Opening Question Based on our past discussions of taxation, and the information provided in yesterday’s documentary, what do you believe is the role of the federal government in the economy of the United States?

GDP Recap Y = C + I + G + (X – M) Consumer sector ( C ) Investor Sector ( I ) Government Sector ( G ) Foreign Sector (X – M )

Nominal vs. Real Nominal GDP Real GDP Uses dollar values from current year Real GDP Uses a base year to control price Why would someone want to use Nominal GDP? Why might someone want to use Real?

What do we use GDP for? Overall health of a country Labor statistics Calculating inflation

Calculating Nominal/Real GDP Nominal GDP Price * Quantity using the price from the specific year Real GDP Price of base year * Quantity of each year

Calculating Nominal GDP Prices and Quantities Year Price of hot dogs Quantity of hamburgers 2008 2009 2010 $1 $2 $3 100 150 200 $4 50 Calculating Nominal GDP ($1 per hot dog × 100 hot dogs) + ($2 per hamburger × 50 hamburgers) = $200 ($2 per hot dog × 150 hot dogs) + ($3 per hamburger × 100 hamburgers) = $600 ($3 per hot dog × 200 hot dogs) + ($4 per hamburger × 150 hamburgers) = $1,200 Calculating Real GDP (base year 2008) ($1 per hot dog × 150 hot dogs) + ($2 per hamburger × 100 hamburgers) = $350 ($1 per hot dog × 200 hot dogs) + ($2 per hamburger × 150 hamburgers) = $500

GDP Deflator The measure of the level of prices of all new, domestically produced, final goods and services in an economy. Or How price has changed for a set of products over a period of time

Calculating the GDP Deflator 2008 2009 2010 ($200 / $200) × 100 = 100 ($600 / $350) × 100 = 171 ($1,200 / $500) × 100 = 240

Inflation What is it? Why do we care about it? We can use GDP Deflator to find it!!!!!!

Finding Inflation Inflation rate The GDP deflator Percentage change in some measure of the price level from one period to the next The GDP deflator Can be used to take inflation out of nominal GDP (“deflate” nominal GDP)

Inflation 2008 = 100 2009 = 171 2010 = 240 2009: [(171 – 100) / 100 ] * 100 = 71% 2010: [(240 – 171) / 171 ] * 100 = 40%

Now you try! Please go help Uzbekistan with their Nominal GDP, Real GDP, GDP Deflator, and Inflation Rate