Measurement of Economic Performance

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Presentation transcript:

Measurement of Economic Performance Nominal vs. Real GDP

Goals Know the difference between real and nominal GDP. Apply your knowledge to calculate real GDP using nominal numbers. List some elements of life that cannot be measured by GDP.

I. GDP as Measure of Output As a measurement: The most important use of GDP is as a measure of the size of the economy, providing us a scale against which to compare the economic performance of other years or other countries. Aggregate output = GDP

I. GDP as Measure of Output Nominal GDP The total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced. Real GDP The total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year.

II. Calculating Real GDP Nominal GDP (Current year output x Current year prices) Real GDP (Current year output x Base year prices) Real Growth Chain-linking: the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year. Year 2 – Year 1 / Year 1

II. Calculating Real GDP GDP per capita GDP/ population Average GDP per person

III. What GDP Does Not Measure Happiness Leisure time Natural beauty Disease Crime

IV. Practice Computers DVDs Year Price Quantity 2008 $900 10 2009 1,000 10.5 2010 1,050 12 Year Price Quantity 2008 $10 100 2009 12 105 2010 14 110 Pizza What is the percent change in computer production from 2008 to 2009? What is the percent change in the price of pizza from 2009 to 2010? Calculate nominal GDP in Britannica for 2008? Calculate real GDP in Britannica for 2008 using 2008 as the base year. Calculate real GDP in Britannica for 2010 using 2008 as the base year. Year Price Quantity 2008 $15 2 2009 16 2010 17 3