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

Microeconomics: Shift in Supply

We recently talked about the factors that cause a shift in the demand. It is now time to discuss the factors that shift the supply curve which cause the equilibrium price and demand to change. Determinants of Supply: changes in supply are caused by changes in the price of inputs, the number of firms in the market, technology, changes in the price of related goods and services, and changes in expected prices. An increase (decrease) in the price of an input results in less (more) supply as per unit production costs rise (fall). More competition increases supply, and less competition leads to less supply. If a new firm enters the market for good X, then the supply of good X increases. Improvement in technology can result in an increase in the ability of producers to supply their products. For example, the invention of the printing press increased the supply of books. An increase (decrease) in the price of a related good leads to an increase (decrease) in the supply of the other...
Post a Comment
Read more

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

Microeconomics: Firms and cost in the short run

In Economics, the term short run refers to a time period where at least one variable of interest does not change . In our case, the short run for a firm is when at least one input  (labor, land, capital) stays fixed. Usually land and capital are considered fixed in the short run.  If an input is fixed during a period time, no matter how much the total product a firm produces, its cost stays the same. This cost is commonly known as fixed cost (FC). Examples of fixed costs: rent, property taxes, loan payments. Labor is often considered to be a part of the  variable cost (VC) . Variable cost can be defined as the cost a firm has control over during the short run. Unlike fixed cost, variable cost increases (decreases) as a firm's total product increases (decreases). Examples of variable costs include: utility bills, wages, raw materials A firm's total cost (TC) is the sum of its variable and fixed costs. As you can see, the fixed cost...
Post a Comment
Read more