What is it why do we use it who cares
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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?