Download Unit 2.3 -- Real and Nominal GDP

GROSS DOMESTIC PRODUCT
Robert F. Kennedy on GDP Inadequacies (1968)
UNIT 1 . 3
NOMINAL
AND
REAL GDP
How can you figure out which is the
most popular movie of all time?
Nominal Box Office Receipts
What is the problem with this method?
How can you figure out which is the
most popular movie of all time?
Real Box Office Receipts (adjusted for inflation)
The Problem with GDP
If a country’s GDP increased from $4 Billion to
$5 Billion in one year, is the country experiencing
economic growth?
Did the country definitely produce 25% more products?
What about Inflation?
A rising general level of prices
EX: If apples are the only good being produced…
Year 1: 10 apples at $1 each; GDP = $10
Year 2: 10 apples x $1.25 each; GDP = $12.50
GDP is rising, but this country is
NOT BETTER OFF !
We need to find…
REAL V. NOMINAL GDP
Real GDP
is GDP expressed in constant, or
unchanging, dollars
Nominal GDP
is GDP measured in current prices. It
does not account for inflation from year to year
Real GDP adjusts for inflation! So...
REAL GDP IS THE MOST ACCURATE
MEASUREMENT OF ECONOMIC GROWTH!!
OK...
Let’s practice!
real
v.
nominal gdp example
2009
The GDP in year 2009 shows
the
dollar
value
of
all
10 trucks at $20,000 each = $200,000
final goods produced
Nominal GDP = $350,000
The nominal GDP in year
2010
2010 is higher which
10 cars at $16,000 each = $160,000
suggests that the economy
is improving.
10 trucks at $21,000 each= $210,000
But how much is the REAL
Nominal GDP = $370,000 GDP? How do you get it?
2010
Use 2009 Prices!
10 cars at $15,000 each = $150,000
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each= $200,000
REAL GDP = $350,000
The Real GDP is the same
as 2009 after we adjust
for inflation!
real
v.
nominal gdp example
2010
The GDP in year 2010 shows
the
dollar
value
of
all
10 trucks at $15,000 each = $150,000
final goods produced
Nominal GDP = $250,000
The nominal GDP in year
2011
2011 is higher which
8 cars at $12,000 each = $96,000
suggests that the economy
is improving.
10 trucks at $17,000 each= $170,000
But how much is the REAL
Nominal GDP = $266,000 GDP? How do you get it?
2011
Use 201 0 Prices!
10 cars at $10,000 each = $100,000
8 cars at $10,000 each = $80,000
10 trucks at $15,000 each= $150,000
REAL GDP = $230,000
Real GDP is less after we
adjust for inflation!
We’ve contracted!!!
One way to measure GDP change is...
GDP DEFLATOR
GDP Deflator =
Nominal GDP
x 100
Real GDP
it’s A measurement of price levels of
all new, domestic final goods and
services in an economy over short time
The GDP Deflator gives us the measure of price increase in specific
goods/services over time
We convert Nominal to Real to measure expenditure patterns
(what’s selling and for how much)
gdp deflator example
U.S. Computer Software in 2010
U.S. Computer Software in 2011
Price per unit = $100
Price per unit = $40
Number of Units Sold = 10,000
Number of Units Sold = 10,000
Nominal GDP = $1,000,000 Nominal GDP = $400,000
real GDP = $500,000
real GDP = $500,000
What’s the GDP Deflator for 2010?
200
Prices for domestic computer software have doubled in the last year!
What’s the GDP Deflator for 2011?
80
Prices for domestic computer software have dropped 20% in the last
year!
Wait a sec! What the hEck is
standard of
living?
DOES GDP ACCURATELY MEASURE
STANDARD OF LIVING?
Standard of living (or quality of life) 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!
• REAL GDP PER CAPITA is real GDP divided by the total
population. It identifies on average how many products each
person makes
Real GDP per capita is the best measure of
a nation’s standard of living!
GLOBAL GDP PER CAPITA
MOST POPULATED NATIONS
TOP NATIONAL GDP PER CAPITA
WHY DO SOME COUNTRIES HAVE
HIGHER GDPS THAN OTHERS?
1. Availability and quality of natural resources
Ex: Syria has a lower GDP because it is mostly desert
2. Availability of capital
Ex: Capital is machinery, tools, and man-made resources
Example: India has over a billion people (human
resources) but relatively few capital resources and
therefore a lower GDP than the U.S.
3. Economic SystemS
Example: Capitalist countries have historically had
more economic growth