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Real vs. Nominal GDPReal GDP controls for inflationU.S. Real & Nominal GDP, 1967-2001U.S. Gross Domestic Product in billions of chained 1996 dollarsPowerPoint PresentationHow the BLS constructs the CPIExercise: Compute the CPIanswers:The composition of the CPI’s “basket”Slide 10GDP DeflatorTwo measures of inflationSlide 13Slide 14Okun’s LawCHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 1Real vs. Nominal GDPReal 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 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 2Real GDP controls for inflationReal GDP controls for inflationChanges in nominal GDP can be due to:changes in prices changes in quantities of output producedChanges in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-year prices.CHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 3U.S. Real & Nominal GDP, U.S. Real & Nominal GDP, 1967-20011967-200101,0002,0003,0004,0005,0006,0007,0008,0009,00010,00011,0001965 1970 1975 1980 1985 1990 1995 2000(billions of U.S. dollars)NGDP (billions of $) RGDP (billions of 1996 $)01,0002,0003,0004,0005,0006,0007,0008,0009,00010,00011,0001965 1970 1975 1980 1985 1990 1995 2000(billions of U.S. dollars)NGDP (billions of $) RGDP (billions of 1996 $)CHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 4U.S. Gross Domestic ProductU.S. Gross Domestic Product in billions of chained 1996 dollarsin billions of chained 1996 dollars3,0004,0005,0006,0007,0008,0009,00010,0001970 1975 1980 1985 1990 1995 2000long-run upward trend…CHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 5CHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 6How the BLS constructs the CPIHow the BLS constructs the CPI1. 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 basket3. CPI in any month equalsCost of basket in that month100Cost of basket in base periodCHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 7Exercise: Exercise: Compute the CPICompute the CPIThe basket contains 20 pizzas and 10 compact discs. prices:pizza CDs2000 $10 $152001 $11 $152002 $12 $162003 $13 $15For each year, computethe cost of the basketthe CPI (use 2000 as the base year)the inflation rate from the preceding yearCHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 8cost of inflationbasket CPI rate2000 $350 100.0 n.a.2001 370 105.7 5.7%2002 400 114.3 8.1%2003 410 117.1 2.5%answers:answers:CHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 9The composition of the CPI’s “basket”The composition of the CPI’s “basket”16.2%40.0%4.5%17.6%5.8%5.9%2.8%2.5%4.8%Food and bev.HousingApparelTransportationMedical careRecreationEducationCommunicationOther goods andservicesCHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 10CHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 11GDP DeflatorGDP DeflatorThe inflation rate is the percentage increase in the overall level of prices.One measure of the price level is the GDP Deflator, defined asNominal GDPGDP deflator = 100Real GDPCHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 12Two measures of inflationTwo measures of inflation16 14 12 10 8 6 4 2 0 -2Percentagechange1948 1953 1958 1963 1968 1973Year1978 1983 1988 1993 1998CPIGDP deflatorCHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 13CHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 14Employed workers help produce GDP, while unemployed workers do not. So one would expect a negative relationship between unemployment and real GDP.This relationship is clear in the data…Okun’s LawOkun’s LawCHAPTER 1CHAPTER 1 The Science of Macroeconomics The Science of Macroeconomicsslide 15Okun’s LawOkun’s Law1951198419992000199319821975Change in unemployment rate10 -3-2-10 1 2 438 6 4 2 0 -2Percentage change in real GDPOkun’s Law states that a one-percent decrease in unemployment is associated with two percentage points of additional growth in real GDPOkun’s Law states that a one-percent decrease in unemployment is associated with two percentage points of additional growth in real


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