Econ 104 1st Edition Lecture 7 Outline of Last Lecture I Expenditure Approach to Calculation GDP II Fun Facts about GDP III Income Approach to Calculating GDP IV Production Approach to calculating GDP Outline of Current Lecture II Real vs Nominal GDP III Gross Domestic Product IV Product approach V Example of Percent Change REAL from previous year VI Example of how to Calculate GDP deflator Current Lecture I Real vs Nominal GDP a When we have real and nominal calculated we can find inflation between two years b Looks simple but you can do a lot II Gross Domestic Product the market value of all final goods and services produced in a country over a period of time a Measured in 3 ways i Product Approach ii Income Approach III Product approach a Quantity of all goods produced X price of those goods b If someone tells you GDP is up by 5 i With nominal GDP there is a problem 1 Is quantity produced or price up Or both These 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 a Typically GDP going up is a good thing but this could just mean inflation b To calculate real GDP use base year prices for each year instead of current year prices i The base year selected by the US Department of Commerce is 2009 1 Why is the real GDP falling a Because all the prices are now higher than they were in 2009 i Prices are always rising typically b Meaning in 2009 i Nominal GDP Real GDP ii Better way to tell which way GDP is going iii Percent change of Real GDP 1 New old old X 100 c Real GDP will increase only when quantity produced increases IV Example of Percent Change REAL from previous year a Negative growth is recession Year Nominal GDP using Current Prices in trillions Real GDP using 2009 Prices in trillion Percent Change REAL GDP from previous year 2009 14 417 14 417 2 8 2010 14 958 14 779 2 5 2011 15 533 15 052 1 8 2012 16 244 15 470 2 8 2013 16 799 15 761 1 8 I Notice that 2009 prices although the base year are not the same numbers a This is because it counts for inflation I How to do the percent change real from previous real a new old old X 100 i Only use 2009 base year prices b 2010 14 779 14 417 14 417 X 100 2 5 II How do we measure the growth in prices inflation from one year to the next a GDP deflator or Price Level P or Price Index b P NGDP RGDP X100 i NGDP nominal GDP ii RGDP real GDP iii NGDP and RGDP are from the same year c Price Level A measure of the average level of prices of goods and services in the economy III Example of how to Calculate GDP deflator a Use data from the previous table used for calculating percent change in Real GDP i NGDP RGDP X100 ii P2012 16 244 15470 X 100 105 iii P2013 16799 15761 107 iv Change 2012 to 2013 107 105 105 X 100 1 9 1 Inflation Rate for 2013 is 1 9 2 inflation I Calculate GDP by Income method a GDP by Income Method National Income GDP i National Income Net interest Compensation of Wages Profits Rental Income Indirect Business Taxes b Example of a GDP by Income Method i Net Interest 1500 ii Depreciation 800 iii Net Interest Compensation 4000 iv Profits 1000 v Rental Income 100 vi Indirect Business Taxes 600 vii Income Taxes 900 viii Social Security Payments 1000 ix GDP 1500 4000 1000 100 600 1500 8 700
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