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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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In this video, we're going to talk about economic growth. And I wanna be very careful here, because depending on the context, people, including economists, might mean different things by economic growth. In everyday language, when people are talking about economic growth, they're usually just talking about an expansion in the output of an economy over time. So if real GDP is increasing, they might consider that to be economic growth. But the context that we're going to talk about in this video, and this is one that you might see in an introductory economics class, or in an AP economics class, we aren't just talking about an increase in real GDP over time. We are talking about an increase in the full employment output over time, regardless of where we are in the economic cycle. So keep that in mind as you watch this video.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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So if real GDP is increasing, they might consider that to be economic growth. But the context that we're going to talk about in this video, and this is one that you might see in an introductory economics class, or in an AP economics class, we aren't just talking about an increase in real GDP over time. We are talking about an increase in the full employment output over time, regardless of where we are in the economic cycle. So keep that in mind as you watch this video. If we're just talking about the increase of real GDP, we are gonna call that an expansion, not necessarily economic growth. And we're gonna call real GDP decreasing as being equal to a contraction. When we talk about economic growth, we're actually talking about the full employment output increasing.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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So keep that in mind as you watch this video. If we're just talking about the increase of real GDP, we are gonna call that an expansion, not necessarily economic growth. And we're gonna call real GDP decreasing as being equal to a contraction. When we talk about economic growth, we're actually talking about the full employment output increasing. And this could happen somewhat independently of where we are in the actual economic cycle. Let's do a little diagram to make that a little bit clearer. So right over here, I have plotted real GDP of an economy versus time.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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When we talk about economic growth, we're actually talking about the full employment output increasing. And this could happen somewhat independently of where we are in the actual economic cycle. Let's do a little diagram to make that a little bit clearer. So right over here, I have plotted real GDP of an economy versus time. And what you see here in yellow is how the real GDP is fluctuating, and it's fluctuating around its full employment output. Let's pick this time right over here, call it T sub one. So right at this point, that is our full employment output.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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So right over here, I have plotted real GDP of an economy versus time. And what you see here in yellow is how the real GDP is fluctuating, and it's fluctuating around its full employment output. Let's pick this time right over here, call it T sub one. So right at this point, that is our full employment output. Let's call it Y sub F sub one. But we see that our economy is performing above our full employment output. We have a positive output gap.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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So right at this point, that is our full employment output. Let's call it Y sub F sub one. But we see that our economy is performing above our full employment output. We have a positive output gap. If we go from that point in time, fast forward a little bit to T two, so let's go to T sub two here. Because the Y sub F right over here, the full employment output right over here is flat, according to this, we would not have experienced any economic growth from T sub one to T sub two, even though the real GDP would have grown. We would have grown from this point to this point right over here.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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We have a positive output gap. If we go from that point in time, fast forward a little bit to T two, so let's go to T sub two here. Because the Y sub F right over here, the full employment output right over here is flat, according to this, we would not have experienced any economic growth from T sub one to T sub two, even though the real GDP would have grown. We would have grown from this point to this point right over here. So one way to think about it is we are expanding as long as this curve is upward sloping, but if the full employment output is not changing, we are not experiencing economic growth. The times where we actually are experiencing economic growth are times where our full employment output is changing. So let's say from this time right over there to this time right over there.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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We would have grown from this point to this point right over here. So one way to think about it is we are expanding as long as this curve is upward sloping, but if the full employment output is not changing, we are not experiencing economic growth. The times where we actually are experiencing economic growth are times where our full employment output is changing. So let's say from this time right over there to this time right over there. And notice, that is happening, theoretically, during a contraction. This is a contraction right over here where real GDP is actually pulling back. But if we knew truly what the full employment output were and we're able to plot it like this, theoretically, we actually are experiencing economic growth here despite a contraction.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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So let's say from this time right over there to this time right over there. And notice, that is happening, theoretically, during a contraction. This is a contraction right over here where real GDP is actually pulling back. But if we knew truly what the full employment output were and we're able to plot it like this, theoretically, we actually are experiencing economic growth here despite a contraction. To appreciate this, let's look at other models that we have studied in economics. So we think about a production possibilities curve. The ones that we typically see only have two goods or services, a real economy is going to be much more complex.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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But if we knew truly what the full employment output were and we're able to plot it like this, theoretically, we actually are experiencing economic growth here despite a contraction. To appreciate this, let's look at other models that we have studied in economics. So we think about a production possibilities curve. The ones that we typically see only have two goods or services, a real economy is going to be much more complex. It would have millions of goods and services, but it's very hard to draw a million-dimension production possibilities curve. But what this shows us is at a snapshot in time, what is the full employment output? And it shows us the trade-off between these two goods or services.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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The ones that we typically see only have two goods or services, a real economy is going to be much more complex. It would have millions of goods and services, but it's very hard to draw a million-dimension production possibilities curve. But what this shows us is at a snapshot in time, what is the full employment output? And it shows us the trade-off between these two goods or services. Now, if we're in a situation where we're behind the production possibilities curve, that is a negative output gap. And it's possible that over time, we go from this negative output gap back to the production possibilities curve. That would be an expansion in the economy.