Week 7 - GDP, CPI, etc.

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5 Terms

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Gross Domestic Product (GDP)

The total value of all goods and services produced in an economy in a given year

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Nominal GDP

reflects the raw numbers in current dollars, unadjusted for inflation.

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Real GDP

adjusts the numbers by fixing the currency value, eliminating distortions caused by inflation or deflation

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Why is GDP useful?

  • Useful indicator of a country’s level of employment and income.

  • Shows the purchasing power of a society.

  • General indicator of a country’s prosperity.

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Weaknesses of GDP as an Economic IndicatorDoesn’t account for inflation.

  • Ignores quality of life improvements.

  • Ignores where production is going (environmental and social consequences).

    • Ex: military spending for war 

  • "In GDP, hotels and prisons are the same."

  • Ignores who gets the goods and distribution of wealth.

  • Ignores nonmarket production (e.g., raising children).

  • Ignores the hidden economy.