Toot-Sweet Tuesday, October 22Wack-a-Mole Wednesday, October 23

● Warm up: [From your brains not your notes] Create an index card on GDP that includes the definition and formula. Also include the difference between real and nominal GDP

● Learning targets: I can calculate real GDP using a base year and the GDP deflator. I can calculate economic growth through change in real GDP.

● HW 2-3 and 2-4 due NOW. Quiz delayed by one day. 1

Based on the definition of real GDP, do you predict real GDP should be higher or

lower than nominal GDP?

SO HOW DO WE CALCULATE REAL GDP?

• Choose a base year and use the prices from the base year to calculate GDP in following years.● India changed base year recently . . .

• This fixes prices so that changes in GDP in later years are caused only by a change in growth (production) and NOT caused by price changes (inflation).

Real vs. Nominal GDP Example2008

10 cars at $15,000 each = $150,00010 trucks at $20,000 each = $200,000Nominal GDP = $350,000

200910 cars at $16,000 each = $160,00010 trucks at $21,000 each= $210,000Nominal GDP = $370,000

The GDP in year 2008 shows the dollar value of all final goods produced.

The nominal GDP in year 2009 is higher which suggests that the economy is improving. But how much is the REAL GDP? How do you get it?

Use 2008 Prices.The Real GDP for 2009 is the same as 2008 after we adjust for inflation.

200910 cars at $15,000 each = $150,00010 trucks at $20,000 each= $200,000REAL GDP = $350,000

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LET’S CALCULATE REAL GDP FOR OUR CLASS FOR 2017

• Consumer spending:● Running shoes: ____ @ $110● Pizzas: ____ @ $12● iPhones: ____ @ $600

• Investment (business) spending:● Factories: ____ @ $1million● Forklifts : _____ @ $500k

• Government spending:● Libraries: ____ @ $770k● Police cars: ____ @ $67k

• Exports:● Oil: ____ @ $75/barrel

• Imports:● Cars: ____ @ $45k

How do we measure growth from year to year?

% Change in GDP

= Year 2 - Year 1Year 1

X 100

Mordor’s GDP in 2014 was $4000Mordor’s GDP in 2018 was $5000What is the % Change in GDP?

Transylvania’s GDP in 2014 was $2,000Transylvania’s GDP in 2018 was $2,100

What is the % Change in GDP?

Change in real GDP over time 8Copyright

ACDC Leadership 2018

From NYTimes, Sept. 24, 2018:FACT CHECK OF THE DAY

Trump’s Inaccurate Claim That U.S. Is ‘the Fastest-Growing Economy in the World’The United States’ G.D.P. growth is nowhere near the highest in the world, though its rate is currently one of the highest among developed economies.

And the data says . . . .

Price Index and GDP Deflator

▪ A Price Index – used to measure inflation from an agreed upon base year’s prices

▪ GDP Deflator:▪ Reflects changes in the prices of goods and services

but not quantities produced▪ Used to monitor average level of prices in the economy

and thus inflation

CHAPTER 23 MEASURING A NATION’S INCOME

The GDP Deflator▪ The GDP deflator measures the changes in

prices for all of the goods and services produced in an economy. Therefore, it measures the overall level of prices in an economy.

▪ Formula:

GDP deflator = 100 x nominal GDPreal GDP

What does GDP Deflator show us and how can we use it?● If nominal GDP shows us changes in

quantities produced and changes in prices (QxP)

● If real GDP shows us changes in quantities only (P)

● Then it follows that the GDP Deflator shows us changes in price!

QxP = P Nominal = GDP Defl. Q Real

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What does GDP Deflator show us and how can we use it?

▪ One way to measure the economy’s inflation rate is to compute the percentage change in the GDP deflator from one year to the next:

GDP Def Y2 - GDP Def Y1 x 100 = Inflation!GDP Defl Y1

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▪ Formula for Real GDP▪ (Nominal GDP÷GDP Deflator) X 100

▪ Formula for GDP Deflator: ▪ (Nominal GDP÷Real GDP) X 100

▪ Formula for Real GDP per capita:▪ Real GDP÷Population

▪ Formula for GDP Growth Rate▪ (Real GDP Year 2 – Real GDP Year 1) ÷ (Real GDP

Year 1) X 100

Does GDP accurately measure standard of living?

Standard of living can be measured, in part, by how well the economy is doing…

But it needs to be adjusted to reflect the size of the nation’s population.

