Skip to main content

Macroeconomics: per capita GDP and economic growth

Per Capita GDP:

  • Real GDP adjusts for prices, per capita gdp adjusts for population size.
  • Countries with large populations have large GDP's  since their supply of labor and human capital allows them to produce more output than countries with smaller populations.
  • The real average income is given by the following formula:
The following table shows the top five largest economies, and the top five per capita GDP:
Countries Nominal GDP ($ million) Countries p.c GDP
U.S.A$21,439,453Luxembourg$113,196
China$14,140,163Switzerland$83,716
Japan$5,154,475Norway$77,975
Germany$3,863,344Ireland$77,771
India$2,935,570Qatar$68,687

  • Notice that the top five countries with the largest economies are not in the top five countries with largest per capita GDP's.
  • Per Capita GDP provides a much better measure (though still imperfect) of the standard of living in a country than GDP. Furthermore, real per capita GDP provides a way to estimate how productive, on average, the inhabitants of a country are.
  • One of the main drawbacks of per capita GDP is that it tells us nothing about the income distribution in a country. For example a nation can have a high per capita GDP but if only a few people own most of the production, than most people earn much less than the average income.
Economic growth and recession:
  • Economic growth is defined as follows; an increase in a country's output over a period of time.
  • Recession is defined as a decline in economic activity, across the country, lasting for at least two successive quarters (i.e 6 months).
  • GDP growth rate:


  • The graph above represents the US GDP growth rate from 1961 to 2019. Notice that the year of highest growth come just after recessions. These spikes represent the periods of recovery in the business cycle.
  • Business cycle: it reflects the idea that due to short term fluctuation in the different variables that compose the economy, it (the economy) may experience periods of rapid economic expansion followed by sudden contraction. Despite these sudden changes in the short run, the economy is moving towards is long term growth rate (usually not negative).
  • When the demand of a nation's output grows more rapidly than the level of aggregate supply, output increases beyond full-employment level in the short run. This represents the phase of economic expansion. 
  • As wages and prices adjust to higher levels of demand, output will decrease. The period of economic growth is followed by an economic contraction (i.e recession).

References: 
  • Welker, Jason. AP Maroeconomics Crash Course. Research & Education Association (2014). p 75-80.

Labels:
Location: New York, NY, USA

Comments

Post a Comment

Popular posts from this blog

Macroeconomics: multiplier and crowding out effects

Multiplier effect: whenever   any of the components of AD increases, the increase in GDP will be greater than the initial increase in expenditures. The impact on GDP of a particular increase in spending depends on the proportion of the new income that is taken out of the system to the proportion that continues to circulate in the economy. The multiplier effect tells us the impact a particular change in one the components of AD will have on the total income (GDP).  Let k denote the spending multiplier, which is a function of MPC and MPS. The larger the marginal propensity to consume, the larger the spending multiplier. Notice that the larger the MPC, the greater the impact a particular change in the spending variables will have on the nation's GDP. The crowding out effect: If government spending increases without an increase in taxes, the government must borrow funds from the private sector to finance its deficit, thereby increasing the interest rate. This increase in interest ...
Post a Comment
Read more

Econometrics: Bivariate population model

Hello I'm finally back from my extended break. I thought that we should start studying Econometrics.  Let's begin by analyzing a simple bivariate regression. Assume that this equation describes the relationship between two variables X and Y. We say that Y is the dependent variable, whereas X is the independent variable. In other words, we assume that Y (the output) depends on X (the input). Epsilon is the error term, it represents other factors that affect Y. The error term must be uncorrelated with the variable X so that we do not need to include them in our regression, and thus the coefficient of X (beta) should not change, even though Epsilon also determines Y.  beta-0 is the constant term. It tells us what would be Y if X=0. beta-1 is the effect on Y if X changes by one unit. To see this, assume X=education is a continuous function, let's take the derivative of Y=wage with respect to X: Thus, if education goes up by one unit, we should expect, on average, wage to go up ...
Post a Comment
Read more

Exercise: short and long run effects of a fiscal policy

  You are in charge of the government budget for the year 2021. You are told that schools and public roads need to be updated, and you estimate an appropriate budget in order to carry out the task. Describe what will happen in the short run to the economy, and what type of inflation do we see? Describe the supply side effect from this policy, explain what happens in the long run. Assume that there is no crowding out effect. First, note that updating public infractures, assuming taxes stay the same, will require an increase in government spending, which will also have an impact on the investment and consumption level in the economy (remember the spending multiplier?). Therefore, the aggregate demand curve will shift to the right. This will cause inflation (i.e positive change in the price level) and a higher output in the short-run.  Note that if we were to assume a large crowding out effect, the short run aggregate supply curve would shift to the left (increase in production c...
Post a Comment
Read more