Interpreting Real Gross Domestic Product - Section 3, Module 11

measures the size of the economy that allows us to compare with the economies of other countries

GDP represents increases in prices, not output

• to measure actual changes in aggregate output, a modified version of GDP adjusted for price changes, called real GDP, is used

GDP allows for comparisons of the size of different economies, but it is not a good measure of the economy’s growth over time

• bc GDP can grow just bc of inflation (prices increase)

For an accurate measure of the economy’s growth, we need a measure of aggregate output - the total quantity of final goods and services the economy produces

• use real GDP

  • Calculate GDP as if prices hadn’t changed - take quantity from year 2 but prices from year 1

• real GDP - total value of all final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the price level of the given base year to remove the effects of price changes

• nominal GDP - a GDP number that has not been adjusted for changes in prices - is the GDP at current prices

• real GDP can be calculated with the base year being year one or year two - when you take the average of the two real GDPs, that’s called chain-linking

GDP per Capita - GDP divided by the size of the population = GDP per person

• real GDP per capita can be useful in comparing the labor productivity between two countries

• however, it is an insufficient measure of human welfare in a country bc it does not include many of the things that contribute to happiness

• higher real GDP does not necessarily equate a higher standard of living