Interpreting Real Gross Domestic Product

Objective: What is the difference between real GDP and nominal GDP?

GDP What does GDP tell us? Is a measurement of the size of the economy Provides a scale against which to compare the economic performance of others years or other countries Have to be careful using GDP: Part of the increase in the value of GDP over time represents increases in the prices of good and services rather than an increase in output

Real GDP GDP is a good measure to compare the size of different economies but not a good measure of the economy’s growth over time GDP can grow because the economy grows but it can also grow simply because of inflation Have to measure aggregate output The total quantity of final goods and services the economy produces Measurement used is real GDP

Calculating GDP and Real GDP in a Simple Economy Real vs. Nominal GDP Calculating GDP and Real GDP in a Simple Economy Year 1 Year 2 Quantity of apples (billions) 2,000 2,200 Price of apple $0.25 $0.30 Quantity of oranges (billions) 1,000 1,200 Price of orange $0.50 $0.70 GDP (billions of dollars) 1,500 Real GDP (billions of year 1 dollars) $1,000 $1,150

Real vs. Nominal GDP Real GDP is the total value of final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the level of some given base year Real GDP numbers come with information about what the base year is Nominal GDP is GDP at current prices

Nominal vs. Real GDP Nominal GDP (billions of current dollars) Real GDP (billions of 2000 dollars) 2001 $10,286 $11,347 2005 12,683 12,638 2009 14,259 12,989

Real vs. Nominal GDP In reality, the government economists who put together the U.S. national accounts have adopted a method to measure the change in real GDP – chain- linking Uses the average between the GDP growth rate calculated using an early base year and the GDP growth rate calculated using a late base year U.S. statistics on real GDP are always expressed in chained dollars – splits the difference between using early and late base years

What Real GDP Doesn’t Measure GDP = country’s aggregate output Larger population = higher GDP GDP per capita – GDP divided by the size of the population, equivalent to the average GDP per person Real GDP per capita = average real GDP per person