Download Real GDP vs. Nominal GDP

Real GDPvs. NominalGDP
GDP (gross domestic product) is the most important economic
variable to macroeconomists. Nominal or current GDP , or
just GDP , is the total value of all new goods and services
produced in an economy during a specified period of time
without the general change in the price level (inflation or
deflation) taken into account. GDP includes spending by
consumers (C) + businesses (J) + the government (G)_±
foreigners (X) (net exports: exports-imports). For example, if a
country makes only watches and made 100 in 2015 at $10.00
each, the country's GDP for 2015 would be $1,00 0 (100 x $10).
But because the quantities of goods and services as well as
their prices (P) change over time, economists prefer to use real
gross domestic product (real GDP) (Y), which is also called
real output or output of production, to calculate economic
growth from year to year.
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· I GDP(cont.)
Real GDP vs. Nom1na
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Real GDPvs. NominalGDP(cont.)
Real GDP focuses on the changes in quantity from year to year,
not the price change. As we'll soon learn, decreases in a
country's money supply doesn't change real output (real GDP).
An increase in aggregate supply (AS) (a country's total supply)
increases real output, as does an initial decrease in workers'
wages, while a decrease in AS, a recession, or a depression
decreases real output.
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Real GDPvs. NominalGDP(cont.)
Real GDP is a country's GDP that is adjusted to take into
account the general change in the price level (inflation or
deflation) over time (from year to year). Real GDP allows an
equal comparison between years, apples to apples.
nominal GDP==consumer consumption ( C) + businesses investments (1)
+ government spending/expenditures ( G)
+ net exports (X) (net exports: exports-imports)
real GDP= nominal GDP - change in the price level (inflation or deflation)
For example, imagine a country with a GDP of $100 in a given
year. In the next year the GDP rises to $105 and the inflation
rate is 3%. Roughly, we can say that real GDP rose 2% to only
$102 when the inflation rate is accounted for. You might think
you are nominating someone good for a position, but what you
get in the end is what is real.
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Real GDP vs. NominalGDP- Questions
13. The table belo,v ho\\'S a country'
n1acroecononuc data in 2013.
Consun1ption
$175 billion
Individual incotne tax
$32 billion
Private investn1ent
pending
$30 billion
Corporate taxes
$25 billion
Exports
$75 billion
Governn1ent purcha e
$40 billion
lr11port
The country's gro
billion
billion
billion
billion
$347 billion
$220
$282
$304
$309
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pending
$100 billion
don1estic product ·
Real GDP vs. NominalGDP- Questions
13. The table belo,v ho\\'S a country'
n1acroecononuc data in 2013.
Consun1ption
$175 billion
Individual incotne tax
$32 billion
Private investn1ent
pending
$30 billion
Corporate taxes
$25 billion
Exports
$75 billion
Governn1ent purcha e
$40 billion
lr11port
The country's gro
. )
B
C
D
$220
$282
$304
$309
billion
billion
billion
billion
E · $347 billion
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pending
$100 billion
don1estic product ·
Real GDP vs. Nominal GDP-Questions
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Real GDP vs. Nominal GDP-Questions
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Real GDP vs. NominalGDP- Questions
60 .. ~ incre e in tl1e n1oney upply will affect the
price lev l and real gro dot11e tic produ t (GDP
in whi h of the following way in the long run?
Price L vet
A ) De rea e
B ) In rea
C ) In rea
D) De rea _e
E) No hai1ge
Real GDP
No chat1ge
Deciea
No hange
In rea e
No chat1ge
30. A country·s real gro s dotne tic product is the
annual value of all final goods and ervices
that are
(A ) purch,
B)
(C)
(D)
E)
Page9
ed in that country .. adjt ted for
change in the price level
produced in that country ..expre ed
in current price
produced in that cotu1try, le exports
produced in that country, les depreciation
produced in that country, adju ted for
change in the price level
Real GDP vs. NominalGDP- Questions
60 .. ~ incre e in tl1e n1oney upply will affect the
price lev l and real gro dot11e tic produ t (GDP
in whi h of the following way in the long run?
