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 = $105B
Nominal 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:
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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?