GDP Per Capita (per person) GDP divided by the population.

GDP per capita is measure of a nation’s standard of living.

❖ So what countries have the highest GDP per capita?

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What are the top 10 most populated countries?

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*CIA Factbook 2017 Estimate

GDP Per Capita

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*CIA Factbook 2017 Estimate

https://www.youtube.com/watch?v=jbkSRLYSojo

Why do some countries have higher GDPs?

REVIEW ACTIVITYName That Concept (7:09)

Rules: 1. Cannot use the word(s)2. Focus on the concept not word

Ex: Demand

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NAME THAT CONCEPT

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1. GDP2. Factor Market3. Substitute goods4.What an umbrella might say if

it could talk5. Opportunity cost6. Production Possibilities

Curve

NAME THAT CONCEPT

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1. Comparative advantage2. Law of supply3. Finished goods & services4. GDP per Capita5.What a toaster might say if

it could talk6.Marginal benefit

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2012 Exam

“Depreciation” is included in NET private investment; GDP only counts GROSS investment.

2007 FRQ

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2007 FRQ

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EXAMPLE:

Compute nominal GDP in each year:

2002: $10 x 400 + $2 x 1000 = $6,000

2003: $11 x 500 + $2.50 x 1100 = $8,250

2004: $12 x 600 + $3 x 1200 = $10,800

Pizza Latteyear P Q P Q2002 $10 400 $2.00 10002003 $11 500 $2.50 11002004 $12 600 $3.00 1200

37.5%

Increase:

30.9%

EXAMPLE:

Compute real GDP in each year,using 2002 as the base year:

Pizza Latteyear P Q P Q2002 $10 400 $2.00 10002003 $11 500 $2.50 11002004 $12 600 $3.00 1200

20.0%

Increase:

16.7%

$10 $2.00

2002: $10 x 400 + $2 x 1000 = $6,000

2003: $10 x 500 + $2 x 1100 = $7,200

2004: $10 x 600 + $2 x 1200 = $8,400

$10 $2.00

EXAMPLE:

In each year,▪ nominal GDP is measured using the (then)

current prices. ▪ real GDP is measured using constant prices from

the base year (2002 in this example).

yearNominal

GDPReal GDP

2002 $6000 $60002003 $8250 $72002004 $10,800 $8400

EXAMPLE:

▪ The change in nominal GDP reflects both prices and quantities.

yearNominal

GDPReal GDP

2002 $6000 $60002003 $8250 $72002004 $10,800 $8400

20.0%

16.7%

37.5%

30.9%

▪ The change in real GDP is the amount that GDP would change if prices were constant (i.e., if zero inflation).

Hence, real GDP is corrected for inflation.

EXAMPLE:

Compute the GDP deflator in each year:

yearNominal

GDPReal GDP

GDP Deflator

2002 $6000 $60002003 $8250 $72002004 $10,800 $8400

2002: 100 x (6000/6000) = 100.0

100.0

2003: 100 x (8250/7200) = 114.6

114.6

2004: 100 x (10,800/8400) = 128.6

128.6

14.6%

12.2%

A C T I V E L E A R N I N G 2: Computing GDP

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Use the above data to solve these problems:A. Compute nominal GDP in 2004.B. Compute real GDP in 2005. C. Compute the GDP deflator in 2006.

2004 (base yr) 2005 2006P Q P Q P Q

good A $30 900 $31 1,000 $36 1050good B $100 192 $102 200 $100 205

A C T I V E L E A R N I N G 2: Answers

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A. Compute nominal GDP in 2004.$30 x 900 + $100 x 192 = $46,200

B. Compute real GDP in 2005. $30 x 1000 + $100 x 200 = $50,000

2004 (base yr) 2005 2006P Q P Q P Q

good A $30 900 $31 1,000 $36 1050good B $100 192 $102 200 $100 205

A C T I V E L E A R N I N G 2: Answers

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C. Compute the GDP deflator in 2006. Nom GDP = $36 x 1050 + $100 x 205 = $58,300 Real GDP = $30 x 1050 + $100 x 205 = $52,000 GDP deflator = 100 x (Nom GDP)/(Real GDP)

= 100 x ($58,300)/($52,000) = 112.1

2004 (base yr) 2005 2006P Q P Q P Q

good A $30 900 $31 1,000 $36 1050good B $100 192 $102 200 $100 205

And why does Ms. Browngive us so many darn quizzes?