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What is it? Why do we use it? Who cares?. Economic growth. GDP is one of the important measures of economic growth GDP, or gross domestic product , is the increase in the total output of an economy

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what is it why do we use it who cares
What is it?

Why do we use it?

Who cares?

economic growth
Economic growth
  • GDP is one of the important measures of economic growth
  • GDP, or gross domestic product, is the increase in the total output of an economy
    • “the total market value, expressed in dollars, of all final goods and services produced in an economy in a given year.”
    • Calculated by multiplying P x Q for ALL final goods/services produced within the borders of a country in a year
the two types of gdp
The two types of GDP
  • Nominal GDP
    • GDP calculated by using the current year’s price for goods and services (also called “current-dollar GDP”)
  • Real GDP
    • GDP calculated by using a base year’s price for goods/services, so that only quantity changes over time (“constant-dollar GDP”)
    • Adjusted for price changes over time (inflation, deflation)
    • Used to compare growth of output of a country or countries over time
nominal v real gdp ex 1
Nominal v Real GDP, ex. 1
  • Suppose in the year 2000, the economy of a country produced $100 billion worth of goods and services based on year 2000 prices. Since we\'re using 2000 as a basis year, the nominal and real GDP are the same.
    • Year 2000 Nominal GDP = $100B, Real GDP = $100B
  • In the year 2001, the economy produced $110B worth of goods and services based on year 2001 prices. Those same goods and services are instead valued at $105B if year 2000 prices are used. Then:
    • Year 2001 Nominal GDP = $110B, Real GDP = $105BNominal GDP Growth Rate = 10%Real GDP Growth Rate = 5%
nominal v real gdp ex 2
Nominal v Real GDP, ex. 2
  • Jim’s height is 1.95 meters
  • Renaldo’s height is 6 feet
  • Which student is taller?
  • If you wanted to compare their height, what would you have to do?
    • Convert each to a common measurement
  • What do you need to know in order to do this?
    • 1 foot= 0.30 meters
  • With this information, which student is taller?
    • 1.95/0.30= 6.5 feet tall (Jim is taller)
so what
So what?
  • To compare GDP over time, GDP has to be adjusted for price level changes (just like the height comparison).
    • (video)
  • Since GDP is a P x Q calculation, g/s have to be measured in constant dollars in order to calculate the real GDP.
  • Let’s get started by taking a look at handout 1.3
check it
Check it:
  • What is economic growth?
  • What is GDP? What is GDP per capita?
  • What is the standard of living?
  • What is the difference in nominal and real GDP?
  • Which should be used to compare GDP over a series of years? Why?
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