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Unformatted text preview: of output
increased, or because both price and quantity increased. On the other hand, if price
was held constant and GDP increased,
would you know what caused the rise in
GDP? If price is held constant, then any
rise in GDP must be due to a rise in quantity, of course.
How can we keep price constant?
Economists do it by computing GDP for
each year—2003, 2004, 2005, and so on—
using the prices that existed in one particular year in the past, called the base year,
chosen as a point of reference for comparison. Economists who compute GDP this
way are said to be computing real GDP
(GDP measured in base-year, or constant,
prices). GDP is equal to price in the current
year times quantity in the current year, but
real GDP is equal to price in the base year
times quantity in the current year.
Let’s again assume that we have a simple, one-good economy that produces only
watches. In Exhibit 11-7, on page 298, column 1 lists several years, column 2 gives
the price of watches in these years, and column 3 gives the quantity of watches base year
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This document was uploaded on 01/16/2014.
- Winter '14