real gdp vs. nominal gdp - mrsadow.commrsadow.com/9magdp, including the gdp deflator and the...

Real GDP vs. Nominal GDP GDP (gross domestic product) is the most important economic variable to macroeconomists. Nominal or current GDP, or just GDP, is the total value of all new goods and services produced in an economy during a specified period of time without the general change in the price level (inflation or deflation) taken into account. GDP includes spending by consumers (C) + businesses (J) + the government (G)_± foreigners (X) (net exports: exports-imports). For example, if a country makes only watches and made 100 in 2015 at $10.00 each, the country's GDP for 2015 would be $1,00 10 (100 x $10). But because the quantities of goods and services as well as their prices (P) change over time, economists prefer to use real gross domestic product (real GDP) (Y), which is also called real output or output of production, to calculate economic growth from year to year.

I GDP (cont.) Real GDP vs. Nom1na Re I U. • G p

15,

13,

1 , _ 0 2 5 6 1 1 11 2 12

Real GDP vs. Nominal GDP (cont.) Real GDP focuses on the changes in quantity from year to year, not the price change. As we'll soon learn, decreases in a country's money supply doesn't change real output (real GDP). An increase in aggregate supply (AS) (a country's total supply) increases real output, as does an initial decrease in workers' wages, while a decrease in AS, a recession, or a depression decreases real output. G) ~f\c:.e \~<Je \ <;,'no1'\-~°'~re 3o\ e ~ PL

SRAS 1 ~J ~U~~ SRAS 2 SRAS 1

SRAS 2

P2

Pl

=7 · . . . . . . . . . . . .

Y2 Y2 Yl y

Real GDP

Real GDP vs. Nominal GDP (cont.) Real GDP is a country's GDP that is adjusted to take into account the general change in the price level (inflation or deflation) over time (from year to year). Real GDP allows an equal comparison between years, apples to apples.

nominal GDP== consumer consumption ( C) + businesses investments (1) + government spending/expenditures ( G)

+ net exports (X) (net exports: exports-imports)

real GDP= nominal GDP - change in the price level (inflation or deflation)

For example, imagine a country with a GDP of $100 in a given year. In the next year the GDP rises to $105 and the inflation rate is 3%. Roughly, we can say that real GDP rose 2% to only $102 when the inflation rate is accounted for. You might think you are nominating someone good for a position, but what you get in the end is what is real.

Real GDP vs. Nominal GDP- Questions 13. The table belo,v ho\\ 'S a country'

n1acroecononuc data in 2013.

Consun1ption pending $175 billion

Individual incotne tax $32 billion

Private investn1ent $30 billion pending

Corporate taxes $25 billion

Exports $75 billion

Governn1ent purcha e $40 billion

lr11port $100 billion

The country's gro don1estic product ·

$220 billion $282 billion $304 billion $309 billion $347 billion

Real GDP vs. Nominal GDP-Questions 57. \\rt1ic of th foll0Ylit1n-tl

• • ( 11 01101111 r C

•

•

•

•

f tl1 1

] I it t i ) • nr 1 l t i11 t 1 11 r 1u11 ·, .

in r dti I · i .,,, • 111 W, • IR n it

• • 111 r < 1 t ~ r ·

• I 'j 11 f i 11 t 1

Real GDP vs. Nominal GDP- Questions 60 .. ~ incre e in tl1e n1oney upply will affect the

price lev l and real gro dot11e tic produ t (GDP in whi h of the following way in the long run?

Price L vet Real GDP

A ) De rea e No chat1ge B ) In rea Deciea C ) In rea No hange D) De rea_e In rea e E) No hai1ge No chat1ge

30. A country·s real gro s dotne tic product is the annual value of all final goods and ervices that are

(A ) purch, ed in that country .. adjt ted for change in the price level

B) produced in that country .. expre ed in current price

(C) produced in that cotu1try, le exports (D) produced in that country, les depreciation E) produced in that country, adju ted for

change in the price level

Macroeconomics Do-Now

Please do this: 1. What are two other names for GDP? 2. What are two other names for real GDP? 3. What is the formula for real GDP? 4. Draw a basic aggregate supply (AS) and aggregate

demand (AD) graph. Make sure to label the graph.


Please do this: 1. GDP is also called: nominal or current GDP, or just GDP 2. Real GDP is also called: real output or output of

production 3. real GDP= nominal GDP - change in the price level (inflation or

deflation) ("':olr."'~ 4. tt!) "<"\c:.e \e<.1e \ <;,\-ot'\-~u.~re jJ e ~

sRAs , 5J ~u~~

; .~ ; : / ' . : ,/ : I

i I:

Y1 . .

'\eo.<

/

/

Real GDP

Forecasting GDP Suppose that it is December, 2016 and a forecast of GDP (Y) is being prepared for 201 7: consumer consumption ( C) will be $15.5 trillion, business investment (J) will be $1.5 trillion, government spending/expenditures ( G) will be $3 trillion, and net exports (X) will be -$1 trillion. The economist's forecast for GDP would be $19 trillion. Another type of forecast, called a conditional forecast, describes what GDP will be in the future under alternative assumptions about the components of spending (C, 1, G, and X). It would be a forecast conditional on the change in any of the four parts or components, like if one of more spent less or more than expected.

The Response of Consumption to Income In the forecasting example, we assumed that none of the other components, neither consumption ( C), investment (J), nor net exports (X), changed in response to the decline in government purchases ( G), kind of like ceteris paribus . But these components of spending are likely to change when government purchases increase or decrease. Thus, something important is missing from the procedure for forecasting real GDP. We must start with a simplifying assumption (in determining conditional forecasts, this is the determination being made that only certain aspects of GDP are being impacted in the forecast). Let us begin by examining why consumption may be affected by income.

