Measurement of Economic Performance Nominal vs Real GDP

Measurement of Economic Performance Nominal vs. Real GDP

Goals • Know the difference between real and nominal GDP. • Apply your knowledge to calculate real GDP using nominal numbers. • List some elements of life that cannot be measured by GDP.

I. GDP as Measure of Output As a measurement: • The most important use of GDP is as a measure of the size of the economy, providing us a scale against which to compare the economic performance of other years or other countries.

I. GDP as Measure of Output Nominal GDP • The total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced. Real GDP • The total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year.

II. Calculating Real GDP Nominal GDP • (Current year output x Current year prices) Real GDP • (Current year output x Base year prices) Real Growth Year 2 – Year 1 / Year 1

II. Calculating Real GDP per capita • GDP/ population • Average GDP person

III. What GDP Does Not Measure Happiness Leisure time Disease Natural beauty Crime

IV. Practice Computers DVDs Year Price Quantity 2008 $900 10 2008 $10 100 2009 1, 000 10. 5 2009 12 105 2010 1, 050 12 2010 14 110 Pizza Year Price Quantity 2008 $15 2 2009 16 2 2010 17 3