UNIT 2 Notes - February 2nd, 2016

Nominal GDP: The Value of output produced in CURRENT prices (Output = Quantity/Production)

CURRENT Quantity X CURRENT Price

Real GDP: The Value of output produced in constant, base year prices. (Adjusted for Inflation)

CURRENT Quantity X BASE YEAR Price

·         If you wanted to measure economics growth, you would use Real GDP

·         If you wanted to measure price increases (Inflation), you would use Nominal GDP

·         In the base year, Nominal GDP = Real GDP

·         In years after the base year, Nominal GDP will exceed Real GDP

·         In years before the base year, Real GDP will exceed Nominal GDP

	Q in 2015	Q in 2016	P in 2015	P in 2016
Pizzas	5	6	$10	$15
CDs	4	5	$15	$20
Stereos	2	4	$600	$550
Automobiles	1	1	$10,000	$12,000

Real GDP in 2015 = (5x10) + (4x15) + (2x600) + (1x10,000) = $11,310

Real GDP in 2016 = (6x10) + (5x15) + (4x600) + (1x10,000) = $12,535

Nominal GDP in 2015 = (5x10) + (4x15) + (2x600) + (1x10,000) = $11,130

Nominal GDP in 2016 = (6x50) + (5x20) + (4x550) + (1x12,000) = $14,390

GDP Deflator: A price index used to adjust from Nominal to Real GDP

(Nominal GDP / Real GDP) X 100

·         In the base year, the GDP Deflator = 100

·         For years after the base year, the GDP Deflator > 100

·         For years before the base year, the GDP Deflator < 100

Consumer Price Index: It is the most commonly used measurement of inflation. It measures the cost of a market basket of goods for a typical urban American family.

(Cost of a market basket of goods in a given year / cost of a market basket of goods in the base year) X 100

Inflation:

[(Price Index in Year Two (current year/new year) – Price Index in Year One) / (Price Index in Year One)] X 100