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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And it shows us the trade-off between these two goods or services. Now, if we're in a situation where we're behind the production possibilities curve, that is a negative output gap. And it's possible that over time, we go from this negative output gap back to the production possibilities curve. That would be an expansion in the economy. But by the definition that we're talking about here, which is not what is typically talked about in the news or something like this, we would not call that economic growth. Economic growth happens when we push out the production possibilities curve, when we have an increase in our full employment output. So economic growth is maybe through some new technology or some more workers or resources or just better institutions, we're able to push our production possibilities curve out.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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That would be an expansion in the economy. But by the definition that we're talking about here, which is not what is typically talked about in the news or something like this, we would not call that economic growth. Economic growth happens when we push out the production possibilities curve, when we have an increase in our full employment output. So economic growth is maybe through some new technology or some more workers or resources or just better institutions, we're able to push our production possibilities curve out. This is an example of economic, economic growth. So for example, this could be our production possibilities curve at, let's say, T3, where this is T sub three right over here. And then this is our production possibilities curve at T sub four, where this is T sub four right over here, where our full employment output has increased.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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So economic growth is maybe through some new technology or some more workers or resources or just better institutions, we're able to push our production possibilities curve out. This is an example of economic, economic growth. So for example, this could be our production possibilities curve at, let's say, T3, where this is T sub three right over here. And then this is our production possibilities curve at T sub four, where this is T sub four right over here, where our full employment output has increased. We can also think about the same idea using our aggregate demand or aggregate supply model. When we study that, we saw that in the short run, because of, say, a demand shock or a supply shock, we could be operating to the left or the right of our full employment output, creating these positive or negative output gaps. But over time, we're going to gravitate back to this full employment output.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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And then this is our production possibilities curve at T sub four, where this is T sub four right over here, where our full employment output has increased. We can also think about the same idea using our aggregate demand or aggregate supply model. When we study that, we saw that in the short run, because of, say, a demand shock or a supply shock, we could be operating to the left or the right of our full employment output, creating these positive or negative output gaps. But over time, we're going to gravitate back to this full employment output. And so as long as our production possibilities curve isn't getting pushed out, isn't changing, or as long as our long-run aggregate supply curve is not changing, according to the definition that I'm talking about in this video, we are not seeing economic growth. The analog for what we saw in this PPC curve is maybe this is the long-run aggregate supply curve at T three, but if our economy has more resources, maybe more population, more natural resources, better technology, better institutions, maybe it's able to produce more at full employment. And in that situation, our long-run aggregate supply curve would shift to the right.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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But over time, we're going to gravitate back to this full employment output. And so as long as our production possibilities curve isn't getting pushed out, isn't changing, or as long as our long-run aggregate supply curve is not changing, according to the definition that I'm talking about in this video, we are not seeing economic growth. The analog for what we saw in this PPC curve is maybe this is the long-run aggregate supply curve at T three, but if our economy has more resources, maybe more population, more natural resources, better technology, better institutions, maybe it's able to produce more at full employment. And in that situation, our long-run aggregate supply curve would shift to the right. And so this could be our long-run aggregate supply curve at time T four. So if this is full employment output, let's call that sub three, this would be full employment output sub four. The big takeaway here is regardless of where we are in the expansion or contraction of our business cycles, the economic growth is the change in that blue line.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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And in that situation, our long-run aggregate supply curve would shift to the right. And so this could be our long-run aggregate supply curve at time T four. So if this is full employment output, let's call that sub three, this would be full employment output sub four. The big takeaway here is regardless of where we are in the expansion or contraction of our business cycles, the economic growth is the change in that blue line. And if we're looking at the PPC, it's a shift out of our PPC, of our production possibilities curve. If we're looking at the aggregate demand, aggregate supply model, it is a shift to the right of our long-run aggregate supply curve. And once again, what are the things that can cause that?
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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The big takeaway here is regardless of where we are in the expansion or contraction of our business cycles, the economic growth is the change in that blue line. And if we're looking at the PPC, it's a shift out of our PPC, of our production possibilities curve. If we're looking at the aggregate demand, aggregate supply model, it is a shift to the right of our long-run aggregate supply curve. And once again, what are the things that can cause that? And these are good to know. There's a notion of capital. Traditionally, people have just thought, hey, more factories, more resources, more land, maybe that will push things out, and it definitely could.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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And once again, what are the things that can cause that? And these are good to know. There's a notion of capital. Traditionally, people have just thought, hey, more factories, more resources, more land, maybe that will push things out, and it definitely could. But more modern definitions are thinking human capital. Hey, if we have a better educated workforce, a more skilled workforce, that could also matter. People also think about things like technology.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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Traditionally, people have just thought, hey, more factories, more resources, more land, maybe that will push things out, and it definitely could. But more modern definitions are thinking human capital. Hey, if we have a better educated workforce, a more skilled workforce, that could also matter. People also think about things like technology. If we can discover better ways of putting together the resources we have, that can also increase our productivity, and that's what we would call technology in an economics context. And things like institutions matter as well. You could imagine if your bureaucracy is really slows things down, if it takes forever to get a permit to do something, well, that might put a hamper on what the full employment output is.
