Principles of Economics- Mankiw (5th) 487

Principles of Economics- Mankiw (5th) 487 - CHAPTER 22 M E...

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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 22-2 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.

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