March 20, 2017

Basic Facts of Wealth

Filed under: Economics — Tags: , , , — Nicholas @ 02:00

Published on 5 Jan 2016

We know that there are rich countries, poor countries, and countries somewhere in between. Economically speaking, Japan isn’t Denmark. Denmark isn’t Madagascar, and Madagascar isn’t Argentina. These countries are all different.

But how different are they?

That question is answered through real GDP per capita—a country’s gross domestic product, divided by its population.

In previous videos, we used real GDP per capita as a quick measure for a country’s standard of living. But real GDP per capita also measures an average citizen’s command over goods and services. It can be a handy benchmark for how much an average person can buy in a year — that is, his or her purchasing power. And across different countries, purchasing power isn’t the same.

Here comes that word again: it’s different.

How different? That’s another question this video will answer.

In this section of Marginal Revolution University’s course on Principles of Macroeconomics, you’ll find out just how staggering the economic differences are for three countries — the Central African Republic, Mexico, and the United States.

You’ll see why variations in real GDP per capita can be 10 times, 50 times, or sometimes a hundred times as different between one country and another. You’ll also learn why the countries we traditionally lump together as rich, or poor, might sometimes be in leagues all their own.

The whole point of this? We can learn a lot about a country’s wealth and standard of living by looking at real GDP per capita.

But before we give too much away, check out this video — the first in our section on The Wealth of Nations and Economic Growth.

March 5, 2017

Splitting GDP

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Published on 21 Nov 2015

In the last three videos, you learned the basics of GDP: how to compute it, and how to account for inflation and population increases. You also learned how real GDP per capita is useful as a quick measure for standard of living.

This time round, we’ll get into specifics on how GDP is analyzed and used to study a country’s economy. You’ll learn two approaches for analysis: national spending and factor income.

You’ll see GDP from both sides of the ledger: the spending and the receiving side.

With the national spending approach, you’ll see how gross domestic product is split into three categories: consumption goods bought by the public, investment goods bought by the public, and government purchases.

You’ll also learn how to avoid double counting in GDP calculation, by understanding how government purchases differ from government spending, in terms of GDP.

After that, you’ll learn the other approach for GDP splitting: factor income.

Here, you’ll view GDP as the total sum of employee compensation, rents, interest, and profit. You’ll understand how GDP looks from the other side — from the receiving end of the ledger, instead of the spending end.

Finally, you’ll pay a visit to FRED (the Federal Reserve Economic Data website) again.

FRED will help you understand how GDP and GDI (the name for GDP when you use the factor income approach) are used by economists in times of economic downturn.

So, buckle in again. It’s time to hit the last stop on our GDP journey.

February 27, 2017

Real GDP Per Capita and the Standard of Living

Filed under: Economics — Tags: , , , — Nicholas @ 02:00

Published on 20 Nov 2015

They say what matters most in life are the things money can’t buy.

So far, we’ve been paying attention to a figure that’s intimately linked to the things money can buy. That figure is GDP, both nominal, and real. But before you write off GDP as strictly a measure of wealth, here’s something to think about.

Increases in real GDP per capita also correlate to improvements in those things money can’t buy.

Health. Happiness. Education.

What this means is, as real GDP per capita rises, a country also tends to get related benefits.

As the figure increases, people’s longevity tends to march upward along with it. Citizens tend to be better educated. Over time, growth in real GDP per capita also correlates to an increase in income for the country’s poorest citizens.

But before you think of GDP per capita as a panacea for measuring human progress, here’s a caveat.

GDP per capita, while useful, is not a perfect measure.

For example: GDP per capita is roughly the same in Nigeria, Pakistan, and Honduras. As such, you might think the three countries have about the same standard of living.

But, a much larger portion of Nigeria’s population lives on less than $2/day than the other two countries.

This isn’t a question of income, but of income distribution — a matter GDP per capita can’t fully address.
In a way, real GDP per capita is like a thermometer reading — it gives a quick look at temperature, but it doesn’t tell us everything.

