2.1.1 Measuring Real GDP

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11 Terms

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Definition of Real GDP

Real Gross Domestic Product (GDP) is the total value of all goods and services produced within a country's borders adjusted for inflation, providing a more accurate measure of economic output over time.

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Base Year

  • The reference year used for calculating real GDP.

  • Prices and quantities of goods and services produced in other years are adjusted relative to this base year.

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Nominal GDP

The total value of goods and services produced within a country's borders measured at current market prices, without adjustment for inflation.

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Price Index

  • A measurement of the average price level of a basket of goods and services relative to a base year.

  • Common price indices include the Consumer Price Index (CPI) and the GDP Deflator.

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Real GDP Calculation

  • Real GDP is calculated by adjusting nominal GDP for changes in price levels using a price index.

  • Real GDP = (Nominal GDP / Price Index) * 100.

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GDP Deflator

  • A measure of the level of prices of all new, domestically produced, final goods and services in an economy.

  • Calculated as (Nominal GDP / Real GDP) * 100.

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Chain-weighted GDP

  • A method of calculating real GDP that accounts for changes in the composition and relative importance of goods and services over time.

  • Considered more accurate than using a fixed-weighted approach.

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Uses of Real GDP

  • Provides a more accurate measure of economic output by adjusting for changes in price levels.

  • Used to compare economic growth across different time periods and countries.

  • Helps policymakers assess the effectiveness of economic policies.

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Limitations of Real GDP

  • Does not account for changes in quality or the underground economy.

  • Ignores non-market transactions and household production.

  • Can be influenced by changes in the composition of output and consumption patterns.

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Real GDP Per Capita

  • Real GDP divided by the population of a country.

  • Provides a measure of average economic output per person, adjusted for inflation.

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Cross-country Comparisons

Real GDP allows for comparisons of economic output across countries by adjusting for differences in price levels.