13-2 GDP And Changes In The Price Level P.P. 350-354 MAIN IDEA: GDP is calculated at existing prices and adjusted for inflation to make comparisons over time.

GDP Review

INFLATION It is a general rise in the price level. It must be tracked to find out if there was real change in the economy. Problem- inflation makes dollar values of final output go up, but there is no change in the quantity of goods and services produced.

Why was inflation a worry during WWII?

CONSTRUCTING A PRICE INDEX Statistics used to measure changes in price over time. FIRST - You must have a base year. SECOND - Create a Market Basket: a representation selection of commonly purchased goods and services. THIRD, Record the price of each item. FINALLY, Total the prices and this represents the base year market basket price an is assigned a value of 100 percent. Then we track the prices goods and services in the basket from one year to the next to track inflation.

MAJOR PRICE INDEXES CONSUMER PRICE INDEX- Measure the price of goods bought buy consumers in all parts of the country. PRODUCER PRICE INDEX- Measures price changes paid by domestic producers for their inputs. IMPLICIT GDP PRICE DEFLATOR- An index of average levels of price for all goods and services in the economy.

REAL VS. CURRENT GDP To accurately compare GDP over time, you must distinguish between: 1. Changes because of inflation 2. Changes because of increase in production and income. Current GDP- not adjusted for the effects of inflation. Real GDP- the distortions of inflation have been removed.

Real GDP