Econ 2006 January 18, 2008 • Economists make two distinctions 1. the nominal value (dollar) of a variable is its current dollar value uncorrected for the effects of inflation and any change in moneys purchasing power 2. The real value of a variable corrects for the effects of inflation and any change in moneys purchasing power. This allows one to compare variables across time. ( We will see how this is done in the next chapter) Economists focus almost exclusively on real variables • Problems with GDP Real GDP is an imperfect measure of economic well-being 1. Does not take into account changes in quality 2. ignores the “underground” economy 3. Ignores non-market production 4. Ignores the effects of externalities such as pollution CH 5. ed 4 questions 1. Using the expenditure approach which of the following would be directly counted as part of the U.S. GDP in 2005? a) A new personal computer produced by IBM, which remained unsold by the years end. YES This represents an increase in inventories and therefore counts (Investment)
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