Download Real GDP

The existence of inflation brings up an interesting
problem in measuring GDP and its annual growth
rate….
 If we are measuring output value in prices and then
the total value of our output increases, how much of
this increase is because the economy is growing and
how much is because prices have increased????
In the first year the price of the chocolate bar was $1
If the price of the chocolate bar rose to $2 , and it was the
only output of the economy, it would appear that the GDP
doubled.
In reality however, we are still producing only one chocolate
bar; the only reason GDP has increased is because the prices
have increased.
Therefore…..
- It is important to use some tool to remove the
effect of any inflation to compare year –to-year output
effectively.
GDP deflator
- A broad Price index to measure price changes on all
goods and services in the GDP, not just consumer goods and
services.
( The basket of goods)
Used to determine if there had been a real increase in the GDP from
year to year or if the increase was due just to an increase in the level
prices.
Job:
- to remove the effect of price increases in measuring the GDP.
*** This only lasted until May 2001 *** now adjusted for using the
Chin Fisher Volume Index
Nominal GDP:
- total value of the output of an economy before the
effect of price increases is removed. (current dollar GDP)
The GDP deflator was applied to remove the effect of
inflation and create the real GDP (Constant dollar GDP)
Formula for Real GDP:
real GDP =
Nominal GDP
_______________ X100
GDP deflator
To compare the GDP between 2 years to see if real growth rate
occurred the nominal GDP must be converted into real GDP
This basically compares two years in constant dollars.
The value of these dollars is set by the base year of the GDP
deflator
Problem:
- Its use of a base year.
-It worked well in the 70 and 80’s
But….
- The rapid expansion of information and
communications technology industries has produced
biased results that overstated economic growth in
Canada during the 1990’s
- Because the base year of 1992 set the weighting of
categories based on prices in 1992, and the prices of
technology declined since then….....The GDP
deflator no longer can effectively account for
inflation effects.
In May 2001, Statistics Canada made a change to its method of
calculating the real GDP.
The new Calculation is known as the Chain Fisher volume
index.
What is the Chain Fisher Index??
- A new method of determining the GDP deflator that
uses a formula to “rebase” the GDP each quarter instead of
comparing it to a base year.
While the method of calculation is more complicated
than the GDP deflator. It is said to be more accurate
measure of change in the GDP and its components.
Ultimately, its use is similar to the old GDP deflator --it is used to remove the effects of changes in price levels
on GDP.