Real Vs. Nominal GDP, Per Capita GDP, & the shortcoming of GDP

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Andrea Farmer
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1 Real Vs. Nominal, Per Capita, & the shortcoming of Comparing Across Time can grow due to: 1) Economy producing more 2) Prices having risen Calculating and Real in a Simple Economy 1

2 Nominal nominal, is the value of all final output produced in an economy during a given year, calculated using the prices current in the year which the output is produced Keeping it Real Comparing output over time is best done with real output which is nominal output adjusted for inflation Real is the value of the final goods and services produced calculated using the prices of some base year Nominal Vs. Real Nominal is calculated at existing prices. Real is nominal adjusted for inflation. Real is important to society because it measures what is really produced 2

inflation Real is the value of the final goods and services produced calculated using the prices of some base year Nominal Vs.

3 Real vs. Nominal Versus Real (R) $8 $9 $10 $ is the Price R is the pie is measured in current dollars. Therefore it appears as if was larger in 2001 than in previous years. To make year-to-year comparisons, we have to get rid of inflation 9-26 Deflating to Get R DEFLATORby Rcy = cy X DEFLATORcy

4 Deflating to Get R DEFLATORby Rcy = cy X DEFLATORcy 100 R 86 = X R 86 = X R 86 = Deflating to Get R DEFLATOR by R97 = 97 X DEFLATOR R 97 = X ` R 97 = X R 97 = and Real (in 1992Dollars), ,000 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 Real 5,500 5,000 4,500 4,000 3,500 3,000 Real 2,500 2,000 1,500 1, Base year =

4 X ----------------------------------------` 115.2 R 97 = 8083.4 X 8680556 R 97 = 7016.

5 Calculating Percentage Changes Change % change = Original Number 9-36 Calculating Percentage Changes Change % change = Original Number 1980 = = R = R = Change -----> % change = % change = = 8.8% Change > 12.9 % change = % change = =.26 % 9-44 Per Capita Per Capita is divided by the size of the population: it is equal to the average per person. Not an end in itself does not address how a country uses that output to affect living standards. 5

7 % change = ------------------- 2557.5 % change =.0886413 = 8.8% Change ------> 12.9 % change = ------------------------- 12.1 4624.0 % change =.0026168 =.

6 Per Capita Per capita = Per Capita Per capita = Per Capita Per capita = $9,966,000,000,000 Per capita = ,000,

Capita Per capita = -------------------------------- 0

7 Per Capita Per capita = Per capita = Per capita = $35,466 0 $9,966,000,000, ,000, Per Capita Real To compare per capita in one year with that of another year we have to correct for inflation. In other words, we really need to revise our formula Real Per capita real = Per Capita Per Capital is divided by the size of the population: it is equal to the average per person. Not an end in itself does not address how a country uses that output to affect living standards. 7

In other words, we really need to revise our formula Real Per capita real = -------------------------------- 9-50 Per Capita Per Capital is divided

8 Measures Market Activity, Not Welfare does not measure happiness, nor does it measure economic welfare. Welfare is a complicated idea, very difficult to measure. Measures Market Activity, Not Welfare does not measure happiness, nor does it measure economic welfare. Welfare is a complicated idea, very difficult to measure. Shortcomings of as a Measure of National Economic Well-being Production that is excluded Household production Illegal production The underground economy Treatment of leisure time Human cost and benefits gives us a ballpark idea of how much we produce, not necessarily how well off we are

Shortcomings of as a Measure of National Economic Well-being Production that is excluded Household production Illegal production The underground economy

9 What Goes into James Tobin and William Nordhaus: A Measure of Economic Welfare The economic bads The regrettable necessities Household, unreported, and illegal production A Measure of Economic Welfare 9-55 What Goes Into When a large part of our production goes toward national defense, police protection, pollution control devices, repair and replacement of poorly made cars and appliances, and cleanups of oil spills, a large is not a good indicator of how we re doing In general, the problem with using as a measure of national economic well-being is that is just one number, and no single number can possibly provide us with all of the information we need 9-56 The Last Word on includes some things that really shouldn t be counted has excluded some things that should be included If we can accept, while acknowledging all of its limitations, it serves us well

and cleanups of oil spills, a large is not a good indicator of how we re doing In general, the problem with using as a measure of national economic well-being is that is just one number, and no

Real vs. Nominal GDP Practice

Name: Real vs. Nominal GDP Practice Period: Real verse Nominal Values Prices in an economy do not stay the same. Over time the price level changes (i.e., there is inflation or deflation). A change in the