GDP Facts
GDP is called the single best measure of
economic well-being.
GDP measures both the economy’s total
income and expenditures.
Because most people would prefer to
receive higher incomes and enjoy higher
levels of spending, GDP seems a natural
measure of economic well-being.
But the validity of GDP as a measure of
societal well-being can be disputed on
several points.
GDP IS NOT A PERFECT MEASURE
Does not include the value of leisure time.
Does not include value of labor done at
home or on a volunteer basis.
Excludes any measure of the quality of the
environment.
Does not account for the unequal
distribution of income.
May overstate incomes because of
inflation
Nominal GDP versus Real
GDP
We use GDP to evaluate whether or not our
economy is growing.
If we produce more goods and services this
year than last year we can conclude that
we are growing and that incomes are
increasing.
Because GDP is measured by adding up our
spending on output (PRICE X quantity) this is
not always clear since prices tend to rise
from year to year.
Nominal GDP versus Real GDP
Nominal
GDP is the dollar amount we
spent this year on goods and services.
It
is found by multiplying output
bought at current price level. If we
have inflation nominal GDP goes up.
Real
GDP is corrected for the effects
of inflation.
It
is found by multiplying output
bought at a constant price level. If
Real GDP has increased then
output has increased.
Calculating Real GDP (base year 2001):
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002
($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) = $350
2003
($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) = $500
Real GDP per Capita
An even better measure of economic wellbeing is GDP per capita (total GDP / total
population)
China’s total GDP is $9.24 trillion
United Kingdom’s total GDP is $2.94 trillion
Whose citizens are better off?
GDP
per capita in China = $11,850 ppp
GDP
per capita in UK = $46,244 ppp
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