If gdp is higher in one year than another do we

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Unformatted text preview: Page 297 Focus Questions What two variables are involved in calculating GDP? If GDP is higher in one year than another, do we automatically know why it is higher? What is the difference between GDP and real GDP? How do economists go about computing real GDP? Real GDP Key Terms base year real GDP The Two Variables of GDP: P and Q When we computed GDP in a simple, one-good economy, we multiplied two variables to find GDP: price (P) and quantity (Q). If either of the two variables rises and the other remains constant, GDP will rise. To see how this relationship works, look at the following chart: Price Quantity GDP $10 $15 $10 2 2 3 $20 $30 $30 With a price of $10 and a quantity of 2, GDP is $20. When the price rises to $15 but the quantity is held constant at 2, GDP rises to $30. Finally, if the price is constant at $10 and the quantity increases to 3, GDP again is $30. Clearly, an increase in either price or quantity will raise GDP. Suppose someone then told you that GDP was $20 one year and $30 the next year. You would have no way of knowing whether GDP increased because price increased, because quantity...
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This document was uploaded on 01/16/2014.

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