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Real vs Nominal GDP GDP is the value of all final goods and services produced Nominal GDP measures these values using current prices Real GDP measure these values using the prices of a base year CHAPTER 1 The Science of Macroeconomics slide 1 Real GDP controls for inflation Changes in nominal GDP can be due to changes in prices changes in quantities of output produced Changes in real GDP can only be due to changes in quantities because real GDP is constructed using constant base year prices CHAPTER 1 The Science of Macroeconomics slide 2 U S Real Nominal GDP 1967 2001 billionsofofU S U S dollars dollars billions 11 000 11 000 10 000 10 000 9 000 9 000 8 000 8 000 7 000 7 000 6 000 6 000 5 000 5 000 4 000 4 000 3 000 3 000 2 000 2 000 1 000 1 000 00 1965 1965 1970 1970 1975 1975 1980 1980 1985 1985 1990 1990 1995 1995 2000 2000 NGDP NGDP billions billionsofof RGDP RGDP billions billionsofof1996 1996 CHAPTER 1 The Science of Macroeconomics slide 3 U S Gross Domestic Product in billions of chained 1996 dollars 10 000 9 000 8 000 7 000 6 000 5 000 lon 4 000 3 000 1970 1975 CHAPTER 1 1980 g u n ru t d r a pw 1985 d n re 1990 1995 The Science of Macroeconomics 2000 slide 4 CHAPTER 1 The Science of Macroeconomics slide 5 How the BLS constructs the CPI 1 Survey consumers to determine composition of the typical consumer s basket of goods 2 Every month collect data on prices of all items in the basket compute cost of basket 3 CPI in any month equals Cost of basket in that month 100 Cost of basket in base period CHAPTER 1 The Science of Macroeconomics slide 6 Exercise Compute the CPI The basket contains 20 pizzas and 10 compact discs For each year compute pizza CDs the cost of the 2000 10 15 basket 2001 11 15 the CPI use 2000 2002 12 16 as the base year 2003 13 15 the inflation rate from the preceding CHAPTER 1 The Science of Macroeconomics slide 7 year prices answers cost of basket CPI inflation rate 2000 350 100 0 n a 2001 370 105 7 5 7 2002 400 114 3 8 1 2003 410 117 1 2 5

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