Monday
23 August
1330-1500 (IS)
"Wealth is not without its advantages"
John Kenneth Galbraith
Overview
Most societies share a number of economic goals. These include: full employment, price stability, economic security (e.g., for those who are old, ill or unemployed) and economic efficiency (that is, getting the most from the available scarce resources). The highest profile goal is economic growth. Economic growth is the production of more and better goods and services and a higher standard of living.
The current standard measure of growth is the rate of change in Gross Domestic Product (GDP). GDP is the final market value of all of the goods and services produced within the boundaries of a country (such as the United States). Growth can occur as the result of a variety of reasons. For example, growth takes place when the existing labor force is used more efficiently as the unemployment rate is reduced, natural resource supplies expand (e.g., oil is discovered), and resource quality is improved (e.g., workers have more education). Growth expands the possibilities for increased production.
Most importantly, increased productivity - producing more goods and services with approximately the same amount of basic resources (natural, human or investment) - is one of the most important elements of growth. Increased productivity is the result of such things as improved management, technological innovation and better-trained or educated labor.
An obvious reason for growth is increased consumption: the amount of goods and services bought by people and governments. Consumption is, of course, limited by income. It is also limited by the amount of income that is placed in savings, rather than consumed.
Savings, too, have an important role in growth. Savings are ultimately used to finance investment: building new or improved production capacity.
Growth of GDP is not always an indicator that the standard of living is improving for the people of a given country. There are a number of things that can distort the meaning of GDP growth. For example, population growth can actually mean a lower amount of GDP is available for each person (i.e., per capita GDP) even if the total amount is increasing. Inflation (the increase in the general level of prices in an economy) can distort the "real" growth that is taking place in GDP. Inequitable distribution of income also can impact on the social outcome of economic growth.
Several alternative means to measuring economic growth have been developed. One of these is called Purchasing Power Parity (PPP). PPP seeks to overcome the differences between foreign exchange rates and the buying power of currency. The Economist has developed an excellent illustration of PPP, known as the Big Mac Index, in which the converted dollar price of Ronald McDonald's favorite burger is compared in key markets around the world.
Objectives
- Understand the role and importance of growth in a market economy.
- Explain how growth can occur.
- Explore other measures of economic growth.
Analyze what GDP means - and what it does not mean.
Issues for consideration
- What are the social ills that can be hidden within a growing GDP?
- What have been the key elements in U.S. economic growth in the 1990s?
- What are some of the ways in which economic productivity can be increased?
- What is the difference between GDP and GNP? Is this difference very significant?
- What are the things that might retard economic growth?
- Why is it important to consider different measurements of growth?
Required readings (90 pages)
* Baumol and Blinder: Chapters 22 (19 pgs.) and 24 (23 pgs.)
* Heilbroner and Thurow: Chapters 3 (11 pgs.), 5 (10 pgs.), 6 (9 pgs.) and 7 (11 pgs.)
* Bradford De Long, "How Fast Is Modern Economic Growth?" Federal Reserve Weekly Letter, Oct. 6, 1998 (5 pgs.)
* "Big Mac Currencies," The Economist, April 2, 1999 [2 pgs.]
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