Growth

       Growth

 Economic growth is the change in a country’s output from one year to the next and the growth rate is the percent change in the country’s output.

As usually the growth is a positive number of a country’s output increases from one year to the next. But occasionally output declines.  In that case, the country has experience negative growth. Because output and income are equal and because income is directly related on a country’s welfare , growth – that is increase in output – is generally looked upon as desirable .

Problems in Measuring Growth

Gross domestic product is measure of output that can be used as a rough measure of a country’s growth from the one year to the next. With GDP per capita income we can see if it is a good indicator of welfare. 

That’s the table of comparing the incomes data for the last four decades of a family in U.S.

Real versus Nominal Income

When we are talking about these two incomes we make a common mistake, because the money we earn is useful only when we can buy things with them. If we are trying to think about that the incomes are rises but the things you are buying also rise, then your income (your real income) might not rise more than the prices of the goods (nominal income).When macroeconomists talk about income, they always mean real income. And, since income equals output, when macroeconomists talk about output, they always mean real output.

Measuring Real Income : Real GDP

If we suppose now that the price level never changed. So the nominal income will be equal to the real income. The price level always changes from year to year  . If we want to measure the constant price , we have to calculate the value that output would have non-changed price level during the common year . Then , if there was an increase from year to year in the value of output calculated at constant prices , we can conclude that the value of output rose in real terms .

This method is exactly the way the government calculates the real GDP ., which is the macroeconomist’s measure of real income . Each year , the real GDP is calculated by valuing that year’s output at the prices that prevailed in some earlier year , called the base year , which does not change .By choosing a base year and evaluating each year’s prices , we can get a meaningful measure of how real income changes overtime . When it’s spoken about real GDP by economists , it’s mean GDP as measured in the prices of an agreed-upon base year . We say that it is measured in base –year dollars , which is equivalent to measuring them in real goods purchased in that year .

Measuring Real Growth

Economic growth (or just growth ) is a rise in real output  .The percent change I aggregative real output from one year to the next is called the annual aggregate growth rate .

The percentage change in real output per capita is annual per capita growth rate . Per capita growth is a rough measure of the rate at which a county’s living standards are improving .

Although most countries tend to grow each year , how rapidly they grow varies substantially .In some years ,real output falls below the output of the previous year . That is , real output decreases , so the county’s growth rate is negative . Although real GDP tends to rise over time , there are occasional declines – such as period is commonly called a recession . Economic event is any change that affects the economy , for example wars and other economical factors .

Comparing Income and Time

Over long periods of time , changes in measured income do not accurately reflect changes in economic welfare . The average middle-class American in the twentieth century lives a far more luxurious life then any European monarch did a few hundred years ago , despite having a much smaller measured income .It is not improbable that Henry VIII would have traded half his kingdom for the luxury of hot and cold running water .  
 

THE PRICE LEVEL AND INFLATION

Price level is the average price of goods and services in an economy .When the price level rises , we say there has been an inflation ; when it falls , we say there has been a deflation , and if it remains the same , we say that prices have bben stable .

Measuring the Price Level and Inflation

The U.S. government measures the price level and inflation on several ways .The measure most frequently cited by the media is the consumer price index  (  CPI ) .

The government starts with a specific bundle of goods and services purchased by households or consumers and defines this year’s CPI to be the cost of that fixed bundle in current dollars . If the dollar cost rises for 10 % over the course of a year , then CPI measure of the inflation rate is 10 % per year .

The government also reports a similar measure for good purchased primarily by producers . This measure is called the producer price index ( PPI ) .There are some problems inherent  in this measurement process. One problem is that each of the bundles represents only subset of all goods and services produced by entire economy , and thus the price indexes might not accurately reflect all changes in the price level .

Consumers make some hope improvements themselves , for example , and so buy goods are classified as producer items . In addition , the quantities and kinds of goods bought by consumers and producers change over time ; by fixing the bundle and the quantities once and for all , the government might be measuring the average price of things that are no longer representative .

Because the computation of the CPI entail fixing a bundle of goods , it cannot account for price changes in newly invented goods . The bungle does undergo periodic revision ,but that revision tends to lag changes in the actual bundle bought by consumers .Because the prices of new goods , like computers , tend to start high and come down rapidly as output of expands , The CPI is believed to overstate inflation rates .

Also , even existing good change I quality over time ; we see this especially in automobiles . When goods improve in quality , CPI price increases tent to overstate the inflation rate , recording as a higher price what is actually the price for ald , unimproved good plus a premium for the higher quality .  

The Implicit GDP Deflator

Economists tend to prefer measures of the inflation rate that are broader than CPI . The broadcast such measure is the implicit GDP deflator . The GPD deflator is an average of the prices of all goods in economy , weighted by quantities of those goods that are actually purchased . The computation of the price deflator is simple . It is equal to nominal GDP ( expressed in dollars ) as percentage of real GDP ( expressed in the dollars of the base year ) . That is , for any given year .

Implicit GDP price deflator = 100 * ( Nominal GDP / Real GDP ) . 

Summary

Aggregative demand is the total of all the incomes that all the people in an economy earn . Per capita income is aggregate income divided by the size of the population . Income is generally accepted as an indicator of welfare , but not a perfect one . Aggregate income can be difficult to measure accurately because some income goes to unreported and some is consumed within the household instead of traded in the marketplace . The total of all gods and services produced is called output . Output includes only final goods , not intermediate goods. One measure of output is gross domestic product (GDP ) .Because income is created by the sale of output aggregate income must equal aggregate output . Therefore , economists use GDP as a measure of income as well as output . Aggregate expenditure is equal to the total amount that all the people I the economy spend . It includes consumption expenditure , investment expenditure , and govorment purchases ( not including transfers ) .

Since everything a person spends created income for someone else , aggregate expenditure must equal aggregate income . We express this fact with the equation income = expenditure . Because income is also equal to output ,we have

Income = Output = Expenditure

In an open economy this equation must be modified slightly by adding net exports to expenditure. Economic growth is the change in the country’s output from one year to the next . Equivalently , growth is the change in a country’s income from one year to the next . However , it is important to distinguish real growth from nominal growth . Economists are primarily interested in real growth .To measure real growth , we measure changes in real GDP ( real income ) , that is , GDP measured in constant prices . To compute real GDP for a period , we multiply the quantity of each item produced in that period by its price as given in the dollars of chosen base period ;then we add the results for all items . The price level is the average price of goods and services . It is measured by the consumer price index ( CPI ) , which is the price in current dollars of fixed basket of goods . An alternative measure of the price level is the implicit GDP deflator  , which is the ratio of nominal to real GDP for any period . Inflation is the rate of change of the price level and is measured by the percent change in be either the CPI or implicit GDP deflator .

Bibliography :

Landsburg S. , Feinstone L.,  Macroeconomics , Chapter 2 , pages 26-36 .