Download Why makes GDP go up?

Shortcomings of GDP
•
•
•
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Leisure Time
Improved Product Quality
Trade-offs on the Environment
Distribution of Output
What makes GDP go up?
1. A country produces more goods and services
2. Goods and services cost more
3.

4.

Nominal GDP
Current output x current prices
Real GDP
Current output x a base year price (price
becomes constant)
5. To measure GDP at constant prices one needs
a couple of things
1. A Base Year
• The year with which
other years are
compared to when
using a price index
2. Price Index
• A measurement that
shows how the
average price of a
group of goods
changes over time
$55
June
$62
October
Let’s take inflation out of GDP
• The GDP Deflator is a price index number
• GDP Deflator =
•
•
price of goods in a specific year
price of goods in the base year
Nominal GDP
Real GDP
x100
x 100 = GDP Deflator
This would also make sense…
• Nominal GDP
Index #
= Real GDP
Assume the following:
Year houses built price
nominal GDP
2000
3
$100,000 = $300,000
x
2001
4
$115,000
2002
5
$125,000
Real GDP
$345,000
GDP Deflator
86.9 300/345
Can you calculate Nominal GDP, Real GDP, and the Deflator?
Not yet.
“01 is the base year
Year houses built price
nominal GDP Real GDP
2000
3
x $100,000 $300,000
$345,000
2001
4
$115,000
2002
5
$125,000
GDP Deflator
86.9
Year houses built price
nominal GDP Real GDP
2000
3
x $100,000 $300,000
$345,000
2001
4
2002
5
x
$115,000 = $460,000
$125,000
$460,000
GDP Deflator
86.9
100
Year houses built price
nominal GDP Real GDP
2000
3
x $100,000 $300,000
$345,000
2001
4
x
$115,000 = $460,000
$460,000
2002
5
x
$125,000 = $625,000
$575,000
GDP Deflator
86.9
100
108.9