Discussion question in your country which would you

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Discussion Question In your country, which would you want to be bigger, GDP or GNP? Why? 25
GNP vs. GDP in select countries, 2010 Country GNP GDP GNP – GDP (% of GDP) Bangladesh 109,695 100,357 9.3 Japan 5,601,557 5,458,837 2.6 China 5,957,012 5,926,612 0.5 United States 14,635,600 14,586,736 0.3 India 1,712,645 1,727,111 -0.8 Canada 1,549,652 1,577,040 -1.7 Greece 292,874 301,083 -2.7 Iraq 77,842 82,150 -5.2 Ireland 171,260 206,612 -17.1 GNP and GDP in millions of current U.S. dollars
27 CHAPTER 2 The Data of Macroeconomics Real vs. nominal GDP GDP is the value of all final goods and services produced. Nominal GDP measures these values using current prices. Real GDP measure these values using the prices of a base year.
NOW YOU TRY Real and Nominal GDP Real and Nominal GDP 28 Compute nominal GDP in each year. Compute real GDP in each year using 2010 as the base year. 2010 2011 2012 P Q P Q P Q good A $30 900 $31 1,000 $36 1,050 good B $100 192 $102 200 $100 205
NOW YOU TRY Answers Answers 29 nominal GDP multiply Ps & Qs from same year 2010: $46,200 = $30 900 + $100 192 2011: $51,400 2012: $58,300 real GDP multiply each year’s Qs by 2010 Ps 2010: $46,200 2011: $50,000 2012: $52,000 = $30 1050 + $100 205
30 CHAPTER 2 The Data of Macroeconomics Real GDP controls for inflation Changes in nominal GDP can be due to: changes in prices changes in quantities of output produced Changes in real GDP can only be due to changes in quantities, because real GDP is constructed using constant base-year prices.
U.S. Nominal and Real GDP, 1960-2012 Nominal GDP Real GDP (in 2005 dollars)
32 CHAPTER 2 The Data of Macroeconomics GDP Deflator Inflation rate : the percentage increase in the overall level of prices One measure of the price level: GDP deflator Definition: Nominal GDP GDP deflator = 100 Real GDP
NOW YOU TRY GDP deflator and inflation rate GDP deflator and inflation rate 33 Use your previous answers to compute the GDP deflator in each year. Use GDP deflator to compute the inflation rate from 2010 to 2011, and from 2011 to 2012. Nom. GDP Real GDP GDP deflator Inflation rate 2010 $46,200 $46,200 n.a. 2011 51,400 50,000 2012 58,300 52,000
NOW YOU TRY Answers Answers 34 Use your previous answers to compute the GDP deflator in each year. Use GDP deflator to compute the inflation rate from 2010 to 2011, and from 2011 to 2012. Nom. GDP Real GDP GDP deflator Inflation rate 2010 $46,200 $46,200 100.0 n.a. 2011 51,400 50,000 102.8 2.8% 2012 58,300 52,000 112.1 9.1%
37 CHAPTER 2 The Data of Macroeconomics Chain-Weighted Real GDP Over time, relative prices change, so the base year should be updated periodically. In essence, chain-weighted real GDP updates the base year every year, so it is more accurate than constant-price GDP. Your textbook usually uses constant-price real GDP, because: the two measures are highly correlated. constant-price real GDP is easier to compute.
38 CHAPTER 2 The Data of Macroeconomics Consumer Price Index (CPI) A measure of the overall level of prices Published by the Bureau of Labor Statistics (BLS) Uses: tracks changes in the typical household’s cost of living adjusts many contracts for inflation (“COLAs”) allows comparisons of dollar amounts over time
39 CHAPTER 2 The Data of Macroeconomics How the BLS constructs the CPI 1 . Survey consumers to determine composition of the typical consumer’s “basket” of goods 2 . Every month, collect data on prices of all items in the basket; compute cost of basket 3

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