chapter 1 alleviating human misery: the role of economic reasoning copyright © 2010 by the...
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Chapter 1Alleviating Human Misery: The Role of Economic Reasoning
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Goods & Services
• Food, Clothing, Shelter, Transportation
• Health Care, Education
• Truth, Justice, and the American Way
1-2
Resources
• Labor
• Capital
• Technology
1-3
Scarcity
Scarcity
Economic Problem
Our InsatiableWants
Our LimitedMeans
1-4
The Capacity of the Economy to Produce
Gross Domestic Producttotal market value of all final goods and
services produced within an economy during a specific time period
1-5
Production Possibilities
Food Education
0 100
40 86
50 80
60 72
90 40
100 0
20
20
40
40
50
60
90
80 86 100 Education (millions of student years)
Food (millions of tons)
72
A
D
C
C’
E
F
Z
100
B
1-6
General and Specific Economic Growth
100
100
Education (millions of student years)
Food (millions of tons)
1-7
The Opportunity Cost Principle
• There is no such thing as a free lunch
• Increasing opportunity cost• The Optimal Combination of
Goods and Services• Marginal Social Cost
(MSC)• Marginal Social Benefit
(MSB)• Cost-Benefit Analysis
20
20
40
40
50
60
90
72 80 86 100
100
Education (millions of student years)
Food (millions of tons)
A
B
D
C
C’
E
F
Z
1-8
Adjusting GDP for Inflation
Year Production of Bread (Loaves)
Price of Bread
GDP in Current Dollars(1)x(2)
Price IndexPercentage and Decimal Forms
Real GDP (2009 Dollars)
(3)/(4)
2009 1,000 $1.00 $1,000 ($1/$1) x 100 = 100, or 1.00
$1,000
2010 1,000 2.00 2,000 ($2/$1) x 100 = 200, or 2.00
$1,000
Two good example
1-9
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Adjusting GDP
for Population
YearGDP, Current Dollars
(Billions)Price Index
GDP, Real 2000 dollars
(Billions)Population (Millions)
GDP, Real per Capita
(2000 Dollars)
1980 2,789.5 54.043 5161.6 227.7 22665.97
1981 3,128.4 59.119 5291.7 230.0 23010.79
1982 3,255.0 62.726 5189.2 232.2 22349.28
1983 3,536.7 65.207 5423.8 234.3 23148.28
1984 3,933.2 67.655 5813.6 236.3 24597.68
1985 4,220.3 69.713 6053.8 238.5 25386.51
1986 4,462.8 71.250 6263.6 240.7 26027.65
1987 4,739.5 73.196 6475.1 242.8 26667.93
1988 5,103.8 75.694 6742.7 245.0 27518.76
1989 5,484.4 78.556 6981.5 247.3 28226.17
1990 5,803.1 81.590 7112.5 250.1 28435.04
1991 5,995.9 84.444 7100.4 253.5 28010.42
1992 6,337.7 86.385 7336.6 256.9 28558.76
1993 6,657.4 88.381 7532.6 260.3 28943.21
1994 7,072.2 90.259 7835.5 263.4 29743.28
1995 7,397.7 92.106 8031.7 266.6 30131.36
1996 7,816.9 93.852 8329.0 269.7 30886.11
1997 8,304.3 95.414 8703.4 272.9 31891.01
1998 8,747.0 96.472 9066.9 276.1 32837.33
1999 9,268.4 97.868 9470.3 279.3 33907.90
2000 9,817.0 100.000 9817.0 282.4 34762.38
2001 10,128.0 102.399 9890.7 285.3 34663.54
2002 10,469.6 104.187 10048.9 288.2 34865.71
2003 10,960.8 106.404 10301.1 291.1 35388.20
2004 11,685.4 109.46 10,675.8 293.9 36,299.89
2005 12,421.9 113.34 10,959.9 296.6 36,913.10
2006 13,178.4 116.67 11,298.4 299.8 37,674.45
2007 13,807.5 119.82 11,523.5 301.6 38,207.89
2008 14,264.6 122.46 11,648.4 304.5 38,224.19
Recession
1-10
CountryPopulation Estimate
2006 (Millions)Annual Rate of
Population IncreasePopulation Density per
Square Kilometer (2006)
Per Capita Real GDP
(2006)Percentage Annual Growth Rate of Real GDP (2006)
Life Expectancy at Birth, Latest Available Dates
Lesser-developed
Chile 16 0.8 22 5,912 4.3 78
China 1,311 0.6 140 1,610 11.6 71
Columbia 46 1.4 45 2,317 6.8 73
Egypt 74 1.8 75 1,615 6.8 71
El Salvador 7 1.4 326 2,262 4.2 72
