Understanding Prosperity and GDP

• Prosperity is achieved when one has enough goods and services to meet their needs, including housing, food, and healthcare.
• Producers, like companies and governments, create goods and services; examples include factories and public education.
• Natural resources, such as trees and oil, need processing to be valuable, like wood becoming furniture.
• GDP, or Gross Domestic Product, measures a country's total production value, allowing prosperity comparisons.
• Production requires workers (labor), money or equipment (capital), and natural resources as key production factors.
• Production enhances the value of natural resources through manufacturing or cultivation.
• A country's total production equals the total income earned by its population.

Differences in Prosperity

• GDP per capita estimates the money each person would receive if a country's GDP was equally divided; for instance, a $1 billion GDP with 10 million people yields $100 per capita.
• Purchasing Power Parity (PPP) reflects how much one can purchase with the same amount of money in different countries; $10 might buy one meal in the USA, but three in India.
• GDP per capita and Purchasing Power Parity (PPP) indicate ways to evaluate a country's prosperity and economic well-being.

Comparing GDP

• To compare GDP: Find GDP per capita, convert GDP to a common currency like USD, and adjust for purchasing power (PPP).
• Economic growth is pursued by countries to satisfy their peoples' increasing needs, such as more schools, jobs, and food as the population expands.
• Human needs often surpass available resources, highlighting limited resources; for example, not everyone globally has access to clean water or education.

Prosperity Disparities

• Economic growth is key to improving the economies and living standards of less prosperous nations.
• Income disparities exist even in wealthy countries, with some residents facing homelessness and lacking access to essential resources like food.

Income Distribution

• Ideal income distribution occurs when each 20% of the population earns 20% of the total income, indicating equality.
• Higher labor productivity leads to greater income, illustrated by skilled doctors earning more than factory workers due to higher value production.
• If income is too evenly distributed, individuals might lack motivation to work hard.
• If income is too unevenly distributed, individuals may struggle to afford basic necessities like healthcare or education.
• Wealthy individuals often leverage their influence to perpetuate the income gap through lobbying and favorable policies.

Equal Income

• Fair income distribution fosters stability by providing shared values and equal access to opportunities like quality education and healthcare.
• Unequal income distribution can lead to societal divisions, where different groups have limited cultural exchange due to income segregation.

Prosperity vs. Welfare

• Prosperity reflects access to goods and services, while welfare denotes happiness and satisfaction with life, showing these can be independent.
• The Human Development Index (HDI) evaluates welfare based on health (life expectancy), education (school access), and standard of living (income per person).
• HDI values range from 0 (low welfare) to 1 (high welfare), serving as comparative metric.

Happiness and Prosperity

• Prosperity contributes to happiness, but is not the sole determining factor, especially amongst those in underprivileged countries.
• Additional income doesn't always correlate to increased happiness in wealthier countries.

Other Factors for Happiness

• Personal traits, meaningful relationships, health, work, and social responsibility all contribute to happiness levels.

Key GDP Points

• GDP (Gross Domestic Product) is the total value of all productive activities within a country's borders
• GDP is measured using these three approaches::
• Production Approach: Adding the added value of businesses and government within the country
• Income Approach: Adding all the income earned by production factors (labour, capital, natural resources)
• Expenditure Approach: Adding all spending on goods and services (total expenditure equals total production)

GDP Example

• The added value is the sale price of the item minus the cost of the supplies. For example, if a product sells for $50 and the material cost is $20, then added value is $30

Production and Income Approaches

• Businesses buy inputs like raw materials, labour, machinery to create finished products
• The income created via businesses buying inputs is distributed wages, rent, profit etc.
• Households provide production factors (labour, land, capital) and earn income (wages, rent, profits).
• House hold income is spent on goods and services, creating a cycle.
• If a Bakery buys ingredients and workers to make bread, then everything becomes an input, with bakery owners profiting.

