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What is it? Why do we use it? Who cares?

What is it? Why do we use it? Who cares?. Economic growth. GDP is one of the important measures of economic growth GDP, or gross domestic product , is the increase in the total output of an economy

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What is it? Why do we use it? Who cares?

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  1. What is it? Why do we use it? Who cares?

  2. Economic growth • GDP is one of the important measures of economic growth • GDP, or gross domestic product, is the increase in the total output of an economy • “the total market value, expressed in dollars, of all final goods and services produced in an economy in a given year.” • Calculated by multiplying P x Q for ALL final goods/services produced within the borders of a country in a year

  3. The two types of GDP • Nominal GDP • GDP calculated by using the current year’s price for goods and services (also called “current-dollar GDP”) • Real GDP • GDP calculated by using a base year’s price for goods/services, so that only quantity changes over time (“constant-dollar GDP”) • Adjusted for price changes over time (inflation, deflation) • Used to compare growth of output of a country or countries over time

  4. Nominal v Real GDP, ex. 1 • Suppose in the year 2000, the economy of a country produced $100 billion worth of goods and services based on year 2000 prices. Since we're using 2000 as a basis year, the nominal and real GDP are the same. • Year 2000 Nominal GDP = $100B, Real GDP = $100B • In the year 2001, the economy produced $110B worth of goods and services based on year 2001 prices. Those same goods and services are instead valued at $105B if year 2000 prices are used. Then: • Year 2001 Nominal GDP = $110B, Real GDP = $105BNominal GDP Growth Rate = 10%Real GDP Growth Rate = 5%

  5. Nominal v Real GDP, ex. 2 • Jim’s height is 1.95 meters • Renaldo’s height is 6 feet • Which student is taller? • If you wanted to compare their height, what would you have to do? • Convert each to a common measurement • What do you need to know in order to do this? • 1 foot= 0.30 meters • With this information, which student is taller? • 1.95/0.30= 6.5 feet tall (Jim is taller)

  6. So what? • To compare GDP over time, GDP has to be adjusted for price level changes (just like the height comparison). • (video) • Since GDP is a P x Q calculation, g/s have to be measured in constant dollars in order to calculate the real GDP. • Let’s get started by taking a look at handout 1.3

  7. Check it: • What is economic growth? • What is GDP? What is GDP per capita? • What is the standard of living? • What is the difference in nominal and real GDP? • Which should be used to compare GDP over a series of years? Why?

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