Module 11Interpreting Real Gross Domestic Product

http://www.slatev.com/video/what-exactly-gdp/

Module 11 Essential Questions

1. What is the difference between real GDP and nominal GDP?

2. Why is real GDP the appropriate measure of real economic activity?

VE4 Video: Real and

Nominal GDP

What Does GDP Tell Us?1. A measure of the size of the e________2. Comparison scale to compare

e___________ of different c____________3. Current dollar GDP = 2012

p_____________ with 2012 p_________4. Issue: Can prices fluctuate? Will that

influence GDP?

5. What can be done to get accurate measurements?

What Does GDP Tell Us?1. A measure of the size of the economy2. Comparison scale to compare economies

of different countries3. Current dollar GDP = 2012 production

with 2012 prices4. Issue: Can prices fluctuate? Will that

influence GDP?

5. What can be done to get accurate measurements? Take out the distortion

Nominal versus Real GDP1. Nominal GDP is measured in current

prices, which may include i________or d___________.

2. How does inflation distort GDP?

3. Real GDP is measured in c_________ p_________ or an a________ to give a more accurate or un-skewed reflection of what is really being produced in the economy.

Nominal versus Real GDP1. Nominal GDP is measured in current

prices, which may include inflation or deflation.

2. How does inflation distort GDP?

If prices go up and quantity does not, GDP will increase because it is a dollar amount. Production has not increased so this is misleading; the economy has not truly grown. To adjust for changing prices, Real GDP is calculated with the value of current production using prices from a fixed point in time. This fixed point in time is called the base year.

3. Real GDP is measured in constant prices or an average to give a more accurate or un-skewed reflection of what is really being produced in the economy.

Activity: Calculating Real GDP

Year Tons of Peaches

Price per Ton Peaches

Tons of Peanuts

Price per Ton peanuts

Nominal GDP Real GDP = base year 2007

2007 100 $100 80 $50

2008 100 $125 80 $100

1. Calculate the nominal GDP for both years. By how much as the economy grown according to nominal GDP?

2. Was the increase due to an increase in output? 3. What caused the increase?4. Calculate real GDP for 2008 using 2008 output & 2007 prices. By how much did

the economy grow?

Answers: Calculating Real GDP

Year Tons of Peaches

Price per Ton Peaches

Tons of Peanuts

Price per Ton peanuts

Nominal GDP Real GDP = base year 2007

2007 100 $100 80 $50 (100 x $100) + (80 x $50)= $14,000

2008 110 $125 85 $100 (110 x $125) + (85 x $100) = $13750 + 8500 = $22,250

(110 x $100) + (85 x $50) = $11,000 + $4250 =$15250

1. Calculate the nominal GDP for both years. By how much as the economy grown according to nominal GDP? Nominal GDP rose by $8250 or 59% . Holy cow!!

2. Was the large increase due to an increase in output? NO, output in 2008 was miniscule

3. What caused the increase? Increase in prices from 2007 to 20084. Calculate real GDP for 2008 using 2008 output & 2007 prices. By how much did

the economy grow? $15250 - $14000 = $1250 or 9%, NOT $8250

GDP: Can It Tell Us Everything? Just a statistical measure Are these measures positive or

normative? GDP cannot measure everything: self

esteem, overall happiness, leisure activities

GDP per Capita: GDP divided by the size of the population (average GDP per person)

http://www.tradingeconomics.com/united-states/gdp-growth

GDP Growth Rates, List by Country

http://www.tradingeconomics.com/gdp-growth-rates-list-by-country

GDP per Capita USA vs. China: Describe what is happening in these graphs

What Can GDP NOT Measure?Non-Market Activities

Negative Externalities

Underground Economy

Quality Of Life

Notes

Illustration

What Can GDP NOT Measure?Non-Market Activities

Negative Externalities

Underground Economy

Quality Of Life

Notes GDP does not measure goods and services that people make or do themselves, such as babysitting, mowing lawns, or cooking dinner.

Unintended economic side effects, such as pollution, have a monetary value that is often not reflected in GDP.

There is a TON of economic activity that is never reported to the government. Examples include black market (illegal) transactions and "under the table" wages.

GDP is used as a standard of living measurement, but there are factors NOT covered by it. These include quality of life, leisure time, pleasant surroundings, & personal safety.

Illustration

Activity: Good for GDP or Bad for GDP?

Time off to coach your child’s soccer game.

Cleaning up after a natural disaster (hurricane Sandy)

Reading a book. Raking your own leaves rather than hiring

out. Paying for divorce. Leave your job to raise children.

Homework Complete Module 11 questions p. 116-117 Read Module 12 Strive for a 5 Module 11 vocab & fill in the

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