What is it? Why do we use it? Who cares?

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# What is it? Why do we use it? Who cares? - PowerPoint PPT Presentation

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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Presentation Transcript
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
• “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
• 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
• 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
• 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?
• 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:
• 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?