GDP – Definitions and History

Some definitions GDP = Gross Domestic Product = the dollar value of an economy’s production in a year. GDP can be nominal or real. Nominal GDP is a measure of Spending in dollar terms. GDP measured in current prices Real GDP is a measure of the Quantity of goods and services produced in an economy in a year. GDP measured in base year prices Nominal Growth measures how much (by what percent) Nominal GDP changes in a year. Real Growth measures how much (by what percent) Real GDP changes in a year. The Price Level is a measure of the average prices of goods. The Inflation Rate measures how much (by what percent) the Price Level changes in a year.

Level Statistic … measures The rate of change (% Δ) per year is called … Real GDP (Q) Q = “Quantity” The quantity of goods & services produced in a year real GDP growth (q) Nominal GDP (X) X = “Expenditures” The number of dollars of spending on goods & services in a year nominal GDP growth (x) The Price Level (P) The average price of goods & services. “The Cost of Living” inflation rate (p) Note that in every case the “level” is denoted by a capital letter (Q, X, P). The corresponding growth rate is a lower case letter (q, x, p)

Vocabulary notes: If … changed … the rate of change (% Δ) was … Real GDP (Q) rose (was higher than last year) q > 0 Real growth was positive fell (was lower than last year) q < 0 Real growth was negative* Q means the same as q > 0 Q means the same as q < 0 Nominal GDP (X) x > 0. Nominal growth was positive x < 0. Nominal growth was negative X means the same as x > 0 X means the same as x < 0 The Price Level (P) p > 0. Inflation was positive p < 0. Inflation was negative ** P means the same as p > 0 P means the same as p < 0 For all these numbers… If the capital letter increased, its rate of change – the lower case letter -- was positive, If the capital letter decreased, its rate of change – the lower case letter -- was negative, * negative real growth (q < 0) defines a recession ** negative inflation (p < 0) is called deflation

A BRIEF HISTORY OF THE US to the 1930s Real GDP mostly grew, averaging about 4%, punctuated by recessions. Put another way: Real Growth was mostly positive – except during recessions when real growth was negative The “Curse of the odd Decades?” Recessions were often associated with “bank panics” – failures of the banking system. The Price Level rose (i.e. there was inflation) always and only during wars. After those wars the Price Level would fall (i.e. “deflation” would occur.) The Price Level in 1917 was about the same as it had been in 1776. http://liberalarts.oregonstate.edu/files/polisci/faculty-research/sahr/inflation-conversion/pdf/sumprice_1774-2012.pdf

A BRIEF HISTORY OF THE US since the 1930s Real GDP has risen at about 3%, with recessions occurring less often than previously. The “Great Recession” (starting in 2008) is the only recession since the 1930s Depression that could perhaps be described as a “bank failure recession.” Depression- era Deposit Insurance (FDIC?) Inflation (rising prices) has become a persistent fact of the economy. Prices have risen at about 3% per year, sometimes considerably more and deflation has become exceedingly rare.