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Understanding economic growth AP Macroeconomics Khan Academy.mp3
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People also think about things like technology. If we can discover better ways of putting together the resources we have, that can also increase our productivity, and that's what we would call technology in an economics context. And things like institutions matter as well. You could imagine if your bureaucracy is really slows things down, if it takes forever to get a permit to do something, well, that might put a hamper on what the full employment output is. But if the institutions become much more efficient, well, then that might allow the country, allow that economy to produce more at full employment. So all of these things could push out your PPC, could push your long-run aggregate supply curve to the right, or cause this blue curve, which represents your full employment output, to move up over time. All of that would be economic growth.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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And we measure that GDP as $1,000. And all of that is due to apples. And we also know that the price of apples in year one were $0.50 a pound. So I'll write it as $0.50 per pound. And let's say that now year one has gone by, and even year two has gone by, and we're able to measure the GDP in year two. So GDP in year two is $1,200. And the price of apples in year two, let's just say it is $0.55 a pound.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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So I'll write it as $0.50 per pound. And let's say that now year one has gone by, and even year two has gone by, and we're able to measure the GDP in year two. So GDP in year two is $1,200. And the price of apples in year two, let's just say it is $0.55 a pound. So my question to you is, the whole point of measuring GDP is measuring the productivity of a country. I mean, we're measuring in terms of dollars, but we care more about just the dollar amount. We really care as was this country more productive.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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And the price of apples in year two, let's just say it is $0.55 a pound. So my question to you is, the whole point of measuring GDP is measuring the productivity of a country. I mean, we're measuring in terms of dollars, but we care more about just the dollar amount. We really care as was this country more productive. And if it was more productive, how much more productive was it? And if we just look at these GDP numbers right over here, this $1,000 versus this $1,200, it gives you the sense that, well, at least if you just look at the numbers, $1,200 is 20% larger than $1,000. So if you just look at those numbers right over there, it looks like the GDP grew by 20%.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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We really care as was this country more productive. And if it was more productive, how much more productive was it? And if we just look at these GDP numbers right over here, this $1,000 versus this $1,200, it gives you the sense that, well, at least if you just look at the numbers, $1,200 is 20% larger than $1,000. So if you just look at those numbers right over there, it looks like the GDP grew by 20%. But is that an accurate representation of the productivity of this country? Did it actually produce 20% more goods? And a big clue is looking at this price here, because some of this GDP actually might have increased just due to price.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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So if you just look at those numbers right over there, it looks like the GDP grew by 20%. But is that an accurate representation of the productivity of this country? Did it actually produce 20% more goods? And a big clue is looking at this price here, because some of this GDP actually might have increased just due to price. But that doesn't actually make the country more productive. The quantity, the extra quantity of apples that the country produces is actually what adds to the total productivity. One way to think about it, let me draw a little diagram over here.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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And a big clue is looking at this price here, because some of this GDP actually might have increased just due to price. But that doesn't actually make the country more productive. The quantity, the extra quantity of apples that the country produces is actually what adds to the total productivity. One way to think about it, let me draw a little diagram over here. Let me draw a little diagram. On this axis, I'll do quantity. On this axis, I will do price.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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One way to think about it, let me draw a little diagram over here. Let me draw a little diagram. On this axis, I'll do quantity. On this axis, I will do price. And P1, so if I want to figure out the GDP in year one, I would have the price of apples in year one. That's the only good or service, just to simplify things. Times the quantity of apples in year one.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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On this axis, I will do price. And P1, so if I want to figure out the GDP in year one, I would have the price of apples in year one. That's the only good or service, just to simplify things. Times the quantity of apples in year one. And then this right over here, the area of this green rectangle would be GDP in year one. And then GDP in year two would be the price in year two. So we're going to go from $0.50 to $0.55.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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Times the quantity of apples in year one. And then this right over here, the area of this green rectangle would be GDP in year one. And then GDP in year two would be the price in year two. So we're going to go from $0.50 to $0.55. The price in year two times the quantity in year two. We'll assume some growth has occurred, times the quantity in year two. And so GDP in year two would be the area of this entire rectangle.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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So we're going to go from $0.50 to $0.55. The price in year two times the quantity in year two. We'll assume some growth has occurred, times the quantity in year two. And so GDP in year two would be the area of this entire rectangle. And if we want to find the difference between GDP in year two and GDP in year one, it would be the difference in area. So it would be what I am shading in in blue right over here. And based on the numbers that we went over right over here, the area that I'm shading in in blue, so the difference between GDP in year two and GDP in year one, the area I'm shading in blue, would be this 200, the 200 increment.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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And so GDP in year two would be the area of this entire rectangle. And if we want to find the difference between GDP in year two and GDP in year one, it would be the difference in area. So it would be what I am shading in in blue right over here. And based on the numbers that we went over right over here, the area that I'm shading in in blue, so the difference between GDP in year two and GDP in year one, the area I'm shading in blue, would be this 200, the 200 increment. So this area right over here would be that 200. Now, when you look at it over here, you see that that 200, some of it is due to an increase in quantity. But a lot of it is also due to an increase in price.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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And based on the numbers that we went over right over here, the area that I'm shading in in blue, so the difference between GDP in year two and GDP in year one, the area I'm shading in blue, would be this 200, the 200 increment. So this area right over here would be that 200. Now, when you look at it over here, you see that that 200, some of it is due to an increase in quantity. But a lot of it is also due to an increase in price. So if we really wanted to figure out how much more productive the country got, and we still want to measure GDP in dollars, maybe we can take a measure of GDP that measures year two's GDP, but it does it in year one's prices. So if we could somehow multiply year two's quantity by year one's prices, then we would get this rectangle right over here. We would get this rectangle right over here.