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Comparing GDP Across Time

GDP can grow due to:1) Economy producing more2) Prices having risen

Calculating GDP and Real GDPin a Simple Economy

Nominal GDP

• nominal GDP, is the value of all finaloutput produced in an economy during agiven year, calculated using theprices current in the year which theoutput is produced

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Keeping it Real

Comparing outputover time is bestdone with realrealoutputoutput which isnominal outputadjusted for inflation

• Real GDP is the valueof the final goods andservices producedcalculated using theprices of some baseyear

Nominal Vs. Real

•• Nominal GDPNominal GDP is GDP calculated atexisting prices.

•• Real GDPReal GDP is nominal GDP adjusted forinflation.

• Real GDP is important to societybecause it measures what is reallyproduced

Real vs. Nominal GDP

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Real vs. Nominal GDP

Laugher CurveThree econometricians went

out hunting, and cameacross a large deer.

The first econometrician fired,but missed, by a yard to theleft.

The second econometricianfired, but also missed, by ayard to the right.

PUNCH LINE: The third

econometrician didn'tfire, but shouted intriumph, "We got it!We got it!"

Chained Dollars

• Depending on the year chosen asthe base year Real GDP can differ.

• Chain-linking split the differencebetween using early base year andlate base year.(similar to our thirdeconometrician)

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GDP Per Capita

• GDP Per Capital is GDP divided by thesize of the population: it is equal to theaverage GDP per person.

• Not an end in itself does not addresshow a country uses that output to affectliving standards.

GDP Measures MarketActivity, Not Welfare• GDP does not measure happiness, nor

does it measure economic welfare.• Welfare is a complicated idea, very

difficult to measure.

Gross Progress Indicator

• The gross progress indicator (GPI) isan alternative measure to GDP.

• The GPI tries to measure pollution,education, health concerns, as well asGDP.

• GPI is not in the text but the text does discuss this idea!