GDP Deflator & the Business Cycle

nominal GDP

GDP measured in current prices

• does not account for inflation from year to year

real GDP

GDP expressed in constant or unchanging $

• adjusts for inflation

• better for measuring actual growth

GDP deflator

• measures the prices of all goods produced whereas CPI measures prices only of goods & services bought by consumers

• an increase in the price of goods bought by firms or the gov will show up in the GDP deflator but not in the CPI

• GDP deflator includes only those goods & services produced domestically - no imported goods

how to calculate GDP deflator

GDP deflator = (nominal GDP/real GDP)x100

business cycle

national economy goes up & down like a rollercoaster overtime

y axis

real GDP

x axis

time

there is a positive output gap between

B and the dotted line

there is a negative output gap

between points A & C and the dotted line

there is a recession between 

points B and C

there is a recovery between

points A and B

there is a contraction between

points B and C

there is expansion between

points A and B

there is a peak at point

B

where are there trough(s)

points C and A

what does the dotted line represent

full employment

recession

a 6 month period of decline in GDP

expenditures approach

counts the price of the goods and/or services that are sold to consumers

income approach

calculates the total income earned by the factors of production in the economy

equation for national income

W+R+I+P

value-added approach

adding different firms’ contributions to the value of each final good or service