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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But a lot of it is also due to an increase in price. So if we really wanted to figure out how much more productive the country got, and we still want to measure GDP in dollars, maybe we can take a measure of GDP that measures year two's GDP, but it does it in year one's prices. So if we could somehow multiply year two's quantity by year one's prices, then we would get this rectangle right over here. We would get this rectangle right over here. And then the difference between that and year one would give us the incremental GDP in year one prices due to quantity. And that's what we care about. We care about total productivity.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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We would get this rectangle right over here. And then the difference between that and year one would give us the incremental GDP in year one prices due to quantity. And that's what we care about. We care about total productivity. When we're thinking about GDP, we want to say how much more productive did the country get? So let's try to do it with these numbers right over here. So we can figure out quantity two.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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We care about total productivity. When we're thinking about GDP, we want to say how much more productive did the country get? So let's try to do it with these numbers right over here. So we can figure out quantity two. We can figure out the quantity in year two just by dividing the GDP by the price, just by dividing this area of the entire blue rectangle and dividing it by the price. That'll give us the quantity. So if we divide 1,200 divided by $0.55, let me get my calculator out.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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So we can figure out quantity two. We can figure out the quantity in year two just by dividing the GDP by the price, just by dividing this area of the entire blue rectangle and dividing it by the price. That'll give us the quantity. So if we divide 1,200 divided by $0.55, let me get my calculator out. So if I do 1,200 divided by $0.55, this is my quantity of apples and pounds in year two. And I'll just round it. 2,182.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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So if we divide 1,200 divided by $0.55, let me get my calculator out. So if I do 1,200 divided by $0.55, this is my quantity of apples and pounds in year two. And I'll just round it. 2,182. So this is 2,182. So the quantity in year two is 2,182 pounds. And then I could, so this is equal to that.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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2,182. So this is 2,182. So the quantity in year two is 2,182 pounds. And then I could, so this is equal to that. And then I could multiply this times the price. So this quantity is 2,182 pounds. And then I could multiply it times the price in year one, in year one's price.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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And then I could, so this is equal to that. And then I could multiply this times the price. So this quantity is 2,182 pounds. And then I could multiply it times the price in year one, in year one's price. So I'm going to multiply it times P1 is equal to $0.50 a pound. $0.50 per pound. And this will give me, so let me just get my calculator.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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And then I could multiply it times the price in year one, in year one's price. So I'm going to multiply it times P1 is equal to $0.50 a pound. $0.50 per pound. And this will give me, so let me just get my calculator. I should be able to do that one in my head, but let's see. 0.5. And I get 1090.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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And this will give me, so let me just get my calculator. I should be able to do that one in my head, but let's see. 0.5. And I get 1090. I'll just say 10. I'll round it to 1091. So this is equal to 1091.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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And I get 1090. I'll just say 10. I'll round it to 1091. So this is equal to 1091. And this is an interesting number. So this is, you could view this as year two's GDP in year, or adjusted for, I'll write adjusted for, adjusted for prices, or adjusted for price increases. Or you could say in year one prices.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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So this is equal to 1091. And this is an interesting number. So this is, you could view this as year two's GDP in year, or adjusted for, I'll write adjusted for, adjusted for prices, or adjusted for price increases. Or you could say in year one prices. Prices in year one prices. And what's useful about this is, this says, look, if prices had remained constant, this is what our GDP would have gotten to. If prices did not increase, our GDP would have gotten to this 1091.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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Or you could say in year one prices. Prices in year one prices. And what's useful about this is, this says, look, if prices had remained constant, this is what our GDP would have gotten to. If prices did not increase, our GDP would have gotten to this 1091. 1091 is this area that I drew in pink here. And so now you could say if prices were held constant, the growth in GDP would have been $91, not $200. So this area right over here that I'm, actually, let me do it in a color.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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If prices did not increase, our GDP would have gotten to this 1091. 1091 is this area that I drew in pink here. And so now you could say if prices were held constant, the growth in GDP would have been $91, not $200. So this area right over here that I'm, actually, let me do it in a color. Let me do it in orange maybe. This area right over here, the actual growth, if prices were held constant, would have been $91. We would have gone from $1,000 of GDP to $1,091.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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So this area right over here that I'm, actually, let me do it in a color. Let me do it in orange maybe. This area right over here, the actual growth, if prices were held constant, would have been $91. We would have gone from $1,000 of GDP to $1,091. So this right over here, that area is $91 of, and we could even call it real growth. It really measures the productivity. Now this gives us an interesting, I guess, set of ideas.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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We would have gone from $1,000 of GDP to $1,091. So this right over here, that area is $91 of, and we could even call it real growth. It really measures the productivity. Now this gives us an interesting, I guess, set of ideas. One idea is to just measure your GDP in the current year's dollars. So this was GDP measured in year two's dollars. It was year two GDP measured in year two dollars, year two prices.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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Now this gives us an interesting, I guess, set of ideas. One idea is to just measure your GDP in the current year's dollars. So this was GDP measured in year two's dollars. It was year two GDP measured in year two dollars, year two prices. So we could call that year two's nominal GDP. Nominal GDP. Nominal, in name.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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It was year two GDP measured in year two dollars, year two prices. So we could call that year two's nominal GDP. Nominal GDP. Nominal, in name. So it's GDP in name, in that year's prices. But this right over here, where we measured year two's GDP in some base year's prices, so it allows a real comparison of how much did our productivity actually increase. Our productivity actually increased by 9%.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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Nominal, in name. So it's GDP in name, in that year's prices. But this right over here, where we measured year two's GDP in some base year's prices, so it allows a real comparison of how much did our productivity actually increase. Our productivity actually increased by 9%. We produced 9% more apples. This we call real GDP. Because it gives you a measure of real productivity.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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Our productivity actually increased by 9%. We produced 9% more apples. This we call real GDP. Because it gives you a measure of real productivity. It tries to take out price increases. What we'll see in the future, or we might not do it in an introductory course, but in practice, it's kind of hard to really measure what the absolute, if you weight every day. This was a simple economy where we only had one product.