Macroeconomics Do-Now Please do this: 1. Define normal goods and inferior goods.

2. If the government share of GDP is 23°/o, what is the nongovernment or private share of GDP?

3. If nominal GDP is $7 trillion and real GDP is $6 trillion, what is the GDP deflator? (you can use a calculator)

4. If nominal GDP is $5 trillion and the GDP deflator is 1.32, what is the real GDP of the economy? ( calc. ok)

5. Draw a supply (S) and demand (D) graph from microeconomics showing a binding or effective price ceiling.


1. *normal goods- goods for which demand (D) increases when income rises and decreases when income falls

*inferior goods- when the demand for some goods, such as one-speed bicycles or day-old bread, may decline when income increases

2. 77°/o

3. 1.17

4. $3. 79 trillion


5. A Market

Price A Binding Price Ceiling Supply (S)

Market equilibrium (Me)

Equilibrium 1 price (Pe) "-.. - - - - - - - - - - - - - - - - - - -- -----

binding price ceiling maximum price

. ? . quantity supplied

(Qs)

Shortage® Demand (D)

,,. Quantity quantity demanded

(Qd)

The G n e ral Case or a Pric e Ce iling

An Alternative Measure of Inflation-Questions 39. Th co n un1 r pric index (CPI ) meas ur s the

(A) value of cu1,~ent gros dom tic product in ba -y ar dollar

(B) pric of all con um r good and ervice produced in the conomy

(C pric of elect d raw materia l purcha ed by firms

(D) pri c of a pec ific group of goods and rv ic s purcha ed by con um r

(E pri c of imp ot1 but not exp rt

41. Th c n .um· r pric index (CPI i de igned to m a ur chang in the

(A p nding pattern of urban con u1n r only (B p· ndin g pattern of all con urn r (C whol al pric of manu fac tur d good (D pric of all good and rvic produc d in

an eco n my (E co t of a l ct mark t ba k t of good and

. fVJC

An Alternative Measure of Inflation-Questions ANNUAL CONSUMER PRICE INDEX CPI

Year

1929

1984

1995

CPI

20 100 120

4 7. The table above how the con umer price index for elected year . On the ba i of the e data, how much did it co tin 1995 to buy the ame good and ervice that co t $50 in 1929 ?

A $25 (B $100 (C $125 (D $250 (E) $300

An Alternative Measure of Inflation-Questions

Year Nominal GDP Price Index 2012 $100~000 200 2013 $110~000 220 .

4. The table above l1ow the nominal gro dome tic pPoduct GDP and the price index for an economy during the period 2012 and 2013. Which of the follovving would have occurred from 2012 to 2013 ?

(A Real GDP decrea ed by 20o/o. B Real GDP decrea ed by 10%. C Real GDP increa ed by 20%.

(D Real GDP increa ed by 10%. E Real GDP did not change.

Shortcomings of Measuring GDP Although real GDP (Y) is the best measure of overall production we have, it is deficient in several ways. First, there are revisions to real GDP that can change the assessment of the economy over time. Second, real GDP omits some production. Much of the production that people do at home is activity that is not included in real GDP. Likewise, some jobs done at home, including illegal activities, are simply off the grid on purpose and not part of GDP, and referred to as the underground economy. The size of the underground economy is estimated to be between 10% and 25% of real GDP in the U.S. Third, the production of goods and services is only part of what affects the quality of life. In other words, real GDP does not serve as the only measure of well-being. Life expectancy, infant mortality, and other factors that enhance life correlate with both gains and losses.

Shortcomings of Measuring GDP-Questions 29. Th con um r pric index CPI) i criticiz. d for

(A ov r tating th tru burd n of inflation becau it doe not recognize con umer ' ability t ub titut go d and ervice . a price change

(B ov rstating the t1u burd n of inflation becau it rec gniz con um r ability to ub titut good and rvic a pric

chang (C under tating the true burden of inflation

becau it doe n t rec gnize c n umer " ability t ub ti tut go d and ervice a price change

(0 under tating the true burden of inflati n becau · it recogniz con um r ability to ub titu t g d and rvic a pric

chang (E ov r tating th ttu burd n of i nflati n

becau it refl ct th pric of both int rm diate go d and final g d

Macroeconomics Do-Now Please do this: 1. Define substitute goods and complementary goods.

2. Define elasticity.

3. Define cross- price elasticy. What's its formula?

4. 4 chairs are bought in 2017 for $20 each and for $15 each in 2016. If 2 cushions are bought in 2017 for $10 each and for $7 each in 2016. What is the CPI?

5. Draw a supply (S) and demand (D) graph from microeconomics showing a binding or effective price floor.


1. *substitute goods- goods that provides some of the same uses or enjoyment as another good

* complementary goods- goods that tends to be consumed together with another good

1 )

'-e '3~ ~ IO~ ~ 2. how sensitive one variable is to another 110 ~ ~

5.

Price

binding price floor/ mimimum price

Equilibrium price (Pe) ...., ...


A Market A Binding Price Floor

Surplus©

Market equilibrium (Me)

Supply (S)

Demand (D)

quantityiemanded (Qd)

/' quantity supplied Quantity

(Qs)

The Gener.a.I asc ot· a Price F l oor

real gdp vs. nominal gdp - mrsadow.commrsadow.com/9magdp, including the gdp deflator and the...

Documents