GDP part 2

Terminology

  • Business Cycle (Short Run)

  • Growth Trend (Long Run)

  • Potential GDP: The maximum output an economy can produce without triggering inflation when using resources efficiently.

  • Actual GDP: The total amount of final goods and services produced in a certain period (typically a quarter or year).

  • GDP Gap: The difference between Actual GDP and Potential GDP, which can indicate economic health.

    • Recessionary GDP Gap: Occurs when Potential GDP is greater than Actual GDP.

    • Inflationary GDP Gap: Occurs when Actual GDP is greater than Potential GDP.

  • GDP Gap Calculation:
    GDP ext{ Gap} = Actual ext{ GDP} - Potential ext{ GDP}

Concepts of Short Run and Long Run

Short Run Business Cycle and Actual GDP

  • Actual GDP can be measured by:

    • Production Approach: Calculating the value of produced goods and services.

    • Expenditure Approach: Summing total expenditure in an economy, expressed as:
      GDP = C + I + G + X - M

    • Where:

    • C = Consumption

    • I = Investment

    • G = Government Spending

    • X = Exports

    • M = Imports

Long Run Growth Trend and Potential GDP

  • Potential GDP relies on:

    • Resources: Labor, capital, and natural resources that are available in the economy.

    • Technology: The efficiency and improvement in production processes.

    • Institutions: The structures and rules within society that influence economic activities.

GDP Gap Examples

  • Example of GDP Gap:

    • GDP ext{ Gap} = 4,409.518 - 4,171.865 = 237.65 (indicates an inflationary gap)

    • GDP ext{ Gap} = 15,216.647 - 16,094.742 = -878.09 (indicates a recessionary gap)

GDP per Capita Over Time

  • Historical Growth Trends:

    • GDP per capita data adjusted for living costs and inflation, measured in constant 2011 international dollars.

  • Data Source: The Maddison Project Database (2020).

  • GDP per capita data across different regions from 1820 to 2018:

    • Regions include Western Offshoots (USA, Canada, Australia, New Zealand), Western Europe, Eastern Europe, Middle East, East Asia, Latin America, South and South-East Asia, and Sub-Saharan Africa.

  • Graph: Illustrates relative change in GDP per capita over years with mentioned breaks for clarity (data points from 1820, 1850, 1900, 1950, 2018).

Determinants of Potential GDP

  • Factors Influencing Potential GDP:

    • Resources (Labor, Capital, Natural Resources, Entrepreneurial skills, Time): These can explain growth rates but are not exhaustive as growth limitations arise from finite resources.

Long Run Economic Growth Factors

  • Technological Change:

    • Involves the development of new processes and inventions, which enable higher GDP levels with existing resources.

    • Importance of Innovation: Ongoing economic growth relies on consistent technological advancement and the generation of new knowledge.

  • Institutional Factors:

    • Include rules, laws, and regulations that govern societal organization.

    • Institutions impact economic incentives, leading to varied prosperity across different societies.

    • Notable institutions that support long-run growth:

      • Private Property Rights: Allowing individuals to hold property securely.

      • Strong and Impartial Legal Systems: Ensuring fair enforcement of laws.

      • Contract Enforcement: Robust environments for contracts enhance trust in economic transactions.

      • Well-Developed Financial Markets: Facilitate investments and economic activity.