Price L vet
A ) De rea e
B ) In rea
I)
In rea
D) De rea _e
E) No hai1ge
Real GDP
No chat1ge
Deciea
No hange
In rea e
No chat1ge
30. A country·s real gro s dotne tic product is the
annual value of all final goods and ervices
that are
(A ) purch,
ed in that country .. adjt ted for
change in the price level
B ) produced in that country ..expre ed
in current price
(C) produced in that cotu1try, le exports
(D ) produced in that country, les depreciation
(9) produced in that country, adju ted for
change in the price level
Page10
MacroeconomicsDo-Now
Please do this:
1. What are two other names for GDP?
2. What are two other names for real GDP?
3. What is the formula for real GDP?
4. Draw a basic aggregate supply (AS) and aggregate
demand (AD) graph. Make sure to label the graph.
Page11
MacroeconomicsDo-Now
Please do this:
1. GDP is also called: nominal or current GDP, or just GDP
2. Real GDP is also called: real output or output of
production
3. real GDP= nominal GDP - change in the price level (inflation or
deflation)
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Real GDP
ForecastingGDP
Suppose that it is December, 2016 and a forecast of GDP (Y) is
being prepared for 201 7: consumer consumption ( C) will be
$15.5 trillion, business investment (J) will be $1.5 trillion,
government spending/expenditures ( G) will be $3 trillion, and
net exports (X) will be -$1 trillion. The economist's forecast
for GDP would be $19 trillion. Another type of forecast, called
a conditional forecast, describes what GDP will be in the
future under alternative assumptions about the components of
spending (C, 1, G, and X). It would be a forecast conditional
on the change in any of the four parts or components, like if
one of more spent less or more than expected.
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TheResponseof Consumptionto Income
In the forecasting example, we assumed that none of the other
components, neither consumption ( C), investment (J), nor net
exports (X), changed in response to the decline in government
purchases ( G), kind of like ceteris paribus . But these
components of spending are likely to change when government
purchases increase or decrease. Thus, something important is
missing from the procedure for forecasting real GDP. We must
start with a simplifying assumption (in determining
conditional forecasts, this is the determination being made that
only certain aspects of GDP are being impacted in the
forecast). Let us begin by examining why consumption may
be affected by income.
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Real GDPvs. NominalGDP-MeasuringInflation
We know that nominal GDP gives a very misleading picture of
the U.S. economy because nominal GDP grows faster than real
GDP (Y) because the changes in the price level (inflation and
deflation) aren't taken into account. If we divide nominal GDP
by real GDP, we get the GDP deflator , which measures the
price level inflation in an economy. It is also a measure of the
pricelevel, which is the average level of all the prices of the
items in real GDP. The reason for the term deflal or is that to
get real GDP, we can deflate nominal GDP by dividing it by
the GDP deflator. That is:
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Real GDPvs. NominalGDP-MeasuringInflation
(cont.)
We can also start with knowing the real GDP (Y) and GDP
deflator to find nominal GDP, or we can start with knowing
nominal GDP and the GDP deflator to find real GDP.
Page16
Macroeconomics
Do-Now
Please do this:
1. Define normal goods and inferior goods.
2. If the government share of GDP is 23°/o, what is the
nongovernment or private share of GDP?
3. If nominal GDP is $7 trillion and real GDP is $6 trillion,
what is the GDP deflator? (you can use a calculator)
4. If nominal GDP is $5 trillion and the GDP deflator is
1.32, what is the real GDP of the economy? (calc. ok)
5. Draw a supply (S) and demand (D) graph from
microeconomics showing a binding or effective price
ceiling.
Page17
Macroeconomics
Do-Now
1. *normal goods- goods for which demand (D) increases
when income rises and decreases when income falls
*inferior goods- when the demand for some goods, such
as one-speed bicycles or day-old bread, may decline
when income increases
2. 77°/o
3. 1.17
4. $3. 79 trillion
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Macroeconomics
Do-Now
5.
Price
A Market
A Binding Price Ceiling
Supply (S)
Market
equilibrium (Me)
Equilibrium
price (Pe) "-..
1
- - - - - - - - - - - - - - - - - - -- -----
binding price ceiling
maximum price
Demand (D)
Shortage®
. ?
.
quantity supplied
,,.
Quantity
quantity demanded
(Qd)
(Qs)
The G n e ral Case
Page19
or a
Pric e Ce iling
An AlternativeMeasureof Inflation
There are other measures of inflation. A frequently cited one,
the GDP price index , is based on the consumer price index
(CPI) , which is the price of a fixed collection: a ''market
basket'' of 300 consumer goods and services in some future
year divided by the price of the same collection in a base year.
