ECON 2203 1st EditionLecture 4KeyEquationsExamplesDefinitionsImportant InformationOutlines - Real, Nominal GDP - GDP deflator, and Inflation rate - Is GDP a good measure? Real GDP vs. Nominal GDPIf nominal GDP (total spending) increases from one year to the next, at least one of two things must be true:– The economy is producing ____ goods and services– Goods and services are being sold at ______ pricesNominal GDP - uses current prices to place a value on the economy’s production of goods and services. It reflects both the quantity and price of goods and services the economy is producing Real GDP uses constant price of base year to place a value on the economy’s production of goods and services. It is not affected by changes in prices. It reflects only the quantities of goodsand services the economy is producing. Real GDP is better measure of economic well being than Nominal GDP because it better reflects the economy’s ability to satisfy people’s needs and desiresA Numerical Example: Consider an economy that produces two goods: hot dogs and hamburgers.Calculating Nominal GDPThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Year Price of hot dogsQuantityof hot dogsExpenditure on hot dogsPrice of hamburgersQuantity ofhamburgersExpenditure on hamburgersNominal GDP2010 $1 X 100 = $100 $2 X 50 = $100 $2002011 $2 X 150 = $300 $3 X 100 = $300 $6002012 $3 X 200 = $600 $4 X 150 = $600 $1,200A Numerical Example: Consider an economy that produces two goods: hot dogs and hamburgersCalculate Real GDP (base year 2010)Year Price of hot dogsQuantityof hot dogsExpenditure on hot dogsPrice of hamburgersQuantity ofhamburgersExpenditure on hot dogsReal GDP2010 $1 X 100 = $100 $2 X 50 = $100 $2002011 $1 X 150 = $150 $2 X 100 = $200 $3502012 $1 X 200 = $200 $2 X 150 = $300 $500GDP deflator• GDP deflator reflects only price of goods and services The GDP deflator is calculated as follows: ��� �������� = Nominal GDP/Real GDP × 100Calculate GDP DeflatorYear Nominal GDP Real GDP GDP Deflator2010 $200 $200 (200/200) x 100 = 1002011 $600 $350 (600/350) x 100 = 1712012 $1,200 $500 (1200/500) x 100 = 240Inflation– economy’s overall price level is risingInflation rate – Percentage change in some measure of the price level from one period to the nextYear GDP Deflator Inflation Rate2010 100 -----------------------------------2011 171 (171 - 100)/100 x 100% = 71%2012 240 (240 - 171)/100 x 100% = 40%Is GDP a Good Measure of Economic Well-Being?Limitations of GDP– Not a perfect measure of well-being – Doesn’t include:• Leisure (working more = better GDP = lower leisure)• Value of almost all activity that takes place outside markets• Quality of the environment– Nothing about distribution of income (does not separate the rich from the poor)Real GDP is still considered as “the best single measure of the economic well-being of a society”G – Economy’s total income G – Economy’s total expenditure G – Larger GDP • Good life, better healthcare • Better educational systems G – Measure our GDP to obtain many of the inputs into a worthwhile life GReal GDP per person is a better measure of the economics well-being of an individual in society.Case Study: International Differences in GDP and the Quality of lifeSource: Human Development report 2009, United Nations. Data on real GDP, life expectancy, and literacy are for 2007. Data on Internet use is for 2005.42• Rich countries - higher GDP per person – Better: • Life expectancy • Literacy• Internet usage • Poor countries - lower GDP per person – Worse: • Life expectancy • Literacy• Internet usage Summary for Chapter 5Microeconomics and Macroeconomics The measurements of GDP G – Which items should include in GDP? Which items should not? G – Used goods; intermediate goods; Goods and services produced at home; goods and services produced in U.S.; housing services GTotal output (GDP) = Total income = Total expenditure The components of GDP G – Y = C + I + G + NXG – What does each component mean? G – How each transactions affect components of GDP and GDP? G – In economics, investment does not mean purchasing of stockGReal, Nominal GDP, GDP deflator, and Inflation rateG – How to calculate real GDP, nominal GDP, GDP deflator, and Inflation rate? G – What do real GDP, nominal GDP, GDP deflator, and Inflation rate measure? – Which one is better? Real GDP or Nominal GDP? Why?Is GDP a good measure? –