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Real GDP and nominal GDP GDP Measuring national income Macroeconomics Khan Academy.mp3
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Because it gives you a measure of real productivity. It tries to take out price increases. What we'll see in the future, or we might not do it in an introductory course, but in practice, it's kind of hard to really measure what the absolute, if you weight every day. This was a simple economy where we only had one product. But if you have many, many, many products, actually gazillions of products in a real economy, and the prices are adjusting, and the quantities are adjusting, it's not so easy to figure out how to adjust for price. But the folks running the national income accounts do try to do this. So they get a sense of how much was the actual real growth.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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So once again, this is a topic very close to my heart. So let's just go through a few thought experiments here. So in general, you have income, income, and that income, in order to produce it, you need capital, you need capital, and you need labor. For example, if you're running a farm, you need land and you need animals and you need some equipment, but you also need people to run the equipment and manage the farm. If you're running a software company, you need a building, you need computers, you need servers, I guess that's computers as well, but you need people to program the computers and to sell the software and to develop it and whatever else. So these are the two things that you need in order to produce output, which you would recognize in terms of income, but then the question is how does that income get split? How much of it goes to the capital and how much goes to labor?
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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For example, if you're running a farm, you need land and you need animals and you need some equipment, but you also need people to run the equipment and manage the farm. If you're running a software company, you need a building, you need computers, you need servers, I guess that's computers as well, but you need people to program the computers and to sell the software and to develop it and whatever else. So these are the two things that you need in order to produce output, which you would recognize in terms of income, but then the question is how does that income get split? How much of it goes to the capital and how much goes to labor? And the idea here is that if you have dissemination of knowledge and if knowledge work becomes more and more and more valuable, so if knowledge work, so let me put a little aura around this. So this is the aura of knowledge. If this is knowledge work and it's less and less of a commodity, then maybe labor has more leverage here.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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How much of it goes to the capital and how much goes to labor? And the idea here is that if you have dissemination of knowledge and if knowledge work becomes more and more and more valuable, so if knowledge work, so let me put a little aura around this. So this is the aura of knowledge. If this is knowledge work and it's less and less of a commodity, then maybe labor has more leverage here. On the other hand, if you have these hugely capital-intensive industries where labor is kind of this monotonous, unskilled work, then maybe capital has more of the leverage. Now let's just think about, and Piketty tends to be a little dismissive of this happening on a large scale. He says it might be happening in pockets.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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If this is knowledge work and it's less and less of a commodity, then maybe labor has more leverage here. On the other hand, if you have these hugely capital-intensive industries where labor is kind of this monotonous, unskilled work, then maybe capital has more of the leverage. Now let's just think about, and Piketty tends to be a little dismissive of this happening on a large scale. He says it might be happening in pockets. It might be happening in pockets in terms of managers and finance or maybe in certain industries like the software industry, but in his mind, this isn't, this knowledge dissemination isn't going to make labor important enough in order to offset this whole more and more income going to capital, especially after generation and generation, potentially leading to dynastic wealth. But the one thought experiment, once again, my goal here isn't to give my point of view. It's really to just give you things to think about and for you to come to your own point of view is to think about the comparison between the present day and the Gilded Age, which the book makes.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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He says it might be happening in pockets. It might be happening in pockets in terms of managers and finance or maybe in certain industries like the software industry, but in his mind, this isn't, this knowledge dissemination isn't going to make labor important enough in order to offset this whole more and more income going to capital, especially after generation and generation, potentially leading to dynastic wealth. But the one thought experiment, once again, my goal here isn't to give my point of view. It's really to just give you things to think about and for you to come to your own point of view is to think about the comparison between the present day and the Gilded Age, which the book makes. If we look at the Gilded Age, so let me write this here. So the Gilded Age, so this is the end of the 19th century, the late 1800s. The Gilded Age, what were the forces of growth in the Gilded Age?
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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It's really to just give you things to think about and for you to come to your own point of view is to think about the comparison between the present day and the Gilded Age, which the book makes. If we look at the Gilded Age, so let me write this here. So the Gilded Age, so this is the end of the 19th century, the late 1800s. The Gilded Age, what were the forces of growth in the Gilded Age? Where was a lot of the income being generated from? Well, this was really the peak of the Industrial Revolution. You have things like railroads, railroads.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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The Gilded Age, what were the forces of growth in the Gilded Age? Where was a lot of the income being generated from? Well, this was really the peak of the Industrial Revolution. You have things like railroads, railroads. You have oil, I guess you could say energy, oil. You have manufacturing, manufacturing. All of these industries are incredibly capital intensive.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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You have things like railroads, railroads. You have oil, I guess you could say energy, oil. You have manufacturing, manufacturing. All of these industries are incredibly capital intensive. Capital is very important. You can't even do these things without capital and in all of these, labor is a bit of a commodity that hey, you just need people to kind of nail the railroad ties in and things like that. You need people to just work on the rig.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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All of these industries are incredibly capital intensive. Capital is very important. You can't even do these things without capital and in all of these, labor is a bit of a commodity that hey, you just need people to kind of nail the railroad ties in and things like that. You need people to just work on the rig. You need people to work on the assembly line and the Industrial Revolution was really a process of taking these crafts and turning them into more and more one-off, almost you could call it commodity labor. Now let's think about the present day and we could probably, I think it's fair to call it the Information Age. Information, Information Age.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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You need people to just work on the rig. You need people to work on the assembly line and the Industrial Revolution was really a process of taking these crafts and turning them into more and more one-off, almost you could call it commodity labor. Now let's think about the present day and we could probably, I think it's fair to call it the Information Age. Information, Information Age. And what are the growth industries in the Information Age? Well, one that's close to my heart, I'm making this video in the middle of Silicon Valley, is software. Actually, that's probably the one that really stands out to me as a major growth area but there's kind of biotech.