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ln2-revised - Econ 102 Winter 2012 Lecture Note 2 -...

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Unformatted text preview: Econ 102 Winter 2012 Lecture Note 2 - Economic Growth GDP Growth To study economic growth, we can compare GDP from time period to time period. The simplest measure would be to look at GDP . For example, in 1990, the US GDP was about 5.8 trillion dollars, while today it is estimated at around $15 trillion. Are we two and a half times better off today than 21 years ago? Perhaps, but some might argue that a dollar had different value in 1990 than it does today. This is the reason economists developed the price index- to make comparisons between time periods. The idea is to adjust GDP (or any amount of money) by a factor that represents the quantity of actual goods that a particular amount of money can buy. Since we are converting units of money to units of actual goods, we call this a real measure. The amount of money is known as the nominal measure. For example, suppose the only final good in the economy is cars, and last year our economy produced 1 car. This year, our economy also produced 1 car. In real terms, GDP stayed the same, but in nominal terms, the value of GDP depends on the price of a car. Put another way, real GDP is the answer to the question: what would nominal GDP be if we had to purchase goods at the prices of a different year? In 1990, a gallon of gasoline cost $1.16. Using 1990 as the reference year, Real GDP in 2011 calculated at 1990 prices would be much less, assuming other prices went up as well. In our simple example above, the price index will simply be the price of 1 car. We then 1 know that if the price of a car jumps, our nominal GDP will increase even though real GDP stays the same. Upward changes in a price index is known as inflation . To actually calculate a price index, we could take the same quantities of goods that we bought last year and calculate the value of those goods using todays prices. The price index would then be the ratio of yesterdays quantities at todays prices vs. yesterdays quantities at yesterdays prices. This type of price index is known as a Laspeyres Index. Mathematically it looks like: L = i P i,t Q i,t- 1 i P i,t- 1 Q i,t- 1 where i is an index over the number of goods....
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This note was uploaded on 02/06/2012 for the course ECON Econ102 taught by Professor D during the Spring '11 term at UCLA.

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ln2-revised - Econ 102 Winter 2012 Lecture Note 2 -...

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