Chapter 8 homework Number 4: Matt Herr Number 6: Carolyn Kostanzer Number 8: Carlos Perez Number 16: Risa Satomura Number 18: Robert Saunders Alternate: Kyoko Yamashita

Chapter 9 GDP and the Business Cycle

Does a higher GDP mean that the economy is better??? We can calculate it…how do we interpret it???

Real and Nominal GDP Nominal GDP is the market value of new output evaluated at the output’s current market price.  When nominal GDP changes, it could be due to a change in output, a change in prices or a change in both. We need a measure that changes only when there is a change in the level of output.

Real and Nominal GDP Real GDP is the value of the economy's output at constant dollars.  Real GDP is calculated using prices from a base year. Because it is calculated using constant prices, real GDP changes only when output changes.

The GDP Deflator Since nominal and real GDP are calculated using prices from different years, they can be used to measure general price changes in the economy. Unlike the CPI (only included Consumption goods), the GDP deflator includes the prices of all goods and services produced in the United States.

The GDP Deflator (cont’d) Example: Nominal GDP in 2004 was $11.7T and real GDP with 2000 as the base year was $10.8T. The GDP deflator was:  Interpretation: Prices rose by 8% between 2000 and 2004.

How is this different from the CPI??? CPI calculated from a “basket of goods” that people buy GDP deflator includes these as well as capital goods  New plant and equipment And good and services sold to foreign households

Real GDP Per Capita If one nation has higher real GDP than another, that doesn’t necessarily mean its residents have higher incomes.  Why? Because population varies across countries. Real GDP per capita measures a country’s real income per person.  Found by dividing a nation’s real GDP by its population.

Real GDP and the Quality of Life Real GDP is the single best measure of a nation’s average income, but there are problems with using GDP as a measure of welfare.

Real GDP and the Quality of Life (cont’d) GDP counts some production that does not add to the quality of life.  Examples: Spending on crime prevention and military weapons Real GDP ignores non-market activities that add to the quality of life.  Examples: Meals prepared at home, cleaning your house are not included doing your laundry Unless you hire someone to do it for you

Real GDP and the Quality of Life (cont’d) GDP ignores the role of leisure in the quality of life.  Leisure activities represent forgone production, and are therefore not counted in GDP. GDP ignores production in the underground economy.  There are some transactions that never get recorded in official statistics.  How much??? Some suggest that about 8–9% of the official GDP of the United States.

Real GDP and the Quality of Life (cont’d) Uneven income distribution may affect well-being.  Neither GDP nor GDP per capita takes the distribution of income into account.  Who has the money??

Life Lessons The grass isn’t always greener even if the money is.  In 2004, GDP per capita in the United States was approximately $40,000, compared to $28,000 in France. Yet there was not a large number of people looking to immigrate from France to the United States.  Compared to the French, Americans: Work longer hours and have fewer vacations Pay for more services such as healthcare and childcare