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CHAPTER 22
MEASURING A NATION’S INCOME
503
CASE STUDY
REAL GDP OVER RECENT HISTORY
Now that we know how real GDP is defined and measured, let’s look at what this
macroeconomic variable tells us about the recent history of the United States. Fig
ure 222 shows quarterly data on real GDP for the U.S. economy since 1970.
The
GDP deflator
is calculated as follows:
GDP deflator
±²
100.
Because nominal GDP and real GDP must be the same in the base year, the GDP
deflator for the base year always equals 100. The GDP deflator for subsequent
years measures the rise in nominal GDP from the base year that cannot be attrib
utable to a rise in real GDP.
The GDP deflator measures the current level of prices relative to the level of
prices in the base year. To see why this is true, consider a couple of simple exam
ples. First, imagine that the quantities produced in the economy rise over time but
prices remain the same. In this case, both nominal and real GDP rise together, so
the GDP deflator is constant. Now suppose, instead, that prices rise over time but
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.
 Spring '10
 abijian

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