Plain Sense Economics » GDP

China’s Growth in GDP

Doug Gentry — Thu, 20 Jan 2011 04:33:05 +0000

Our Principles of Macroeconomic classes have been learning more about GDP – how it is measured, and what levels of GDP growth are sustainable. The New York Times reported significant growth in GDP for China for the 4th quarter and all of 2010…

China’s economy grew at a higher-than-expected rate of 9.8 percent in the fourth quarter and inflation eased only moderately last month, China’s National Bureau of Statistics said Thursday.

The agency said the economy grew at a rate of 10.3 percent for the full year, while the rate of inflation was 3.3 percent. Inflation fell in December to 4.8 percent, from 5.1 percent in November. G.D.P. growth rose from 9.6 percent in the third quarter and topped the 9.2 percent forecast by market analysts surveyed by Reuters.

The report did little to quell concern that China’s economy was growing at an unsustainable pace.

Selling the Stimulus

Doug Gentry — Tue, 28 Sep 2010 03:20:25 +0000

James Surowiecki writes in The New Yorker that a combination of thoughtful, but less visible stimulus decisions and some less effective decisions made it hard for the American people to believe the 2009 fiscal stimulus worked.

[The] Washington stimulus has become the policy that dare not speak its name. This wouldn’t be surprising if we were talking about a failed program. But, by any reasonable measure, the $800-billion stimulus package that Congress passed in the winter of 2009 was a clear, if limited, success.

The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7 per cent in recent months. Economists at various Wall Street houses suggest that it boosted G.D.P. by more than two per cent. And a recent study by Mark Zandi and Alan Blinder, economists from, respectively, Moody’s and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above eleven per cent and that G.D.P. would have been almost half a trillion dollars lower.

Read the rest of the article for an interesting political dissection of the impact on the electorate and the coming mid-term elections.

For my econ students, see the important points about what we call the fiscal (or Keynesian) multiplier. If the government spends money or gives a tax cut, residents of the country end up with more money in their pocket. If things work right, the total addition to GDP is a multiple of what the government spent or the taxes reduced. In general that multiple is lower for tax cuts because it just allows people to keep money that would have otherwise gone to the government, while government spending goes directly to GDP and then, like tax cuts, cascades down in the form of increased spending.

As Surowiecki points out a one time tax cut/rebate has been shown to have a lower multiplier, because people take the windfall and pay off credit card debt or otherwise save the money. The stimulus bill reduced Federal income tax withholding, which made a small increase in take home pay each pay period. That should have a higher multiplier, but from a political point of view was probably invisible to the average voter.

The question of the appropriate multiple – how high it is, and whether tax cuts are higher or lower than government spending, is the crux of the thoughtful policy debate on the stimulus. I don’t include in here the anguish over the deficit or the Republican complaint about businesses being uncertain about future regulation – these are mostly red herrings. It’s a good use of economic theory and research to understand how best to design a stimulus.

The Great Recession?

Doug Gentry — Sat, 31 Jul 2010 11:45:01 +0000

Catharine Rampell in The New York Times Economix blog wonders if the most recent recession has earned the title, The Great Recession. She is leaning towards, “yes”.

Here is one graph that illustrates the impact on economic output from 10 post World War II recessions. No contest.

Economic Output in Recent Recessions

GDP – 2008 the Best Year Ever?

Doug Gentry — Wed, 28 Jan 2009 14:30:00 +0000

This may cause us to scratch our heads about the presence of a recession, but Casey Mulligan’s post in the New York Times Economix has some interesting points about gross domestic product. It is simple enough to be worth reading by principles of economics students.

The opening paragraph:

When measured in terms of financial gyrations and national employment, 2008 was an absolutely terrible year. When measured in terms of production, the United States economy in 2008 was the best in its history.

More Wealth = More Happiness ?

Doug Gentry — Thu, 17 Apr 2008 02:31:00 +0000

Two blog posts, one by Justin Wolfers, writing in the Freakonomics blog, and another by David Leonhardt in the New York Times, report on Stevenson and Wolfers’ research on the relationship between income and happiness. This is a great example of a complaint non-economists have about economists, where the latter keep finding situations which prompt the phrase, “On the other hand…”

A quick recap… Generally we might assume that as a country’s income goes up, so does the happiness or general satisfaction of the residents of that country. In other words, greater real per capita GDP means higher income, which means a greater standard of living, and thus more contentment.

Reasonably enough, this straightforward connection bothers those who believe that contentment can come from sources other than income and standard of living. Leonhardt summarizes past research on this point – in particular what became known as the Easterlin paradox. Easterlin found, after studying data in Japan, that rapid growth in income in that country did not result in increases in satisfaction. Easterlin concluded that the absolute level of income wasn’t the principal driver of satisfaction – but instead it was someone’s income relative to their peers. If they got richer than their friends, their satisfaction went up.

Now, two Penn economists – Stevenson and Wolfers – have done some new studies and explored some of Easterlin’s old data. Their conclusion? That absolute income is, after all, more important.

You can make your own conclusions by following the links to these articles, and beyond. What is important is to think critically about what increases in real GDP mean to our country, and the degree to which we should seek continued growth in that measure.