# I.B. - prices—gives you a real growth factor(1 real...

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I.B. Measuring Output and the Price Level 1. Measuring Total Output To add different goods and services we need to convert each good to its dollar value using market prices ( nominal GDP ) This introduces a problem—output measure is confounded with prices Solution—fix the prices over time to get a measure of output changes ( real GDP ) (a) Simple Method—Real GDP (i) pick a base year (ii) use market prices in the base year to measure the dollar value of production in every other year. Table 2.1 (b) Fancy Method—Chain-Weighted Real GDP Here we essentially form real GDP by calculating the real growth in two consecutive years by using an average of only those years’ prices Hence we only fix prices for two consecutive years (allows for changes in relative prices over time and for introduction of new goods) (i) compute nominal GDP for year 1 (ii) compute average market prices over year 1 and year 2 (iii) use the average price to compute the market value of production in both year 1 and year 2

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(iv) take the ratio of the output measures computed with the average
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Unformatted text preview: prices—gives you a real growth factor (1 + real growth rate) for those years (v) real GDP in year 2 = real growth factor times nominal GDP in year 1 Table 2.1 To compute the real GDP in year 3, calculate the growth factor between year 2 and year 3 and then multiply by the real GDP in year 2. 2. Measuring the Price Level In a one good economy if I knew nominal GDP (PQ) and I knew real GDP (Q), I could find the price level using the formula P = PQ/Q = nominal GDP/real GDP. This is how the government forms a estimate of the price level in our many-good economy implicit price level = nominal GDP/real GDP Table 2.1 3. Real GDP as a Measure of Welfare First, need to adjust for population size by dividing by the number of people in the economy to get real GDP per capita. Still problems (i) distribution of income (ii) nonmarket goods not included (iii) no value for leisure (iv) no measure of environmental quality...
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I.B. - prices—gives you a real growth factor(1 real...

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