lnc19 - Notes 19 GDP and other matters Real GDP In 1956 US...

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Unformatted text preview: Notes 19. GDP and other matters Real GDP In 1956, US GDP was equal to \$437.5 billion; in 2006, it was \$13,244.6 billion. That is, US GDP in 2006 was 30 times its 1956 size, a whopping 7.1 percent annual growth rate. That means that incomes in 1956 were only a measly 3 percent of what they are today. Now I understand why, when I was a little boy, everyone was so poor; wearing rags, eating slop, losing their teeth at 30 and dying at 50. Oh, no, I forgot, it wasn’t like that at all. The US economy has grown considerably since 1956, and incomes are higher than they were then, but not that much higher! So what's wrong with the data? Nothing. What's wrong is the use of nominal GDP rather than real GDP. Some definitions: To calculate real GDP, use the formula shown in your textbook. Refer to the following diagram, which shows the difference between the growth in nominal and real GDP from 1956 through 2006. As you can see, the greater share of the growth of nominal GDP has been the nominal component, that is, inflation. In the table, nominal and real GDP are shown at ten-year intervals, with real GDP expressed in 1956 constant dollars. Nominal GDP rose to 3,000% of its 1956 level by 2006, while real—that is, inflation- adjusted—GDP grew by a respectable but much smaller amount, to about 500% of the 1956 level. Thus, real output in 2006 was about 5 times what it was in 1956. Regarding nominal GDP, the difference (3,027% - 506%) is just inflation. Regarding prices and the value of the dollar, here’s another way of looking at it, using the GDP chain-type price index. The index for 1956, using 2000 as the base year, is 19.604....
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lnc19 - Notes 19 GDP and other matters Real GDP In 1956 US...

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