigerators, washing machines, and cars are examples of durable goods. Non-durable goods are products that are consumed over a short period of time. Food and clothing are examples of non-durable goods. Services are products that typically do not create a tangible commodity. Banking services, haircuts, and entertainment are examples of services. Structures are buildings. Over half of U.S. GDP is services.

Durable goods orders are sometimes used as an indicator of the health of the U.S. economy.

Gross domestic product also can be broken down into several categories based on the purchaser of the newly produced goods and services. This alternative way to divide GDP involves separating it into consumption spending, investment spending, government purchases, exports, and imports.

An equation that illustrates this relationship is:

GDP = C + I + G + X - M
where:
C = consumption spending
I = investment spending
G = government purchases
X = exports
M = imports

Consumption is the purchase of final goods and services by households. Investment is the purchase of capital equipment, inventories, and structures. Most of this is done by businesses. The purchase of a home by a household, however, is also considered to be investment.
Government purchases are payments made in exchange for currently produced goods and services. This includes salaries of current government workers, vehicles purchased for government use, and supplies for government offices. Government purchases do not include transfer payments. A transfer payment is a government payment not made in exchange for a good or service. Social Security benefits, retirement checks paid to former government employees, and welfare benefits are examples of transfer payments. Exports are goods and services sold by domestic producers to foreign purchasers. For example, a jet fighter manufactured in the U.S. and purchased by the government of Egypt is an exported good. Imports are goods and services sold by foreign producers to domestic purchasers. The domestic purchasers might by households, businesses, or the government. For example, a Mercedes-Benz automobile manufactured in Germany and sold to an American consumer is an imported good.

The difference between exports and imports (X – M) is referred to as net exports (NE). Thus an alternative way to write the equation for gross domestic product is:

GDP = C + I + G + NE


Gross National Product

Another measure of a country’s output is gross national product. Gross national product (GNP) is the total value of all final goods and services produced in a given period (usually a year) by businesses owned by citizens of a country.

Gross means total. Product means output. Both GDP and GNP measure the total output produced by a country. GDP measures the final output produced in a country, regardless of ownership of the businesses. Thus, the key to GDP is location, not ownership. The key to GNP is ownership, not location. For example, if a Japanese company operates in the United States, the value of its output in the U.S. is included in U.S. GDP and Japanese GNP. Yet, the output of a Japanese company’s operations in the U.S. would not be included in U.S. GNP or Japan’s GDP.

The U.S. Commerce Department used GNP to measure U.S. output from 1900 to 1991. Since then, GDP has been used. Most countries in the world use GDP to measure their output. A few countries in the world still use GNP, however.

Real Gross Domestic Product

Although GDP is the most common measure of a country’s output, it may not be the best measure. Real GDP measures the value of the total final output of a country's economy without the influence of inflation. Inflation is a general increase in the prices in an economy. Real GDP measures the output of a country’s final goods and services in constant dollars (i.e., using prices in a single base year to measure output in different years). (For example, it might measure output in 2003, 2004, and 2005 using prices from 2000.) When calculating real GDP, the base year is the year from which prices are used to calculate the value of output.

Nominal GDP in year x = prices in year x outputs in year x
Real GDP in year x = prices in the base year outputs in year x

A Simple Example of an Economy with One Product

To illustrate the difference between nominal GDP and real GDP, consider a simple economy that only produces one product, widgets. Suppose this economy produces 100 widgets in 2003 and the price of widgets in 2003 is $1. Thus, the economy’s nominal GDP in 2003 is $100. Suppose the economy produces 100 widgets in 2004, but the price of widgets in 2004 is $2. Nominal GDP in 2004 is $200. If one uses nominal GDP to measure output, one might think this economy produced more output in 2004 than 2003 (since nominal GDP in 2004 is larger than nominal GDP in 2003). Yet output in this economy was the same in 2003 and 2004. The reason nominal GDP is larger in 2004 than in 2003 is because the price of widgets increased. Real GDP attempts to measure the real change in output without the influence of inflation. In this simple example, let 2003 be the base year. Thus real GDP in 2003 is calculated by multiplying the quantity of output in 2003 by the price of widgets in 2003 (since 2003 is the base year).

Real GDP in 2003 = $1 100 = $100

Real GDP in 2004 is calculated by multiplying the quantity of output in 2004 by the price of widgets in 2003 (since 2003 is the base year).

Real GDP in 2004 = $1 100 = $100

Since real GDP in 2003 and 2004 is the same, it indicates real output did not change. Thus changes in real GDP are a better measure of changes in real output than changes in nominal GDP.
Per capita real GDP measures the real value of a country’s output per person. It is calculated by dividing real GDP by the country’s population.
Many economists think the single best measure of a country's standard of living is per capita real GDP because it measures the income of an average person in a country without the influence of inflation.

Limitations of Using GDP as a Measure of Quality of Life

Gross domestic product and its related concepts (such as real GDP, per capita GDP, and per capita real GDP) are incomplete measures of a country’s standard of living. There are many productive activities that are not included in GDP because it only measures output produced and sold in legal markets. It does not include productive activity that does not have a market transaction.

Although GDP and its related concepts are useful in measuring a country’s output, income, and standard of living, they are not perfect measures of quality of life. Quality of life refers to the amount of fulfillment people have in life. There are also many aspects of the quality of life that are not considered in the calculation of output, such as leisure, the environment, and the quality of people’s health.