It’s far from the end-all, be-all of measuring our state of well-being. Still, it’s worth understanding how GDP per capita correlates to many of the other things we care about: our health, our happiness, and our education.

So join us in this video, as we work to understand how GDP per capita helps us measure a country’s standard of living. As we said: it’s not a perfect measure, but it is a useful one.

February 19, 2017

Nominal vs. Real GDP

Filed under: Economics — Tags: , , , — Nicholas @ 03:00

Published on 19 Nov 2015

“Are you better off today than you were 4 years ago? What about 40 years ago?”

These sorts of questions invite a different kind of query: what exactly do we mean, when we say “better off?” And more importantly, how do we know if we’re better off or not?

To those questions, there’s one figure that can shed at least a partial light: real GDP.

In the previous video, you learned about how to compute GDP. But what you learned to compute was a very particular kind: the nominal GDP, which isn’t adjusted for inflation, and doesn’t account for increases in the population.

A lack of these controls produces a kind of mirage.

For example, compare the US nominal GDP in 1950. It was roughly $320 billion. Pretty good, right? Now compare that with 2015’s nominal GDP: over $17 trillion.

That’s 55 times bigger than in 1950!

But wait. Prices have also increased since 1950. A loaf of bread, which used to cost a dime, now costs a couple dollars. Think back to how GDP is computed. Do you see how price increases impact GDP?

When prices go up, nominal GDP might go up, even if there hasn’t been any real growth in the production of goods and services. Not to mention, the US population has also increased since 1950.

As we said before: without proper controls in place, even if you know how to compute for nominal GDP, all you get is a mirage.

So, how do you calculate real GDP? That’s what you’ll learn today.

In this video, we’ll walk you through the factors that go into the computation of real GDP.

We’ll show you how to distinguish between nominal GDP, which can balloon via rising prices, and real GDP—a figure built on the production of either more goods and services, or more valuable kinds of them. This way, you’ll learn to distinguish between inflation-driven GDP, and improvement-driven GDP.

Oh, and we’ll also show you a handy little tool named FRED — the Federal Reserve Economic Data website.

FRED will help you study how real GDP has changed over the years. It’ll show you what it looks like during healthy times, and during recessions. FRED will help you answer the question, “If prices hadn’t changed, how much would GDP truly have increased?”

FRED will also show you how to account for population, by helping you compute a key figure: real GDP per capita. Once you learn all this, not only will you see past the the nominal GDP-mirage, but you’ll also get an idea of how to answer our central question:

“Are we better off than we were all those years ago?”

February 13, 2017

What is Gross Domestic Product (GDP)?

Filed under: Economics — Tags: , — Nicholas @ 02:00

Published on 18 Nov 2015

Picture the economy as a giant supermarket, with billions of goods and services inside. At the checkout line, you watch as the cashier rings up the price for each finished good or service sold. What have you just observed?

The cashier is computing a very important number: gross domestic product, or GDP.

GDP is the market value of all finished goods and services, produced within a country in a year.

But, what does “market value” mean? And what defines a “finished good”?

These, and more questions, percolate inside your head. Meanwhile, the cashier starts ringing up the total, and you’re left confused. An array of things pass by you — A bottle of wine. A carton of eggs. A cake from the local bakers. A tractor, of all things. A bunch of ballpens. A bag of flour.

In this video, join us as we show you how to make sense of this important economic indicator. You’ll learn how GDP is computed, and you’ll get answers to some pretty interesting questions along the way.

Questions like, “Why are the eggs in my homemade omelet part of the GDP, but the eggs my baker uses are not? Why does my bottle of French wine contribute to France’s GDP, even if I bought it in the United States?”

Most importantly, you’ll also learn why polar bears aren’t part of the GDP computation, even if they’re incredibly cute.

So, buckle in for a bit—in the following videos we’ll dive into specifics on GDP.

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