For example, if the market basket consists solely of one CD
and two tapes, than the CPI for 2016 (on top) compared with
the base year 2015 (on the bottom) would be:
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Because the CPI allows apples to be compared with apples
between different years, it is referred to as the quantityconstant model.
Page20
An AlternativeMeasureof Inflation(cont.)
The CPI inflation rate is the percent change in the CPI, like
from a CPI of 1.6 to 2.0. It measures how fast the prices of the
items in the basket increase in price between years. The use of
a fixed collection of goods and services and the CPI is one of
the reasons economists think the CPI overstates inflation.
When the price of goods rises, the quantity demanded (Qd)
should decline and vice versa. Cheaper substitutes are also
purchased. But, by not allowing the quantities to change when
the price (P) changes, the CPI puts too much weight on items
with rising prices and too little weight on items with declining
prices. The result is an overstatement of inflation.
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AnAlternativeMeasureof Inflation-Questions
39. Th co n un1 r pric index (CPI ) meas ur s the
(A) value of cu1,~ent gros dom tic product in
ba -y ar dollar
(B) pric of all con um r good and ervi ce
produced in the co nomy
(C pri c of elect d raw mat eria l purcha ed
by firms
(D ) pri c of a pec ific group of goods and
rv ic s purcha ed by co n um r
(E pri c of imp ot1 but not exp rt
41. Th c n .um· r pric index (CPI i de igned to
m a ur chang in the
(A p nding pattern of urban con u1n r only
(B p· ndin g pattern of all co n urn r
(C whol al pric of manu fac tur d good
(D pric of all good and rvic produc d in
an eco n my
(E co t of a l ct mark t ba k t of good and
.
fVJC
Page22
AnAlternativeMeasureof Inflation-Questions
39. Th con um r price index (CPI) mea ur
th
(A) value of cu1Tent gro dom tic product in
ba -y ar dollar
(B price of all con um r good and ervice
produ ced in the conomy
(C pric of elect d raw material purcha ed
by firm
•
pric of a pecific group of good and
rvic purcha ed by con um r
(E pric of import , but not export
41. Th con um r pric index (CPI i de igned to
m a ur chang in the
p nding pattern of urban con utn· r only
(B p nding pattern of all con urn· r
(C whol al pric of manufactur d good
(D pri ·
fall good and rvi
produc d in
an co n my
•
co t of a I ct mark t ba k t of good and
(A
.
· fVlC
Page23
An AlternativeMeasureof Inflation-Questions
4 . In 2007 .. th n 111in I gr
d 111 ti pr du t
GDP
a O billi n an I tl1 DP I tlat r
a 20 . Thu r , I GDP a
bi 11i
billi
bi Iii
billi
billi
Page24
11
n
n
n
n
An AlternativeMeasureof Inflation-Questions
4 . In 2007 .. th n 111in I gr
d 111 ti pr du t
GDP
a O billi n an I tl1 DP I tlat r
a 20 . Thu r , I GDP a
bi 11i
billi
bi Iii
billi
billi
Page25
11
n
n
n
n
AnAlternativeMeasureof Inflation-Questions
ANNUAL CONSUMER PRICE INDEX CPI
Year
1929
1984
1995
CPI
20
100
120
4 7. The table above how the con umer price
index for elected year . On the ba i of the e
data, how much did it co tin 1995 to buy the
ame good and ervice that co t $50 in 1929 ?
A
$25
(B $100
(C $125
Page26
(D
$250
(E)
$300
AnAlternativeMeasureof Inflation-Questions
ANNUAL CONSUMER PRICE INDEX CPI
Year
1929
1984
1995
CPI
20
100
120
4 7. The table above how the con umer price
index for elected year . On the ba i of the e
data, how much did it co tin 1995 to buy the
ame good and ervice that co t $50 in 1929 ?
A
$25
(B $100
(C $125
Page27
(D
$250
•
$300
AnAlternativeMeasureof Inflation-Questions
Year
2012
2013
Nominal GDP
$100~000
$110~000
.
Price Index
200
220
4. The table above l1ow the nominal gro
dome tic pPoduct GDP and the price index for
an economy during the period 2012 and 2013.
