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Chapter 2

# Chapter 2 - Core Ideas More Precisely(Blanchard ch 2 Prof...

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Core Ideas More Precisely (Blanchard ch. 2) Prof. Irina A. Telyukova UCSD Econ 110A Spring 2008

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2 Outline: Main Macroeconomic Variables I. Measuring a country’s output: Gross Domestic Product. Three definitions. Nominal versus real GDP. Measuring output growth. II. Unemployment rate: definition, measurement, and policy implications. III. Inflation: two ways of measuring (GDP deflator and the Consumer Price Index) and policy implication. IV. Why we distinguish between the short, medium and long run.
3 I. Aggregate Output: the GDP There are three definitions of the GDP: 1. GDP is the total value of the final goods and services produced in the economy during a given period. (Supply side) 2. GDP is the value added in the economy during a given period. (Supply side) 3. GDP is the sum of incomes in the economy during a given period. (Income side) GDP: Total Production = Total Value Added = Total Income

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4 Nominal vs. Real GDP square6 Nominal GDP (\$Y t ) is the sum of quantities of final goods produced times their current prices. square6 Production of most goods increases over time. square6 BUT, prices of most goods increases over time too. head2right Thus, growth of nominal GDP may be due to the growth of either. square4 Real GDP (Y t ) takes out price growth: the sum of quantities of final goods produced times their constant prices . square4 Growth of real GDP is thus entirely due to growth of production, so better measures economic growth. square4 Chained-dollar GDP computes real GDP by taking into account the fact that relative prices of goods also change over time.
5 Nominal vs. Real GDP 0 2,000 4,000 6,000 8,000 10,000 12,000 1965 1970 1975 1980 1985 1990 1995 2000 (billions of U.S. dollars) NGDP (billions of \$) RGDP (billions of 1996 \$)

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6 Real GDP Measures Economic Size of a Country square6 Real GDP measures economic performance of a country (better than nominal GDP).
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