GDP at Market and Basic Prices

• GDP at Market Prices (GDPmp): Consists of VAT
• GDP at Basic Prices (GDPbp): Excludes taxes and subsidies.
• Net Domestic Product at Basic Prices (NDPbp): GDPbp minus depreciation of capital goods where depreciation is the decline of capital goods.
• Considering these terms, if an item is sold for $100, with $10 attributed to VAT, the GDPmp is $100, but the GDPbp is $90.

Difference Between GDP and GNI

• GDP: Production within a country's borders
• GNI: Income earned by a country's residents, including income from abroad.
• The government provides public services (e.g., education, healthcare, infrastructure) the added value of government services is equal to the wages paid to government employees.
• A teacher who makes $30,000 yearly counts towards GDP

Government's Role in Added Value

• Public Safety and Legal System: The government employs workers (e.g., police, judges) to provide safety and law enforcement.
• Measurement of Government Production: The value is measured by the total wages paid to employees, this is because those services aren't sold on an open market.
• Local police who spend $5M on salaries counts toward added value of dep

Production Factors

• Labour: Human effort Capital: Tools, machinery, and infrastructure Natural Resources: Raw materials like land and minerals.

Durable Capital Goods

• Goods used repeatedly over time, like machines and buildings.
• These wear out and require replacement through investments.
• If a factory uses a $1M machine which gets replaced, the purchase of a replacement counts to a durable capital good.

Floating Capital Goods

• Semi-Finished Products: Partially processed materials that need further production
• Consumables: Items like energy, raw materials, and fuel are used up during production.
• If steel is used to make cars, or electricity to power machine, then those are floating capital goods.

Capital Coefficient

• Measures how much capital is needed to produce one unit of output.
• A high coefficient means heavy investments are needed for production growth.
• Service Sectors: Low capital coefficient (e.g., software companies).
• If a software firm makes $1 million using $500k in equipment, where as an auto factory uses $3M to make $1M, software firm is better, because it takes more $ to make less $.

Labor

• Workforce and Participation Rate:
• Workforce: People aged 15–65 available for work.
• Participation Rate: Percentage of the working-age population active in the labour market.
• Employment Rate:
• Percentage of working-age people who are employed.
• Related to GDP, labour demand, and productivity.
• If 70% of population aged 15-65 is is working, the employment rate is 70

Labour Productivity

• Labour Productivity: Amount of production per worker.
• Higher productivity leads to economic growth.

Relation to GDP

• GDP = Number of workers × Productivity per worker.
• So if a country has 1M workers each producting $50k, then the country GDP is $50 billion

Relationship Between Variables

• The relationship between GDP, labour productivity, and labour demand or employment is outlined.
• Equation: gGDP=gLp+gLd
• Where:
  • gGDP: percentage increase in production
  • gLp: percentage increase in labour productivity
  • gLd: percentage increase in employment

Unemployment

• Definition of Unemployment: A person aged 15+ who is actively looking for work but does not have a job.
• Types of Unemployment:
  • Short-term unemployment: Caused by temporary decreases in spending/production and is less harmful.
  • Long-term unemployment: More damaging due to prolonged joblessness.
• Economic Cycles: Jobs typically decrease during slow economic growth, leading to temporary unemployment.

Labour Costs and Wages

• Labour Costs: Wages are a significant cost for companies, constituting about 80% of added value.
• Wage Cost Per Employee:
  • Includes gross wages and social security charges paid by employers.
• Wage Determination:
  • Influenced by supply and demand in the labour market
  • If labour demand is high, wages may rise; if demand is low, wages may stagnate.

Unemployment's Effect on Wages

• High unemployment leads to low wage increases.
• Low unemployment leads to high wage increases.

Wage Scope

• Combines price compensation (for inflation) and productivity-linked increases.
• Factors Raising Wages; Increased education levels as well as higher average age of the workforce.

Education and Wage

• Both average wage and education raise costs per employee.