Ethiopia 77 2.6 77 161 10.9 52
India 1,109 1.4 373 637 9.7 64
Indonesia 223 1.1 123 983 5.5 68
Kenya 37 2.6 64 439 6.1 53
Mexico 104 1.1 54 6,389 4.8 74
Nigeria 144 2.4 159 454 6.2 47
Peru 28 1.1 22 2,552 7.6 71
Philippines 86 2.0 289 1,154 5.4 71
South Africa 47 1.0 39 3,562 5.0 51
Thailand 63 0.2 124 2,605 5.1 70
Venezuela 27 1.7 31 5,426 10.3 74
Zambia 12 1.9 16 321 6.2 42
Average 1.5 6.6 65
Developed
Canada 32 1.0 3.6 25,894 2.8 80
France 61 0.8 111 23,992 2.0 81
Germany 82 -0.1 236 24,474 2.8 79
Italy 59 0.6 200 19,630 1.9 81
Japan 128 0.6 350 38,824 2.2 82
Singapore 4 3.1 6,388 28,833 9.4 80
Sweden 9 0.6 22 31,189 4.2 81
Switzerland 7 0.6 187 35,794 3.2 82
United Kingdom 61 0.6 250 27,611 2.8 79
United States 299 1.0 33 37,674 2.9 78
Average 0.08 3.4 80
1-11
Adjusting GDP for
Distribution
Country (Year of Study)
Poorest 20 Percent
Second 20 Percent
Third 20 Percent
Fourth 20 Percent
Richest 20 Percent
Lesser-developed
Chile (2003) 3.8% 7.3% 11.1% 17.8% 60.0%
China (2004) 4.2 8.5 13.7 21.7 51.9
Columbia (2004) 2.9 6.9 11.0 18.3 60.9
Egypt (2004) 8.9 12..7 16.0 20.8 41.5
El Salvador (2002) 2.7 7.5 12.8 21.2 55.9
Ethiopia (2000) 9.1 13.2 16.8 21.5 39.4
India (2004) 8.1 11.3 14.9 20.4 45.3
Indonesia (2005) 7.1 10.7 14.1 20.5 42.5
Kenya (1997) 6.0 9.8 14.3 20.8 49.1
Mexico (2004) 4.3 8.3 12.6 19.7 55.3
Nigeria (2003) 5.0 9.6 14.5 21.7 49.2
Peru (2002) 3.7 7.7 12.2 19.7 56.7
Philippines (2003) 5.4 9.1 13.6 21.3 50.6
South Africa (2000) 3.5 6.3 10.0 18.0 62.2
Thailand (2002) 6.3 9.7 14.0 20.8 49.0
Zambia (2004) 3.6 7.9 12.6 20.8 55.1
Average 5.3 9.2 13.4 20.3 51.8
Developed
Canada (2000) 7.2 12.7 17.2 23 39.9
France (1995) 7.2 12.6 17.2 22.8 40.2
Germany (2000) 8.5 13.7 17.9 23 36.8
Italy (2000) 6.5 12 16.7 22.8 42.0
Japan (1993) 10.6 14.2 17.6 22 35.7
Singapore (1998) 5.0 9.4 14.6 22.0 49.0
Sweden (2000) 9.2 14 17.6 22.7 36.6
Switzerland (2000) 7.6 12.2 16.3 22.6 41.3
United Kingdom (1999) 6.1 11.4 16.0 22.5 44.0
United States (2000) 5.4 10.7 15.7 22.4 45.8
Average 7.3 12.3 16.7 22.5 41.1
1-12
Adjusting GDP for Distribution
Annual Income
Family A
Annual Income
Family B
Annual Income
Family C
Annual Income
Family D
Annual Income
Family E
Annual Income
of all Families
Average Annual
Family Income
Alpha $2,000 $2,000 $2,000 $2,000 $2,000 $10,000 $2,000
Omega 0 0 0 0 10,000 10,000 2,000
1-13
Causes of Poverty and Requisites of Economic Growth
• Quality of the Labor Force
• Stock of Capital and Capital Accumulation
• Technology
• Efficiency
• Population
1-14
Can Governments Help?• Governments of LDCs
Private property rights Universal education Capital accumulation process Social infrastructure Population control
• Governments of DCs Loans and grants Technical assistance World Bank
1-15
Computing Current-dollar GDP
Year
Bread Fruit Punch Current-dollar
GDPPb Qb PbQb Pf Qf PfQf
2009 $1.00 100 $100 $2.00 75 $150 $250
(Pb * Qb) + (Pf * Qf) = Current-dollar GDP
1-16
Adjusting GDP for Inflation
Year
Bread Fruit Punch Current-dollar
GDPPb Qb PbQb Pf Qf PfQf
2009 $1.00 100 $100 $2.00 75 $150 $250
2010 $1.50 200 $300 $4.00 150 $600 $900
1-17
Year Pb Qb PbQb Pf Qf PfQfReal GDP
2009 $1.00 100 $100 $2.00 75 $150 $250
2010 $1.00 200 $200 $2.00 150 $300 $600
Adjusting GDP for Inflation
BaseYear
Year
Bread Fruit Punch Current-dollar
GDPPb Qb PbQb Pf Qf PfQf
2009 $1.00 100 $100 $2.00 75 $150 $250
2010 $1.50 200 $300 $4.00 150 $600 $900
1-18
GDP Deflator
GDP Deflatort = Current-dollar GDPt * 100
Real GDPt
1-19
Converting Current-dollar GDP to Real GDP
Real GDPt = Current-dollar GDPt * 100
GDP Deflatort
1-20