Key takeaways real gdp or real gnp is often used as

Key Takeaways
• Real GDP or real GNP is often used as an indicator of the economic well-being of a country.
• Problems in the measurement of real GDP, in addition to problems encountered in converting
from nominal to real GDP, stem from revisions in the data and the difficulty of measuring output
in some sectors, particularly the service sector.
• Conceptual problems in the use of real GDP as a measure of economic well-being include the
facts that it does not include nonmarket production and that it does not properly adjust for “bads”
produced in the economy.
• Per capita real GDP or GNP can be used to compare economic performance in different countries.
Try It!
What impact would each of the following have on real GDP? Would economic well-being increase or
decrease as a result?
206 • PRINCIPLES OF MACROECONOMICS

1. On average, people in a country decide to increase the number of hours they work by 5%.
2. Spending on homeland security increases in response to a terrorist attack.
3. The price level and nominal GDP increase by 10%.
Case in Point: Per Capita Real GDP and Olympic Medal Counts
David Pilbrow – Adam Gemili – CC BY-NC-ND 2.0.
In the popular lore, the Olympics provide an opportunity for the finest athletes in the world to compete
with each other head-to-head on the basis of raw talent and hard work. And yet, contenders from Laos
tend to finish last or close to it in almost any event in which they compete. One Laotian athlete garnered
the unenviable record of having been the slowest entrant in the nearly half-century long history of the
20-kilometer walk. In contrast, U.S. athletes won 103 medals at the 2004 Athens Olympics and 110 medals
at the 2008 Beijing Olympics. Why do Laotians fare so poorly and Americans so well, with athletes from
other countries falling in between?
Economists Daniel K. N. Johnson and Ayfer Ali have been able to predict with astonishing accuracy the
number of medals different countries will win on the basis of a handful of factors, including population,
climate, political structure, and real per capita GDP. For example, they predicted that the United States would
win 103 medals in Athens and that is precisely how many the United States won. They predicted 103 medals
for the United States in Beijing; 110 were won. They did not expect the Laotians to win any medals in either
Athens or Beijing, and that was indeed the outcome.
Johnson and Ali estimated that summer game participant nations average one more medal per additional
$1,000 of per capita real GDP. With per capita real GDP in Laos less than the equivalent of $500 compared
to per capita real GDP in the United States of about $38,000, the results for these two nations could be
considered a foregone conclusion. According to Johnson and Ali, “High productive capacity or income
per person displays an ability to pay the costs necessary to send athletes to the Games, and may also be
associated with a higher quality of training and better equipment.” For example, a Laotian swimmer at