In the above example whether we use 2007 or 2008 as

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In the above example whether we use 2007 or 2008 as base year prices gives the same answer for the growth rate of real GDP This is not the case in general, particularly if you are comparing real GDP over a 5-10 year period. Using initial prices (i.e. 2007) is know as a Laspeyres index Using final prices (i.e. 2008) is known as a Paasche index
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29 Chain Weighting For any two consecutive years compute the growth rates of real GDP implied by both the Laspeyres and the Paasche indexes. Then take the average of the two growth rates and this is the chain-weighted growth rate. This can be used to compute a real chained-weighted GDP. Finally to compute a change index over a long period, the above approach is applied on a year-by-year basis.
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30 Example 2007 2008 % Change No. of Cars 10 10 0 Price of Cars $20,000 $40,000 100 No. of Apples 100 1000 900 Price of Apples $10 $25 150 Nominal GDP $201,000 $425,000 111 Real GDP 2007 prices $201,000 $210,000 4.5 2008 prices $402,500 $425,000 5.6
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31 Chain-weighted measure of Real GDP Take average of growth rates implied by 2007 and 2008 prices. 5.05 = (4.5 + 5.6)/2 Choose either 2007 or 2008 as the base-year (nominal=real GDP). Let’s pick 2007 2007 2008 Nominal GDP 201,000 425,000 Real GDP 201,000 211,151 ( 201,000×1.0505)
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32 Is GDP A Good Measure of Economic Wellbeing? Some Omissions Leisure Time Household production Environmental Degradation Quality of Life Economic Inequality It is likely that GDP is positively related (correlated) with economic wellbeing Variety of goods and services Health and Education
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33 Measures of the Price Level Want to measure the average level of prices in the economy. Main Measures Consumer Price Index (CPI) GDP Deflator/Price Index CPI – For a given period, measures the cost in that period of a given basket of goods and services relative to their cost in a fixed year – called a base year .
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34 Construct a CPI Choose a basket of goods and services Basket 2000 (base) 2008 Rent (2 bedroom flat) $500 $630 Hamburgers (60) $150 $150 CDs (2) $30 $70 Total Expenditure $680 $850 CPI = Cost of base-year basket of goods and services in current year Cost of base-year basket of goods and services in base year
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