section 3b- module 11- interpreting real gross domestic product
TRANSCRIPT
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BY J. A. SACCO
Section 3B- Module 11- Interpreting Real Gross Domestic Product
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MODULE OUTLINE
Distinguishing Between Nominal and Real Values
Comparing GDP Throughout the World
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REAL VERSUS NOMINAL GDP
Review- GDP measures the total spending on goods and services in all markets of the economy.
If total production and spending rises from one year to the next, at least one of two things must be true.
1. The economy is producing a larger output of goods and services or
2. Goods and services are being sold at higher prices.
2 apples X $2.00 = $4.003 apples X $3.00 = $9.00
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REAL VERSUS NOMINAL GDP
Inflation can distort economic variables like GDP, so we have two versions of GDP:
Nominal GDP values output using current prices not corrected for inflation
Real GDP values output using the prices of a base year is corrected for inflation
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NOMINAL GDP
To calculate Nominal GDP:
Current year price X Current year quantity
If more than one good/service add them up
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EXAMPLE:
Compute nominal GDP in each year:
2011: $10 x 400 + $2 x 1000 = $6,000
2012: $11 x 500 + $2.50 x 1100 = $8,250
2013: $12 x 600 + $3 x 1200 = $10,800
Pizza Latte
year P Q P Q
2011 $10 400 $2.00 1000
2012 $11 500 $2.50 1100
2013 $12 600 $3.00 1200
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REAL GDP To calculate Real GDP:
Prices of goods/services of base year
Quantity of good/services in current yearX
If more than one good/service then add them up!
Remember Real GDP is the
same as Nominal GDP in the base year!.
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EXAMPLE:
Compute real GDP in each year, using 2011 as the base year:
Pizza Latte
year P Q P Q
2011 $10 400 $2.00 1000
2012 $11 500 $2.50 1100
2013 $12 600 $3.00 1200
$10 $2.00
2011: $10 x 400 + $2 x 1000 = $6,000
2012: $10 x 500 + $2 x 1100 = $7,200
2013: $10 x 600 + $2 x 1200 = $8,400
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EXAMPLE:
In each year, nominal GDP is measured using the (then)
current prices. real GDP is measured using constant prices
from the base year (2011 in this example).
yearNominal
GDPReal GDP
2011 $6000 $6000
2012 $8250 $7200
2013 $10,800 $8400
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EXAMPLE:
The change in nominal GDP reflects both prices and quantities.
yearNominal
GDPReal GDP
2011 $6000 $6000
2012 $8250 $7200
2013 $10,800 $8400
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.
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ECONOMIC GROWTH RATE IN GDP
To determine the rate of economic growth in GDP from year to year.
Real GDP in year 2 - Real GDP in year 1 Real GDP 1
X 100
GDP GROWTH
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REAL GDP OVER RECENT HISTORY
The GDP data Real GDP grows over time Growth – average 3% per year since 1965 Growth is not steady
GDP growth interrupted by recessions
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REAL GDP OVER RECENT HISTORY Recession
Two consecutive quarters of falling GDP Real GDP declines Lower income Rising unemployment Falling profits Increased bankruptcies
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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
NOMINAL AND REAL GDP IN THE U.S., 1965–2012
Real GDP (base year
2005)
Nominal GDP
billi
ons
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REAL VERSUS NOMINAL GDP
The GDP deflator Price index for the macroeconomy that can
determine the amount of change in inflation from one year to the next
Measures the current level of prices relative to the level of prices in the base year
IT IS NOT A PRICE!!! Is 100 for the base year Can be used to take inflation out of nominal GDP
(“deflate” nominal GDP) to give you Real GDP
15
100xDeflator GDP
GDP nominal GDP Real
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THE GDP DEFLATOR
The GDP deflator is a measure of the overall level of prices.
Definition:
One way to measure the economy’s inflation rate is to compute the percentage increase in the GDP deflator from one year to the next.
GDP deflator = 100 x nominal GDP
real GDP
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EXAMPLE:
Compute the GDP deflator in each year:
yearNominal
GDPReal GDP
GDP Deflator
2011 $6000 $6000
2012 $8250 $7200
2013 $10,800 $8400
2011: 100 x (6000/6000) = 100.0
100.0
2012: 100 x (8250/7200) = 114.6
114.6
2013: 100 x (10,800/8400) = 128.6
128.6
The GDP Deflator for base year is always 100!
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A C T I V E L E A R N I N G 2
COMPUTING GDP
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Use the above data to solve these problems:
A. Compute nominal GDP in 2011.
B. Compute real GDP in 2012.
C. Compute the GDP deflator in 2013.
2011 (base yr) 2012 2013
P Q P Q P Q
Good A $30 900 $31 1000 $36 1050
Good B $100 192 $102 200 $100 205
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A C T I V E L E A R N I N G 2
ANSWERS
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
A. Compute nominal GDP in 2011.
$30 x 900 + $100 x 192 = $46,200
B. Compute real GDP in 2012.
$30 x 1000 + $100 x 200 = $50,000
2011 (base yr) 2012 2013
P Q P Q P Q
Good A $30 900 $31 1,000 $36 1050
Good B $100 192 $102 200 $100 205
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A C T I V E L E A R N I N G 2
ANSWERS
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
C. Compute the GDP deflator in 2013.
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
2011 (base yr) 2012 2013
P Q P Q P Q
Good A $30 900 $31 1,000 $36 1050
Good B $100 192 $102 200 $100 205
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REAL VERSUS NOMINAL GDP
After you calculate the GDP deflator for each year you can now determine the rate of inflation for the macroeconomy
Inflation rate (calculated from the GDP Deflator) Percentage change in some measure of the
price level from one period to the next
21
100
Inflation in year 2GDP deflator in year 2-GDP deflator in year 1
GDP deflator in year 1
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GDP
GDP – not a perfect measure of well-being Doesn’t include
Leisure Value of almost all activity that takes place
outside markets Quality of the environment
Nothing about distribution of income
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DISTINGUISHING BETWEEN NOMINAL AND REAL VALUES
Per Capita GDP Adjusting for population growth and for
price changes Real GDP per capita is the main indicator
of the average person’s standard of living.
population
GDP Real GDP Real Capita Per
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COMPARING GDPTHROUGHOUT THE WORLD
True Purchasing Power Accounting for goods and services that are
not traded in the world market Purchasing Power Parity
Adjustments in exchange rate conversions that takes into account differences in the true cost of living across countries
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INTERNATIONAL DIFFERENCES: GDP & QUALITY OF LIFE
Rich countries - higher GDP per person Better
Life expectancy Literacy Internet usage
Poor countries - lower GDP per person Worse
Life expectancy Literacy Internet usage
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TABLE 3
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GDP and the Quality of Life
The table shows GDP per person and three other measures of the quality of life for twelve major countries.