3.4 Interpreting GDP

is GDP per capita a perfect measure of living standards?

no - it doesn’t include many aspects of our well0beinbg

when comparing output in one country at two points in time, what do we consider?

differences in prices between the two points in time

when comparing output between two countries at a point in time, what do we need to take into consideration?

differences in prices between the two countries

real GDP

a measure of the total quantity of goods and services sold

aka GDP at constant prices

how do we find real GDP

(1) estimate nominal GDP
(2) pick a base year and define real GDP using 2020 prices as equal to nominal GDP that year. the following year, nominal GDP for 2021 is calculated as usual using the prices prevailing in 2021

(3) estimate what has happened to real GDP by multiplying 2021 quantities by 2020 prices. if, using base year prices, GDP has gone up, we can infer that real GDP has increased

if GDP is unchanged, what does that mean

growth rate of the economy is zero

when do we use real vs. nominal gdp?

nominal - use data in current prices (nominal GDP) when calculating shares of GDP or ratios to GDP

otherwise, use real GDP

using nominal GDP

aggregates expressed as a percentage of GDP enable comparisons to be made over time and across countries that are independent of the size of the country and not affected by changes in prices

using real gdp

to gauge the size and growth of an economy, assess GDP per capita, make cross-country comparisons

how do we compare GDP across countries

choose a set of prices and apply it to both countries, otherwise comparisons are misleading

purchasing power parity (PPP) prices

set of prices that measure how much it costs to purchase a basket of goods and services compared to how much it costs to purchase the same basket in a reference country in a particular year
**idea is to achieve equality in the real purchasing power

are prices typically higher or lower in richer countries? why?

higher because wages are higher so prices have to be higher

issues with accuracy of GDP

• changes in quality of goods

• non-market activity i.e. household and volunteer work

• underground and illegal economy

• depletion of natural resources not included

does GDP include any forms of non-market activity?

technically yes because spending by government on schools is non-market, however it doesn’t include household production and volunteering bc it’s difficult to estimate their market value

in calculating GDP, how are changes in product or service quality measured?

they’re measured as changes in quantity

true or false: the underground and illegal economy cannot be included in GDP bc they’re typically difficult to measure

false - in some european countries they’re added in, the monetary value of illegal activities can be estimated and incorporated into national accounts

true or false: the value of non-market activies i..e household production and volunteer work is typically small compared to GDP

false - when expressed as a percentage of GDP, the value of unpaid household service work is typically very high

non-market activity

a substantial amount of measured GDP (~30%) is non-market activity, but the only non-market activity included in GDP is government spending on G+S i.e. schools, prisons, and defense

change in quality - how is it measured?

change in quantity of the item bc you get more or less for the same amt of money