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February 7, 2012 Goal 1: Compare and Contrast Nominal and Real GDP Nominal GDP vs. Real GDP Nominal GDP -GDP measured in terms of the price level at the time of the measurement, unadjusted for inflation or deflation -If prices never changed nominal GDP would be a good measure from year to year Real GDP- is GDP corrected for changes in prices (inflation or deflation) from year to year. -uses prices from a base year to calculate GDP Example: $110 GDP II Per 8 Page 1 $110 Goal 2: Examine what GDP does not measure. Limitations to GDP as a Measure Nonmarket Activities -GDP does not include certain productive activities do not take place in a market -unpaid work of housewives, househusbands, do-ityourself repairmen Leisure -GDP does not account for the value of increased leisure time -more vacation time and holidays are valuable to peoples production at work Improved Product Quality -GDP does not take into account how much products have improved GDP II Per 8 Page 2 Example: $200 cell phone bought today vs. a $200 cell phone purchased in 2000. The Underground Economy -does not include income made from illegal gambling, prostitution, and drug dealing GDP and the Environment -GDP does not take into account the negative costs of dirty air, dirty water, toxic waste, congestion and noise. GDP II Per 8 Page 3 Exit Question: What is the difference between nominal GDP and Real GDP? 2008 2009 2010 MP3 Players Produced 200 200 225 Price $75 $100 $100 Nominal GDP Real GDP Base: 2008 GDP II Per 8 Page 4