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Review from Friday

Review from Friday. The Income and Expenditure Approaches National / Domestic Income Assignments 2.1 and 2.2. GDP Analysis Continued. The Circular Flow Model Nominal versus Real GDP. The Circular Flow Model Revisited. Nominal vs. Real GDP.

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Review from Friday

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  1. Review from Friday • The Income and Expenditure Approaches • National / Domestic Income • Assignments 2.1 and 2.2

  2. GDP Analysis Continued The Circular Flow Model Nominal versus Real GDP

  3. The Circular Flow Model Revisited

  4. Nominal vs. Real GDP • GDP is a measure of the market or money value of all final goods and services produced by the economy. • Since market value is measured by money, it is hard to compare GDP from year to year if the value of money changes (inflation or deflation). • To solve this problem, we deflate GDP when prices rise and inflate GDP when prices fall.

  5. Nominal vs. Real GDP • Nominal GDP (unadjusted for inflation): Refers to GDP based on the prices of a product in the year it was produced. Not inflated or deflated. • Real GDP(Adjusted for inflation): Refers to a GDP that has been adjusted for inflation or deflation. • Accurately shows the increase or decrease in production for comparison, and measured in relation to the price index of a given year.

  6. A Price Index • A Price Index is a measure of the price of a collection of goods (market basket) in a certain year as compared to the price of the similar "market basket" in a reference year. • Price Index in a certain yr = (Price of basket in specific yr / Price of same basket in base yr) x 100 • If the price of Monkey’s Choice Bananas in the Base Year is $2.50 Price Index, Year 2 = (3.00 / 2.50 x 100) = 120

  7. Dividing Nominal GDP by Price Index Real GDP = Nominal GDP / price index (in hundredths). 2000 Nominal GDP (1038.8 B) / 2000 Price Index of 112.7 or 1.127= Real GDP of 921.74 B

  8. Assignment 2.3 Page 150, Key Questions 11 and 12.

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