Management and

Business in Context 2
seminar 4.

Tools of Comparison
 Tools of Comparison

 Index numbers
 Show the percentage change compared to a base year
 Index of the base year = 100
 actual 
index    100
 Growth rate  base 
 The percentage change in a quantity between two
dates, relative to the beginning date
yt 1  yt
growtht ,t 1 
yt
Real vs. Nominal GDP

 Why is this distinction important?

 Nominal vs. real growth
 Nominal growth = ?
 More spending driven by either
 Expanding economic activity or
 Inflation

 Real growth = ?
 Expanding economic activity
USA
GDP (current US$); unit = 1000bn GDP (constant 2000 USD); unit = 1000bn
16000
14000
12000
10000
8000
6000
4000
2000
0

14
12
10
8
6
4
2
0
-2
-4
% change of nominal GDP, USA % change of real GDP, USA
 USA 14
% change of nominal GDP, USA % change of real GDP, USA

12
10
8
6
4
2
0
-2
-4
16
14
12
10
8
6
4
2
0
-2

Inflation, consumer prices (annual %)

 Economic Growth

 Measurement ?
 The increase in real GDP per capita
 In ch.21: PPP adjusted 2005 constant dollars
 U.S. GDP per Capita
$45,835  $45,336
Growth 2012,2013 = = 0.011
$45,336
USA Real GDP Per Capita
1820 $1,858
1950 $13,056
2012 $45,336

Exhibit 21.1
© 2015 Pearson Education, Ltd.
 Annual Growth Rate of
USA Real GDP Per Capita

The average annual growth rate is 2.03% Exhibit 21.2

© 2015 Pearson Education, Ltd.
 Exponential Growth

 A process by which a quantity, like GDP

per capita, grows at a constant
proportion or growth rate
 With exponential growth, new growth
builds on past growth, and its effects
compound
Similar to compound interest calculations
 It is much more convenient to use an
axis with a proportional scale
Exponential Growth

 Suppose Y is growing at 10% each year

from 2000
 What would be the value of Y in 2015?
 Y2001 = Y2000 × 1.10
 Y2002 = Y2001 × 1.10 = Y2000 × 1.102
 Y2003 = Y2002 × 1.10 = Y2000 × 1.103
 Y2015 = Y2000 × 1.1015 = Y2000 × 4.18
 Two Variables Growing at 10%
in a Constant Scale
70,000

60,000

50,000

40,000

30,000

20,000

10,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
 Two Variables Growing at 10%
in a Proportional Scale
100,000

10,000

1,000

100

10

1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Exponential Growth

Y Y grows Y grows
Annual
doubles in 100 yrs in 200 yrs
growth
in .... yrs ... fold ... fold

0% never same same

1% 70 2.7 7.3
2% 35 7.2 52
5% 15 131 11,793
To do for next seminar

 Read ch.20 of Acemoglu et al. (2016).

 Consider the thinking problems on
moodle
Key Ideas

 Index number
 Growth rate
 Economic growth
 Exponential growth