Effects of Ageing Population:

• Labour scarcity leads to higher wages.
• Higher education/age often leads to increased wages.
• Pension contributions cause pressure on net wages.
• Employees may burden employers with pension costs, further increasing wages.

Labour Cost Per Unit

• Importance for Firms:
• Competitive advantage depends on wage cost per unit, not wage cost per employee.
• Formula:
• Labour cost per unit=Wage cost per employee/Labour productivity
• Example:
  • Wage cost = €70,000/year.
  • Productivity = 3,500 units/year.
  • Cost per unit = €70,000 / 3,500 = €20/unit.

Changes in Wage Costs

• Equation: %s Lu= %s We - %sLp
• Where:
  • Lu: percentage change in wage cost per unit.
  • We: percentage change in wage cost per employee.
  • Lp: percentage change in labour productivity.
• Key Insight: Wage cost per unit increases when wages rise faster than productivity, and decreases when productivity outpaces wage growth.

Example of Labour Costs

• Given:
  • Total wage bill: €350 billion.
  • Labour productivity: 10,000 units/employee.
  • Labour demand: 5 million employees.
• Calculations:
  • Average wage cost per employee: €350 billion divided by 5 million = €70,000
  • Wage cost per unit: €70,000 divided by 10,000= €7/unit
• Scenario: A 10% wage increase and 5% productivity increase results in a 5% rise in labour cost per unit.

Dual Impact of Wages

• Higher wages increase spending, benefiting businesses that sell high-elasticity (luxury) goods.
• For export-oriented or primary goods companies, wage increases primarily represent costs.

Profitability

• Wages affect profit margins through their impact on production costs and sales.

Importance of Natural Resources

• Provide raw materials (e.g., metals, oil, gas).
• Significant for production and need satisfaction.
• Price Volatility: Fluctuating raw material prices ( fluctuating oil prices) directly impact company profits.
• High oil prices increase costs for energy-dependent firms.

Energy Costs and Company Reactions

• Energy Costs per Unit: Determined by multiplying oil price by energy consumption per unit.
• Responses to Rising Energy Prices:
  • Companies reduce energy consumption
  • Or pass cost increases to customers (requires market power).

Profit Margins and Sales

• Profit margin = Price - Cost per unit.
• Rising oil prices may reduce consumer spending, shifting demand toward low-energy products or reducing overall spending.
• Total profit = Profit margin per unit × Sales.

Geographical Impact on Industry

• Proximity to seaports and rivers influences industrial locations.
• Modern industries prefer areas near recreational facilities and nature.
• Agriculture: Dependent on climate and soil conditions.
• Nature's Role: Essential for water, air, and waste breakdown.
• Provides recreation opportunities, requiring suitable climate and space.

Environmental Impact of Economic Growth

• Environmental Impact of Economic Growth: Past: Focus on maximizing nature's use, with little concern for long-term effects.
• Present: Recognition of the environment as a scarce resource under threat.
• Sustainable development: Balances economic growth with environmental protection.
• sustainable Develoment may involve reduced GDP growth to lower raw material and energy demand.
• Sustainable Development in Companies: Covers natural resources, capital, and labor by focusing on people, planet, and profit,. Profit: Rewards capital and ensures continuity, Planet: Prevents environmental damage and ensures resource availability and People: Improves treatment of employees and societal relations.

Quantitative growth

• Possible through discovery of new raw material stocks.

Qualitative Growth

• Achieved via technological advancements enabling alternative resource use (renewable energy).

The Structure of the European Economy

• Businesses and the government produce to meet needs such as food, clothing, housing, transport, recreation, education, and safety, therefore Understand the ten sectors of the European economy classified by Eurostat.
• The EU sectors such as Agriculture, manufacturing, services, and technology represent different types of production activities.

Purpose of Production

• The EU Businesses and governments produce goods and services to meet these human needs, such as:
  • Basic needs: Food, clothing, housing
  • Other needs; Transport, recreation, education, and safety.

