On the other hand if price was held constant and gdp

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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 In gene...
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This document was uploaded on 01/16/2014.

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