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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Information, Information Age. And what are the growth industries in the Information Age? Well, one that's close to my heart, I'm making this video in the middle of Silicon Valley, is software. Actually, that's probably the one that really stands out to me as a major growth area but there's kind of biotech. Biotech, we could go on and on and on. And what's common about all of these? Well, they're not necessarily as capital intensive as what we see here.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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Actually, that's probably the one that really stands out to me as a major growth area but there's kind of biotech. Biotech, we could go on and on and on. And what's common about all of these? Well, they're not necessarily as capital intensive as what we see here. In particular, if we're talking about software, it's not very capital intensive at all. You just need some computers and a place to program in. You can, in theory, do it inside someone's house.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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Well, they're not necessarily as capital intensive as what we see here. In particular, if we're talking about software, it's not very capital intensive at all. You just need some computers and a place to program in. You can, in theory, do it inside someone's house. And this is really more about highly, highly, highly skilled labor. Same thing with biotech. It does need capital but that capital isn't for railroads or it isn't for hugely, I mean, there is some equipment but it's mainly for people.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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You can, in theory, do it inside someone's house. And this is really more about highly, highly, highly skilled labor. Same thing with biotech. It does need capital but that capital isn't for railroads or it isn't for hugely, I mean, there is some equipment but it's mainly for people. It's mainly for researchers and people to run the clinical trials and for whatever else. And so we are, it seems like we are in an age where labor is going to become more and more valuable but not just commodity labor, not just someone to kind of work one shift at the factory but highly, highly, highly skilled labor. Now, just because this is happening, this could be a driver of more and more income going to labor.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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It does need capital but that capital isn't for railroads or it isn't for hugely, I mean, there is some equipment but it's mainly for people. It's mainly for researchers and people to run the clinical trials and for whatever else. And so we are, it seems like we are in an age where labor is going to become more and more valuable but not just commodity labor, not just someone to kind of work one shift at the factory but highly, highly, highly skilled labor. Now, just because this is happening, this could be a driver of more and more income going to labor. But that by itself wouldn't necessarily drive off inequality. For example, you might have a situation and there's some data science that maybe it's just happening where if you look at, if this is the pool of folks that the people who are able to participate in these high growth sectors where labor adds a significant amount of value, that that's actually a small percentage of this population. So a small percentage of the population is going to take advantage, could potentially take advantage of these dynamics.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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Now, just because this is happening, this could be a driver of more and more income going to labor. But that by itself wouldn't necessarily drive off inequality. For example, you might have a situation and there's some data science that maybe it's just happening where if you look at, if this is the pool of folks that the people who are able to participate in these high growth sectors where labor adds a significant amount of value, that that's actually a small percentage of this population. So a small percentage of the population is going to take advantage, could potentially take advantage of these dynamics. But if the rest of the population doesn't have the skills necessary, then they're going to essentially be left out of this growth. And so that could still drive inequality. It won't be driving inequality because of income going to more and more, income going more and more to capital because of R being greater than G because returns of capital are greater than growth.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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So a small percentage of the population is going to take advantage, could potentially take advantage of these dynamics. But if the rest of the population doesn't have the skills necessary, then they're going to essentially be left out of this growth. And so that could still drive inequality. It won't be driving inequality because of income going to more and more, income going more and more to capital because of R being greater than G because returns of capital are greater than growth. It wouldn't be because of that. It would be because of this differentiation in labor where highly, highly skilled labor is getting a disproportionate share of the income relative to other labor. So the question is, is can we get more people to participate in this?
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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It won't be driving inequality because of income going to more and more, income going more and more to capital because of R being greater than G because returns of capital are greater than growth. It wouldn't be because of that. It would be because of this differentiation in labor where highly, highly skilled labor is getting a disproportionate share of the income relative to other labor. So the question is, is can we get more people to participate in this? And once again, this is an issue of education. Can we get this pool as a percentage of the population to become a much larger pool of the population so more and more, so more and more of the world, more and more of the world can participate in that? So once again, this is just something to think about.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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So the question is, is can we get more people to participate in this? And once again, this is an issue of education. Can we get this pool as a percentage of the population to become a much larger pool of the population so more and more, so more and more of the world, more and more of the world can participate in that? So once again, this is just something to think about. I don't know the answer to this, but there are some dynamics in play. And we're definitely in a different type of world than we were in the Gilded Age. Another way that you could think about it, and this isn't from the book, but this is just a way that I sometimes think about it.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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So once again, this is just something to think about. I don't know the answer to this, but there are some dynamics in play. And we're definitely in a different type of world than we were in the Gilded Age. Another way that you could think about it, and this isn't from the book, but this is just a way that I sometimes think about it. If you think of the Industrial Revolution, the world was kind of a pyramid. That down here, you have your labor. And you needed a lot of folks there, but it was relatively unskilled.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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Another way that you could think about it, and this isn't from the book, but this is just a way that I sometimes think about it. If you think of the Industrial Revolution, the world was kind of a pyramid. That down here, you have your labor. And you needed a lot of folks there, but it was relatively unskilled. And then in the middle, you kind of have your white collar jobs. This is the folks who are kind of manipulating information, filing papers, et cetera, et cetera, the office jobs. And then at the top of the pyramid during the Industrial Revolution, really going into the 20th century, you had, I guess you could say, your capital owners, your owners of capital.