Relationships Between Sectors:

• Advanced economies typically Small agrarian and industrial sectors contributing to production, along with accounts for a large service sector that accounts for over 70% of GDP.

Growing service

• Physical limits to the need for goods, and Consumers have enough material goods as their basic needs are already fulfilled.
• They spend more on services like travel, sports, education, and entertainment.
• Factories producing clothing or electronics often move to Asia for cheaper labor

Advanced Economies and Competitive Advantage

• Advanced economies no longer rely Economic efficiency like cheap labor or raw materials but instead, such as: * Efficient organization * Advanced technology and innovation * Strong branding * Customer-focused services
• The largest sectors for jobs are : * Public services * Trade, transport, and communication where together, sectors provide 48% of total employment.

Introduction to Chapter 5

• Main Question: The chapter focuses on expenditure, topics covered, production, the demand side of the economy.
• Income, and Expenditure: These three elements are closely linked.
• A business produces goods (production), earns revenue (income), and uses that money to invest or pay wages in the following four sectors.
• Consumer, Businesses, Government, Foreign countries

Defintion of Consumption

• Household spending on goods and services are called consumer goods after purchase.
• The way consumers allocate their spending across different products as patterns vary between individuals based on preferences, as
• One person may spend money on fruits and vegetables VS Another person who dines at fancy restaurants

Macro-Economic Consumption Patters

• Macro-Economic :The totals of all individuals consumption across the government gives a national pattern where studies of the demand is then formed.
• Consumers differ in their spending priories, and are either on either spend on durable items like furniture OR on experiences while spending more.

Changes in Spending Habts

• Companies and industries take in to the spending what happens when consumers either own an item OR need different habbits.
• Companies see it the market becomes satuated, and also leading the increased for lower amount of buyers to targets.
• Income elasticity affects spending on different goods.

Low elasticity goods

• Goods for items like food dont change on when income prices

High elasticity goods : People may buy luxury servuces like eating out

• The level depends on the long term spending influence, and distribution in economic agencies

Short factors

• The distribution between income spends, along with consumer confidence in optisim
• Consumers also depend on lower intrest rates, which are economic

Long factors - Income growth

• Confidence ahows that spending how much people are secured on their jo , and econmies

Pricesa dn inflation : inflation where goods increase and what consumers acan buy

Power Inflation

• Spending is all based who gets the extra income, and marginal spending where extra euro where earned is sent

Dividens

• Wealth people spend dividends with is invest
• If people feel to what may not simulatr economicly, for a crash

Real intrest rest

• High is peopke saved

Capital spending : WEatlh with increase spending

• Companies need to what they can be produced

Tech push vs pul

• Push is producted with tech
• Pull is with customer needs

Sependign Competivness

• Compamys who spend make more
• Japanese companies who spend

classifcation of industries

• High skill vs skilled

long term potential

• Productiivty = incresae what workes made and prosperiuty

Incerase for worker

• If more proeductuvty then they become efficient

Business cycle

• if unarifulty paid there are soial conflicrs

What happens in busnieess cycle that can

• Bessesnes go, and people loose jobs

Positive outpt gap - More product then people want

• They get products easy Neagtuve less product But bad demand

Busniyiss are effected in different waya

What is a cycle with is a high cycle

• Low is defcit
• What a countyr makes verse what the countyr imports

Increase for consumprt

• The more price a high value and beater means

industries effected

• Durng a recession some dont hqvr sales or protfts

Companies sensivitivty on busninnes

• Market type and whats served

Key market aspects

• What prodct are durable
• Incime eleaticry, how much you spend, and less sensivuty for food

product cycle market

• What there already is, as if people what phones

What there on at production

• They see customers

Capital intensive - Higyer costs force

More investmnet then

What are cycles in high to

diversificaion to sales

What is to a stability market to share more

Why companies need to under stand the business

That its external

Comapies more with there cost

Bussienss results

• There must be
• cyicilsed to
• Voltile high enought