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Shortcomings of GDP

Shortcomings of GDP. Leisure Time Improved Product Quality Trade-offs on the Environment Distribution of Output. What makes GDP go up?. A country produces more goods and services Goods and services cost more Nominal GDP Current output x current prices 4. Real GDP

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Shortcomings of GDP

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  1. Shortcomings of GDP • Leisure Time • Improved Product Quality • Trade-offs on the Environment • Distribution of Output

  2. What makes GDP go up? • A country produces more goods and services • Goods and services cost more • Nominal GDP • Current output x current prices 4. Real GDP • Current output x a base year price (price becomes constant) 5. To measure GDP at constant prices one needs a couple of things

  3. 1. A Base Year • The year with which other years are compared to when using a price index 2. Price Index • A measurement that shows how the average price of a group of goods changes over time $55 June $62 October

  4. Let’s take inflation out of GDP • The GDP Deflator is a price index number • GDP Deflator = • price of goods in a specific year price of goods in the base year x100 • Nominal GDP Real GDP x 100 = GDP Deflator

  5. This would also make sense… • Nominal GDP Index # = Real GDP

  6. Assume the following: Year houses built price nominal GDP Real GDP GDP Deflator • 3 $100,000 2001 4 $115,000 2002 5 $125,000 Can you calculate Nominal GDP, Real GDP, and the Deflator? Not yet. “01 is the base year $345,000 86.9 = $300,000 300/345 x

  7. Year houses built price nominal GDP Real GDP GDP Deflator • 3 x $100,000 $300,000 $345,000 86.9 2001 4 $115,000 2002 5 $125,000

  8. Year houses built price nominal GDP Real GDP GDP Deflator • 3 x $100,000 $300,000 $345,000 86.9 2001 4 x $115,000 = $460,000 $460,000 100 2002 5 $125,000

  9. Year houses built price nominal GDP Real GDP GDP Deflator • 3 x $100,000 $300,000 $345,000 86.9 2001 4 x $115,000 = $460,000 $460,000 100 2002 5 x $125,000 = $625,000 $575,000 108.9

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