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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And you needed a lot of folks there, but it was relatively unskilled. And then in the middle, you kind of have your white collar jobs. This is the folks who are kind of manipulating information, filing papers, et cetera, et cetera, the office jobs. And then at the top of the pyramid during the Industrial Revolution, really going into the 20th century, you had, I guess you could say, your capital owners, your owners of capital. And then you had also a very small, I would say, creative class. So this is creative class. And so this would be folks like engineers, and artists, and people doing research.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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And then at the top of the pyramid during the Industrial Revolution, really going into the 20th century, you had, I guess you could say, your capital owners, your owners of capital. And then you had also a very small, I would say, creative class. So this is creative class. And so this would be folks like engineers, and artists, and people doing research. And so this is essentially the dynamic you had. But now when we go to the Information Age, automation is making labor less important. And even white collar jobs, information processing.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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And so this would be folks like engineers, and artists, and people doing research. And so this is essentially the dynamic you had. But now when we go to the Information Age, automation is making labor less important. And even white collar jobs, information processing. And so there's two different realities that we could potentially go to. There's one where essentially you still have a relatively small class of people who own capital or own most of the capital or in a creative class. And then you have a small, actually, let me just, so if I just take that triangle, that same triangle right over there.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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And even white collar jobs, information processing. And so there's two different realities that we could potentially go to. There's one where essentially you still have a relatively small class of people who own capital or own most of the capital or in a creative class. And then you have a small, actually, let me just, so if I just take that triangle, that same triangle right over there. So you still have a small group of people who've fallen to the top of the triangle. And because automation is taking care of these middle two, you only need a small sliver of people who are participating in here. And so everyone else here is essentially going to be left out.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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And then you have a small, actually, let me just, so if I just take that triangle, that same triangle right over there. So you still have a small group of people who've fallen to the top of the triangle. And because automation is taking care of these middle two, you only need a small sliver of people who are participating in here. And so everyone else here is essentially going to be left out. So these folks are going to be left out, which isn't a good recipe for anyone. But there's another reality where, well, what if we could expand this top triangle, where we can have a larger and larger creative class? And if these people can participate in the high value labor jobs, I guess you could say, then they are going to be in a position to capture more and more of the income.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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And so everyone else here is essentially going to be left out. So these folks are going to be left out, which isn't a good recipe for anyone. But there's another reality where, well, what if we could expand this top triangle, where we can have a larger and larger creative class? And if these people can participate in the high value labor jobs, I guess you could say, then they are going to be in a position to capture more and more of the income. And then they will also be in a position to have more and more capital. You see that happening in Silicon Valley. People who get a neat software job at Google or Facebook or Apple, not only they're getting that through their labor, but because that income is larger than their expenses, they're able to start to accumulate capital and also become capital owners.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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And if these people can participate in the high value labor jobs, I guess you could say, then they are going to be in a position to capture more and more of the income. And then they will also be in a position to have more and more capital. You see that happening in Silicon Valley. People who get a neat software job at Google or Facebook or Apple, not only they're getting that through their labor, but because that income is larger than their expenses, they're able to start to accumulate capital and also become capital owners. So there is a reality that if we play our cards right in education, and once again, this is close to my heart, maybe instead of going to this world where we leave all of these people out, we can go to a world that looks more like this, where we don't need a lot of labor because of automation, more kind of, I guess you could say, commodity labor. We don't need a lot of the traditional white collar jobs in information processing. And then most people, if we can get education to be good enough, can now participate in these really high value jobs where labor has a lot more leverage, where the returns to labor are larger than the returns to capital.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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People who get a neat software job at Google or Facebook or Apple, not only they're getting that through their labor, but because that income is larger than their expenses, they're able to start to accumulate capital and also become capital owners. So there is a reality that if we play our cards right in education, and once again, this is close to my heart, maybe instead of going to this world where we leave all of these people out, we can go to a world that looks more like this, where we don't need a lot of labor because of automation, more kind of, I guess you could say, commodity labor. We don't need a lot of the traditional white collar jobs in information processing. And then most people, if we can get education to be good enough, can now participate in these really high value jobs where labor has a lot more leverage, where the returns to labor are larger than the returns to capital. And because the returns to labor are larger, you're going to have those people also, they're going to get more share of income, and they're also going to be able to start to accumulate capital. So getting to this reality where you're having a larger and larger percentage of people who are essentially capital owners, and software engineers, and artists, and people doing R&D, in my mind, this is predicated on improving education. So to get from here to here, and to avoid going to this top one, it really is about having a more talented labor pool, a more educated labor pool.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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And then most people, if we can get education to be good enough, can now participate in these really high value jobs where labor has a lot more leverage, where the returns to labor are larger than the returns to capital. And because the returns to labor are larger, you're going to have those people also, they're going to get more share of income, and they're also going to be able to start to accumulate capital. So getting to this reality where you're having a larger and larger percentage of people who are essentially capital owners, and software engineers, and artists, and people doing R&D, in my mind, this is predicated on improving education. So to get from here to here, and to avoid going to this top one, it really is about having a more talented labor pool, a more educated labor pool. And if we pull this off, then we get into what could be considered a Star Trek reality. People don't really view Star Trek from economic point of view. But in Star Trek, you might realize that there aren't a lot of people tilling the fields here.
