Shortcomings of GDP Leisure Time Improved Product Quality Trade-offs on the Environment Distribution of Output

What makes GDP go up? Nominal GDP Current output x current prices A country produces more goods and services Goods and services cost more Nominal GDP Current output x current prices 4. Real GDP Current output x a base year price (price becomes constant) 5. To measure GDP at constant prices one needs a couple of things

1. A Base Year The year with which other years are compared to when using a price index 2. Price Index A measurement that shows how the average price of a group of goods changes over time $55 June $62 October

Let’s take inflation out of GDP The GDP Deflator is a price index number GDP Deflator = price of goods in a specific year price of goods in the base year x100 Nominal GDP Real GDP x 100 = GDP Deflator

This would also make sense… Nominal GDP Index # = Real GDP

Assume the following: Year houses built price nominal GDP Real GDP GDP Deflator 3 $100,000 2001 4 $115,000 2002 5 $125,000 Can you calculate Nominal GDP, Real GDP, and the Deflator? Not yet. “01 is the base year = $300,000 $345,000 86.9 x 300/345

Year houses built price nominal GDP Real GDP GDP Deflator 3 x $100,000 $300,000 $345,000 86.9 2001 4 $115,000 2002 5 $125,000

Year houses built price nominal GDP Real GDP GDP Deflator 3 x $100,000 $300,000 $345,000 86.9 2001 4 x $115,000 = $460,000 $460,000 100 2002 5 $125,000

Year houses built price nominal GDP Real GDP GDP Deflator 3 x $100,000 $300,000 $345,000 86.9 2001 4 x $115,000 = $460,000 $460,000 100 2002 5 x $125,000 = $625,000 $575,000 108.9