[MUSIC] So now we know where GDP comes from, later on we're going to talk about what, gives us the level of GDP that we find in an economy, but I like us to look for just a minute at first of all what GDP growth looks like and then secondly to try get a reference point. So that we know whether GDP growth in a certain country at a certain time is too high, too low, just right, sort of Goldilocks story, right? Too hot? Too cold? Or, or just right? First what I like to look at with you is a screen from Google Public Data. I would recommend this tool to you because you can draw, you can pull up indicators on a lot of different countries over time and compare them. So we're going to look first at GDP growth rate in different countries, a group of countries over time. I've selected actually since 1960. So, this was a really long period. And I've selected some countries that we might be interested in. I'm sorry if your country isn't represented, we've got China, Mexico, the United States, Japan Germany, the UK, and then Greece. What you're observing on this screen it says GDP growth rate and that's what you're usually going to find when you open the paper and it talks about what's happening to GDP they'll just say the GDP growth rate. This is actually technically something we call real GDP growth which you'll be familiar with if you've done any economics previously. That means, we take the amount of good and services produced in, say, year two, in the prices at year two, and we adjust down their prices to make them the same as year one. That way, we eliminate inflation from our calculations and we can actually see how much more the economy has of all goods and services. Compare to the previous year, so this screenshot you're looking at has taken the inflation out of all these numbers and we're seeing how much, output really increased from 1 year to the next, in all of these countries. So if we look at this, we can see for example, there's the United States Up here is, this line okay, and if you look at GDP growth you can see, that it runs in the 60s, it runs level of 5% many years. Sometimes it's below. You can see. In the '70s, you can see a recession, where GDP growth is actually negative. In other words, where the amount of goods and services that we have declines. Alright? You go on into the '80s, you see another recession. Then you can see some pretty fast growth rates, again,up around 5%. Then later, when you go into the 90's, you see growth rates of around 4%, pretty strong. Then you can see the crisis, alright? You can see in 2009 growth is negative. In other words, the United States is in a recession. And if you look at all the countries on this chart, you can see everybody's. In a recession in that year except in this chart for China. Now if we looked at China and I don't even need to put my pointer over the data here because China's such as outlier, look at the way China is growing. Do you see that their rates are sometimes more than 15, sometimes more than 20%? Look at the period since 1990 okay, and you can see that growth rates are averaging 10%, a little over 10% that entire period. Okay? You could look at for example Mexico. You can look at Japan. You can see again that their growth rates are going to be really different from the United State and China. Mexico's growing about one and a half times as fast as the United States. Japan's growing about half the rate of the United States. Then you see a country like Greece. You can see how deep the Euro zone crisis is for Greece. You can see them at the end there, still in recession. So, the question this poses for us is what's the right rate of GDP growth? Should we be growing as fast as we possibly can? You know, does the U.S. want to be growing like China? Is Japan really in trouble because its growth rate about half that of the United States? How can we make sense of all of this data. In order to make sense of it, we're going to move to a new concept here, which becomes our reference point for this course. Which is potential real GDP growth, and that becomes our target and our reference point for analyzing the business cycle. So what is this potential GDP growth? What is this target for the economy? Well, it's calculated by big think tanks, big institutions, in quite a technical way. By adding up how much the investment is in the economy, how much the labor force is growing. Thinking about things like productivity growth. And so these are big models. But we can calculate it in a very simple way that becomes useful for our, for our objectives here in this course by adding up two concepts that it's pretty easily, pretty easy to get data on. One of them is productivity growth. Now productivity is GDP divided by the number of workers. So it's how much each worker actually produces. So we measure the growth in that. You can see that education, technological change, management all influence how much each worker can produce. Right? So we add productivity growth plus labor force growth. Now the labor force is the number of people who are available in the economy, who are either working or looking actively for work. So, you know, if demographic growth is strong, people are having a lot of children, or there's immigration, or the age distribution of the population is pushing a lot of people into the labor force, then we're going to have strong labor force growth. If on the other hand, our population is aging, or there's outward migration, we're going to have labor force shrinkage. So when you add these two together, productivity growth plus labor force growth, you get a pretty good estimate of what the potential GDP growth of the economy is. Why do we care? Well, the potential growth rate of the economy is that rate of growth that the economy can sustain over the medium term without accelerating inflation. In other words, we don't want to grow as fast as we can, because if we grow as fast as we can, we're going to have an inflation problem. Okay? We don't want to grow too slowly, because as we all know, living through this crisis now, we'll have an unemployment problem. So what would you, what would we like to do? Well, we'd like to grow at that rate where inflation's not accelerating, it's not growing, and unemployment is acceptable. So what is that rate? Well, it's very different among countries. Here on the slide you can see that I took those two concepts that I just mentioned to you, productivity growth and labor force growth for the United States for a long period. And, when I averaged them out, I get an estimate of potential GDP growth. And you can see that's that blue line. So you can see it moves around. But it's around two and a half to 3% a year. That's how much the US economy could grow without causing inflation to rise. And keeping unemployment over time relatively reasonable. Right? Now right now we're trying to recover from the unemployment generated by the crisis, but if we could sustain this rate over time, unemployment would go to a good level, inflation would be at a good level. So you can see, what potential growth looks like for the United States. Now I did the same thing for the countries the 17 countries, that are in the Euro zone. You can see Their productivity growth is actually lower than in United States. And you can see their labor force growth, which in some years is higher than the United States, some years is lower. Actually on average, surprisingly is higher than US. So that gives us a potential growth rate for the countries in the Euro zone now, obviously this is going to be very different for Germany. And for Spain, okay, and these can really be different numbers, but just giving a very big average, you can see that their potential rate of growth, is lower than in the United States. It's about two percent. What does that mean? That means the United States should be targeting faster growth than Europe because, the United States has a lot workers coming in, more productivity growth it can grow faster without causing higher inflation. Europe should be targeting a rate of growth at somewhat lower, according to this picture, around two percent or a little bit below. I put Japan up here too, so we can see the contrast. So here you can see for Japan, the labor force growth is negative almost every year, okay? So this is going to affect their potential GDP growth and therefore target for economic policy making, you can see their productivity growth is pretty high but since labor force growth is negative, we come up with a lower estimate of potential GDP growth. In this picture, I took the average for ten years, and you can see potential GDP growth for the Japanese economy is only about one percent. So, here we have a reference point. How much should we grow? Well, ideal. Grow at or near potential. And this becomes the bottom line for our economic policy making. [MUSIC] [BLANK_AUDIO]
