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