Criticisms of GDP data as measurements of quality of life include:

1. GDP only measures the output produced and sold in legal markets.
It does not include productive activity that does not have a market transaction.

Activities INCLUDED In Gross Domestic Product (GDP)
Activities NOT INCLUDED In Gross Domestic Product (GDP)
Hiring a lawn service to mow your yard.
Mowing the lawn yourself.
Taking your children to a day-care center.
Caring for your children yourself.
Hiring a plumber to fix a water leak at your house.
Fixing the water leak yourself.
Prostitution in Nevada (where it is legal).
Prostitution in the rest of the U.S. (where it is illegal).

2. GDP does not consider how output contributes to the quality of people’s lives.
It simply measures how much output a country produces. For example, people who live in urban areas spend a portion of their incomes on products to help them cope with urban problems. For example, urban residents buy more alarm systems for their homes and cars, self-defense classes, and stress medication. Some economists refer to these products as "bads" rather than "goods".

Suppose you live in a rural area. If you move into the city, you can change to a job that pays you $1000 more per year. Suppose urban life causes you to spend $1000 per year on things you did not need living in a rural environment. Even though your income is larger, has moving to the city improved the quality of your life?
3. GDP does not measure the quality of the environment.
A country might be able to increase its output (and GDP) if it eases pollution regulations. Yet, having higher per capita real GDP might not mean people have a better quality of life if the air, water, and other resources are more polluted.

4. GDP does not consider how leisure contributes to the quality of life.
A country could increase its output (and GDP) if its people worked 12 hours per day, seven days per week. However, having more products might not mean people are better off if they have no leisure time to enjoy it.
Virtually all data have limitations. Even though GDP data are not perfect measures of the quality of life in a country, they are still useful in measuring the standard of living.






IMPORTANT DEFINITIONS FROM CHAPTER 6

Macroeconomics studies issues of resource allocation that affect the entire economy, such as economic growth, unemployment, and inflation.

Macroeconomic policy is the government’s attempts to influence the whole economy.

Macroeconomic policy goals are the objectives the government tries to achieve when it influences the whole economy: economic growth, low unemployment, and low inflation.

Macroeconomic policy tools are the monetary and fiscal policies that can be used to influence the entire economy.

Monetary policy is the Federal Reserve System’s use of the money supply, interest rates, and the banking system to influence the economy. Monetary policy is the most commonly used tool of macroeconomic policy.

Fiscal policy is taxing and spending by the government.

Standard of living is the value of the goods and services available to an individual, group, or country.

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. Since income is equal to the value of output, economic growth also measures how people’s incomes are changing.

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.

Intermediate products are goods and services that are inputs in the production of other goods and services.

Nominal GDP is the total value of all final goods and services produced in a country in a period of time (usually a year). It is another name for gross domestic product (GDP).

Money GDP is the total value of all final goods and services produced in a country in a period of time (usually a year). It is another name for gross domestic product (GDP).

Per capita GDP measures the nominal value of a country’s output per person. It is calculated by dividing nominal GDP by the country’s population. It is a measure of the average income of a person in the country.
Productivity is the quantity of goods and services produced from a typical hour of a worker’s labor.

Physical capital is anything man-made that makes labor more productive.

Human capital is the education, training, and skills people acquire that makes them more productive.

Durable goods are products that are used over a long period of time, such as refrigerators, washing machines, and cars.

Non-durable goods are products that are consumed over a short period of time, such as food and clothing.

Services are products, such as banking services, haircuts, and entertainment, that typically do not create a tangible commodity. Over half of U.S. gross domestic product is services.

Structures are buildings.

Consumption is the purchase of final goods and services by households.

Investment is the purchase of capital equipment, inventories, and structures. Most of this is done by businesses. The purchase of a home by a household, however, is also considered to be investment.

Government purchases are government payments made in exchange for currently produced goods and services. This includes salaries of current government workers, vehicles purchased for government use, and supplies for government offices. Government purchases do not include transfer payments.

A transfer payment is a government payment not made in exchange for a good or service. Examples of transfer payments are Social Security benefits, government pensions, and welfare payments.

An export is a good or service sold by a domestic producer to a foreign purchaser.

An import is a good or service sold by a foreign producer to a domestic purchaser.

· Net exports (NE) are the difference between the value of a country’s exports (X) and imports (M).

Gross national product (GNP) is the total value of all final goods and services produced in a given period of time (usually a year) by businesses owned by citizens of a country.

Real GDP measures the value of the total final output of a country's economy without the influence of inflation.

Inflation is a general increase in the prices in an economy.

Real GDP measures the output of a country’s final goods and services in constant dollars.

The base year is the year from which prices are used to calculate the value of output.

Per capita real GDP measures the real value of a country’s output per person. It is calculated by dividing real GDP by the country’s population.

· Quality of life is to the amount of fulfillment a person has in life.

QUESTIONS FOR FURTHER STUDY

1. Describe the life of a typical American around 1800. How much have the standard of living and quality of life changed over the last 200 years?

2. Are current politicians promoting policies that will lead to increased economic growth? Provide evidence to support your answer. How would you change current public policy to achieve a higher standard of living or quality of life?





ENDNOTES

[1] “When My Grandmother Was a Child,” by Leigh W. Rutledge.

[2] www.pbs.org