Teach me Economics Teach me Economics Adjusting GDP

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Adjusting GDP for price increases

A Review of GDP

Price Increases in perspective… �Suppose that Rosa serves as treasurer for the math club at her high school. In preparation for the club’s annual candy sale, Rosa reviews the sales figures for the last two years. Although the club raised almost twice as much money last year as the year before, Rosa notices that the price collected by the club for each candy bar increased from $1. 25 to $2. 50 from the 1 st year to the next.

Price Increases in perspective… �However…. The number of candy bars sold each year was approximately equal. The rise in price had masked the lack of increase in candy bar sales. �The same thing happens with GDP…

Consider the following table: 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 7, 414. 7 7, 838. 5 8, 270. 46 8, 727. 02 9, 286. 86 9, 884. 17 10, 218 10, 572. 4 11, 067. 8 11, 788. 9 12, 554. 5 13, 310. 9 13, 969. 3 14, 270. 5 14, 014. 8 14, 551. 8 The following table lists GDP in Billions of Dollars

Price Increases in perspective… �In 1995, US GDP was nearly seven times greater than in 1970. As in Rosa’s case, these increases do not necessarily derive from real increased in the output of goods and services. �As prices increase, so does GDP. Therefore, economists calculate GDP in both nominal and real prices.

Nominal GDP (or Current GDP) Expressed in the current prices of the period being measured

Real GDP Is GDP adjusted for price changes. GRAPH

Limitations of Gross Domestic Product Although GDP is the most common measure of the state of a nation’s economy, it is not an entirely accurate measure of output and economic growth. To properly interpret GDP and other national accounts based on it, one must understand it’s limitations.

Accuracy and Timeliness of Data �Gathering the necessary data is a slow and time consuming process. �As a result, initial GDP figures are often inaccurate and the Commerce Department may have to issue revised figures.

Nonmarket Activities �For the most part, GDP measures only market transactions. (exchanges of goods and services for money that is recorded in the marketplace. ) �Barter transactions, housework, and do it yourself home repairs are examples of nonmarket activities.

Underground Economy �Suppose you have your own painting business during the summer months and large school breaks. You paint other people’s interior/exteriors. You do not advertise, and you only accept cash for payment. �UNDERGROUND ECONOMY: illegal activities and unreported legal activities. �Failure to report this income to the government is illegal.

Can you think of other underground economies that are both legal and illegal?

“Goods” and “Bads” �The value of many “Goods” – things that make for a better society- are not reported in GDP while the value of many “bads” – things that make the society worse are reported in GDP. �Some policies that protect our society result in decreased GDP. �Automotive emissions standards and regulations that prohibit development in ecologically sensitive areas reduce GDP but improve the nation’s well being.

…And here we go with our “DUMB VIDEO of the DAY” YOU BETTER LAUGH! “Teach me Economics, Teach me Economics!”

Review Questions Pg. 248 REVIEWING CONCEPTS #1&2 THINKING AND WRITING CRITICALLY #1 & 2 ** Due at the beginning of the hour tomorrow for a homework grade**