Part -1:
How well off are the citizens of a country? There are several ways of measuring this; the method that we will study in this chapter is a metric called "Gross Domestic Product", or GDP. Essentially GDP is a measure of how much "stuff" is made in a particular country in some time frame. If we calculate each citizen's share of the output by dividing GDP by the number of people in a country, the resultant number is called the GDP per capita. However, that is just an average-some people receive a larger share of the country's output than others.
As a bit of a sidenote, economists do consider other measures of a country's well being that are not captured by GDP. One such measure is called the Gross National Happiness, which combines such things as literacy rates, life expectancy and infant mortality into one number. There are other measures that affect how well-off citizens of a country are, but perhaps because (as we will see later in the course) GDP can be directly influenced by government policy, the focus of a country-or at least the government, financial sectors, and business leaders-is on GDP which leads to headlines like "GDP growth beats forecasts; may boost case for Fed move". By the end of this chapter you will be able to understand the first half of the headline. Why the Federal Reserve (the Fed in the article headline) would ‘make moves' based on the GDP numbers will have to wait for later in the course.
Resources for reading and viewing
Textbook, Chapter 5
Videos on Sapling
Practice exercises
1. Suppose you purchased 5 apples and 3 oranges last week. Apples cost $0.75 per apple, and oranges were $1.00 per orange. How much did you spend on fruit? (Assume the only fruit you purchased was apples and oranges).
2. This week you increased your purchases to 6 apples and 5 oranges, but the price remained the same. How much money did you spend this week on fruit? Did your increase in spending seem to ‘match' your increase in consumption?
3. Suppose this week the prices of apples and oranges doubled instead of remaining the same (as in question 2). How much money would you have spent on fruit if you still purchased 6 apples and 5 oranges? Did your increase in spending seem to ‘match' your increase in consumption?
4. How do your answers to questions 1-3 relate to the calculation of real and nominal GDP? Think about what your answers from 2+3 indicate about the importance of the price when calculating GDP. That is, if you want GDP (or your expenditures on fruit) to accurately measure the increase in output (your fruit consumption), what should you use for the prices you use to calculate GDP (your expenditures on fruit)?
5. Pick two items from your immediate surroundings (that is, don't worry about the particular object you use) and apply the definition of GDP to determine whether either or both of those items contributed to the GDP of the United States this year. You may have to make assumptions, and if so, just briefly state them.
Part -2:
Practice exercises
1. List the five factors of growth in the production function (the first equation in the purple box on page 139, or the FYI box entitled "The Production Function" towards the end of section 7-2b) and give one example illustrating an increase in each factor.
2. Briefly explain in your own words the law of diminishing returns.
3. Suppose Country A currently has a per-capita GDP of $2000, and Country B has a per-capita GDP of $1000. The per-capita GDP of Country A is growing at a rate of 5%, while the per-capita GDP of Country B is growing at 10% per year. Currently, the ratio of the per-capita GDP of Country A to that of Country B is $2000/$1000 = 2. What is this ratio after 1 year? After 2 years? After 3 years? How does this illustrate the catch-up effect?
4. Pick two items from pages 143 or later (sections 7-3c through 7-3i) and (briefly-one or two sentences) explain in your own words why that item would tend to increase per-capita GDP.