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Education as a force of convergence Macroeconomics Khan Academy.mp3
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So to get from here to here, and to avoid going to this top one, it really is about having a more talented labor pool, a more educated labor pool. And if we pull this off, then we get into what could be considered a Star Trek reality. People don't really view Star Trek from economic point of view. But in Star Trek, you might realize that there aren't a lot of people tilling the fields here. There aren't a lot of people just doing desk jobs at Star Trek. Everyone at Star Trek is either doing R&D, they are explorers, or they are artists. So once again, just something to think about.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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Both of them are good, because in either case you're getting money. So choice one. Today I will give you $100. I'll circle the payment when you get it in magenta. So today you get $100. Choice two, and I'll try to write this choice a little bit neater, choice two is that not in one year, but in two years. So let's say this is year one.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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I'll circle the payment when you get it in magenta. So today you get $100. Choice two, and I'll try to write this choice a little bit neater, choice two is that not in one year, but in two years. So let's say this is year one. And now this is year two. Actually, I'm going to give you three choices. That'll really, hopefully, hit things home.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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So let's say this is year one. And now this is year two. Actually, I'm going to give you three choices. That'll really, hopefully, hit things home. Actually, let me scoot this choice two over to the left. So now I'm back in business. So choice two.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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That'll really, hopefully, hit things home. Actually, let me scoot this choice two over to the left. So now I'm back in business. So choice two. I am willing to give you, let's say, $110 in two years. So not in one year, in two years I'm going to give you $110. And so I'll circle in magenta when you actually get your payment, and then choice three.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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So choice two. I am willing to give you, let's say, $110 in two years. So not in one year, in two years I'm going to give you $110. And so I'll circle in magenta when you actually get your payment, and then choice three. And choice three is going to be fascinating. I've done it in a slightly different shade of green. Choice three.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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And so I'll circle in magenta when you actually get your payment, and then choice three. And choice three is going to be fascinating. I've done it in a slightly different shade of green. Choice three. I am going to pay you, I'm making this up on the fly as I go, I'm going to pay you $20 today. I'm going to pay you $50 in one year. So let's see, that's 70.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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Choice three. I am going to pay you, I'm making this up on the fly as I go, I'm going to pay you $20 today. I'm going to pay you $50 in one year. So let's see, that's 70. Let me make this so it's close. And then I'm going to pay you, I don't know, $35 in year three. So all of these are payments.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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So let's see, that's 70. Let me make this so it's close. And then I'm going to pay you, I don't know, $35 in year three. So all of these are payments. I want to differentiate between the actual dollar payments and the present values. And just for the sake of simplicity, let's assume that I am guaranteed, I am the safest person available if the world exists, if the sun does not supernova, I will be paying you this amount of money. So I am as risk-free as the federal government.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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So all of these are payments. I want to differentiate between the actual dollar payments and the present values. And just for the sake of simplicity, let's assume that I am guaranteed, I am the safest person available if the world exists, if the sun does not supernova, I will be paying you this amount of money. So I am as risk-free as the federal government. And I had a post on the previous present value where someone talked about, well, is the federal government really that safe? And this is the point. The federal government, when it borrows from you $100, let's say it borrows $100 and it promises to pay it in a year, it'll give you that $100.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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So I am as risk-free as the federal government. And I had a post on the previous present value where someone talked about, well, is the federal government really that safe? And this is the point. The federal government, when it borrows from you $100, let's say it borrows $100 and it promises to pay it in a year, it'll give you that $100. The risk is, what is that $100 worth? Because they might inflate the currency to death. Anyway, I won't go into that right now.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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The federal government, when it borrows from you $100, let's say it borrows $100 and it promises to pay it in a year, it'll give you that $100. The risk is, what is that $100 worth? Because they might inflate the currency to death. Anyway, I won't go into that right now. Let's just go back to this present value problem. And actually, sometimes governments do default on debt, but the US government has never defaulted. It's inflated its currency, so that's kind of a roundabout way of defaulting.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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Anyway, I won't go into that right now. Let's just go back to this present value problem. And actually, sometimes governments do default on debt, but the US government has never defaulted. It's inflated its currency, so that's kind of a roundabout way of defaulting. But it's never actually said, I will not pay you. Because if that happened, our entire financial system would blow up and we would all be living off the land again. Anyway, back to this problem.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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It's inflated its currency, so that's kind of a roundabout way of defaulting. But it's never actually said, I will not pay you. Because if that happened, our entire financial system would blow up and we would all be living off the land again. Anyway, back to this problem. Enough commentary from Sal. So let's just compare choice one and choice two again. And once again, let's say that risk-free, I could lend it to the federal government at 5%.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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Anyway, back to this problem. Enough commentary from Sal. So let's just compare choice one and choice two again. And once again, let's say that risk-free, I could lend it to the federal government at 5%. And it doesn't matter over what risk-free rate is 5%. And for the sake of simplicity, in the next video I will make that assumption less simple. But for the sake of simplicity, the government will pay you 5% whether you give them the money for one year, whether you give them the money for two years, or whether you give them the money for three years.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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And once again, let's say that risk-free, I could lend it to the federal government at 5%. And it doesn't matter over what risk-free rate is 5%. And for the sake of simplicity, in the next video I will make that assumption less simple. But for the sake of simplicity, the government will pay you 5% whether you give them the money for one year, whether you give them the money for two years, or whether you give them the money for three years. So if I had $100, what would that be worth in one year? We figured that out already. It's 100 times 1.05, so that's $105.
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Present Value 2 Interest and debt Finance & Capital Markets Khan Academy.mp3
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But for the sake of simplicity, the government will pay you 5% whether you give them the money for one year, whether you give them the money for two years, or whether you give them the money for three years. So if I had $100, what would that be worth in one year? We figured that out already. It's 100 times 1.05, so that's $105. And then if you've got another 5%, so the government is giving you 5% per year, it would be 105 times 1.05. And what is that? So I have 105 times 1.05 is equal to $110.25.
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