Which of the follovving would have occurred from
2012 to 2013 ?
(A Real
B Real
C Real
(D Real
E Real
Page28
GDP
GDP
GDP
GDP
GDP
decrea ed by 20o/o.
decrea ed by 10% .
increa ed by 20 % .
increa ed by 10% .
did not change.
AnAlternativeMeasureof Inflation-Questions
Year
2012
2013
Nominal GDP
$100~000
$110~000
.
Price Index
200
220
4. The table above l1ow the nominal gro
dome tic pPoduct GDP and the price index for
an economy during the period 2012 and 2013.
Which of the follovving would have occurred from
2012 to 2013 ?
(A Real
B Real
C Real
(D Real
(.
Real
Page29
GDP
GDP
GDP
GDP
GDP
decrea ed by 20o/o.
decrea ed by 10% .
increa ed by 20 % .
increa ed by 10% .
did not change.
Shortcomingsof MeasuringGDP
Although real GDP (Y) is the best measure of overall
production we have, it is deficient in several ways. First, there
are revisions to real GDP that can change the assessment of the
economy over time. Second, real GDP omits some
production. Much of the production that people do at home is
activity that is not included in real GDP. Likewise, some jobs
done at home, including illegal activities, are simply off the
grid on purpose and not part of GDP, and referred to as the
underground economy. The size of the underground
economy is estimated to be between 10% and 25% of real GDP
in the U.S. Third, the production of goods and services is only
part of what affects the quality of life. In other words, real
GDP does not serve as the only measure of well-being. Life
expectancy, infant mortality, and other factors that enhance life
correlate with both gains and losses.
Page30
Shortcomingsof MeasuringGDP-Questions
29. Th con um r pric index CPI) i criticiz. d for
ov r tating th tru burd n of inflation
becau it doe not recognize con umer '
ability t ub titut go d and ervice . a
price change
(B ov rstating the t1u burd n of inflation
becau it rec gniz con um r ability to
ub titut good and rvic a pric
chang
(C under tating the true burden of inflation
becau it doe n t rec gnize c n umer "
ability t ub titut go d and ervice a
price change
(0 under tating the true burden of inflati n
becau · it recogniz con um r ability to
ub titu t g d and rvic a pric
chang
(E ov r tating th ttu burd n of i nflati n
becau it refl ct th pric of both
int rm diate go d and final g d
(A
Page31
Shortcomingsof MeasuringGDP-Questions
29. Th con um r pric index CPI) i criticiz. d for
. ) ov r tating th tru burd n of inflation
becau it doe not recognize con umer '
ability t ub titut go d and ervice . a
price change
(B ov rstating the t1u burd n of inflation
becau it rec gniz con um r ability to
ub titut good and rvic a pric
chang
(C under tating the true burden of inflation
becau it doe n t rec gnize c n umer "
ability t ub titut go d and ervice a
price change
(0 under tating the true burden of inflati n
becau · it recogniz con um r ability to
ub titu t g d and rvic a pric
chang
(E ov r tating th ttu burd n of i nflati n
becau it refl ct th pric of both
int rm diate go d and final g d
Page32
Macroeconomics
Do-Now
Please do this:
1. Define substitute goods and complementary goods.
2. Define elasticity.
3. Define cross- price elasticy. What's its formula?
4. 4 chairs are bought in 2017 for $20 each and for $15
each in 2016. If 2 cushions are bought in 2017 for $10
each and for $7 each in 2016. What is the CPI?
5. Draw a supply (S) and demand (D) graph from
microeconomics showing a binding or effective price
floor.
Page33
Macroeconomics
Do-Now
1. *substitute goods- goods that provides some of the
same uses or enjoyment as another good
*complementary goods- goods that tends to be
)
consumed together with another good 1
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2. how sensitive one variable is to another
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Page34
Macroeconomics
Do-Now
5.
Price
A Market
A Binding Price Floor
binding price floor/
mimimum price
Supply (S)
Surplus©
Equilibrium
price (Pe) ...., ...
Market
equilibrium (Me)
Demand (D)
/'
quantity supplied
quantityiemanded
(Qs)
(Qd)
The
Page35
Gener.a.I
asc
ot· a Price
F l oor
Quantity