Detailed Study Notes on GDP, Economic Growth, and Measurement Approaches (ECON 102 2/10/2026)

Nominal and Real GDP

  • Nominal GDP: The measurement of GDP at current prices without adjustments for inflation.
  • Real GDP: Adjusted for inflation, measured using constant base year prices.
  • Price Levels: While nominal GDP uses current prices, real GDP is reflective of the quantity produced adjusted for inflation.

Growth Rates

  • Nominal GDP Growth Rates:
    • Year 1: 200%
    • Year 2: 100%
  • Real GDP Growth Rates:
    • Year 1 to Year 2: 75%
    • Year 2 to Year 3: 43%
  • Importance of Real GDP: Gives insight into actual production increases, which correlate with job creation.

The Importance of Questioning GDP Figures

  • Questioning Sources: It is crucial to analyze the datatype presented (nominal vs real) and the source of the data to make informed economic decisions.

Definitions

  • Nominal GDP Defined:
    • Combines the price level with the aggregate quantity of goods and services produced: nominal GDP = price * quantity.
  • Real GDP Defined:
    • Nominal GDP adjusted for inflation and expressed in base year prices.
  • Relationship of Changes:
    • The % change in nominal GDP equals the % change in prices plus the % change in quantity:
      ext{Percentage change in nominal GDP} = ext{Percentage change in price} + ext{Percentage change in quantity}
    • Rearranged as:
      ext{Percentage change in quantity} = ext{Percentage change in nominal GDP} - ext{Percentage change in price}

Growth in Real GDP

  • Formula for Growth in Real GDP:
    • Grow in real GDP = Grow in nominal GDP - Grow in inflation.
  • Mathematical Applications: Familiarity with these formulas is crucial for numerical problems and multiple choice questions.

Business Cycles

  • Real GDP Trends:
    • It primarily shows a long-term growth trend interspersed by short-term fluctuations (business cycles).
    • Remember: Real GDP grows over time but is not steady and shows both peaks and troughs.
  • Recessions and Depressions:
    • Recession: Two consecutive periods of GDP downturns, leading to falling GDP, income, and profits, while unemployment and bankruptcies increase.
    • Depression: A prolonged decline in economic activity.

Aggregate Well-Being Indicator

  • Per Capita Real GDP:
    • Calculation: ext{Real GDP} / ext{Population}
    • Average income metric, but can misrepresent wealth distribution.
  • Income Distribution Concerns:
    • High per capita GDP can exist alongside poor income distribution, illustrating the importance of understanding full economic contexts.

GDP Measurement Approaches

  • Official Measurement of GDP: Based on nominal GDP, adjustments, and incorporation of base year contexts.

The Circular Flow Model

  • Assumptions:
    • Assumption: No savings in the economy; everything earned is spent.
  • Definition of Savings in Economics:
    • Savings must represent a deferred consumption to generate future wealth. It is exemplified by putting money into investments such as stocks.
  • Contrasting Views on Savings: Individual savings vs. whole economy savings. When individuals save, it often contributes to overall economic spending through the banking sector.

Demand in Economic Terms

  • Demand Definition: Desire backed by purchasing power.
  • Consumption Expenditures: Include private consumption, government expenditure, and investment expenditures.

Macroeconomic Identity of GDP

  • Micro vs. Macro: While individuals may save, on a macroeconomic level, income equals expenditure, leading to the conclusion that overall savings do not exist.
  • Basic Macro Identity:
    • GDP = C + I + G + (X - M)
    • where:
      • C = Consumption
      • I = Investment
      • G = Government spending
      • X = Exports
      • M = Imports
  • Understanding Identities:
    • Unlike equations, identities must hold true due to variable definitions; e.g., the sum of C, I, G, X, and M must equal GDP.

Composition of GDP Expenditures

  • Consumption (C):
    • Expenditures on durable goods (e.g., vehicles), nondurable goods (e.g., food), and services (e.g., healthcare).
  • Investment (I):
    • Includes machinery, structures (buildings), and inventories.
    • Investments do not include stocks since they are not tangible capital creation.
  • Government Expenditures (G):
    • All aspects of governmental spending except transfer payments like welfare.
  • International Sector Impact:
    • Determining net exports with calculations separating domestic-produced goods sold abroad (exports) vs. foreign-produced goods sold domestically (imports).

Trade Balances

  • net exports (NX) can be positive (trade surplus), negative (trade deficit), or zero (balanced trade).

Conclusion

  • GDP Complexity: Understanding the makeup and fluctuations of GDP is essential for evaluating economic health. Common reasons for inconsistencies in GDP measurement include misreported consumption and other data discrepancies.