Interpreting Real Gross Domestic Product

1. Interpreting Real Gross Domestic Product

2. Objective: • What is the difference between real GDP and nominal GDP?

3. GDP • What does GDP tell us? • Is a measurement of the size of the economy • Provides a scale against which to compare the economic performance of others years or other countries • Have to be careful using GDP: • Part of the increase in the value of GDP over time represents increases in the prices of good and services rather than an increase in output

4. Real GDP • GDP is a good measure to compare the size of different economies but not a good measure of the economy’s growth over time • GDP can grow because the economy grows but it can also grow simply because of inflation • Have to measure aggregate output • The total quantity of final goods and services the economy produces • Measurement used is real GDP

5. Real vs. Nominal GDP Calculating GDP and Real GDP in a Simple Economy

6. Real vs. Nominal GDP • Real GDP is the total value of final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the level of some given base year • Real GDP numbers come with information about what the base year is • Nominal GDP is GDP at current prices

7. Nominal vs. Real GDP

8. Real vs. Nominal GDP • In reality, the government economists who put together the U.S. national accounts have adopted a method to measure the change in real GDP – chain-linking • Uses the average between the GDP growth rate calculated using an early base year and the GDP growth rate calculated using a late base year • U.S. statistics on real GDP are always expressed in chained dollars – splits the difference between using early and late base years

9. What Real GDP Doesn’t Measure • GDP = country’s aggregate output • Larger population = higher GDP • GDP per capita – GDP divided by the size of the population, equivalent to the average GDP per person • Real GDP per capita = average real GDP per person