GDP & Changes in Price Intramural Econ

Price Index Inflation is a rise in the general price level It distorts economic statistics To remove distortions, economists construct a price index- a statistical series that can be used to measure changes in prices over time Can be compiled for specific products, or for a range of time

1st, select a base year- year that serves as the basis of comparison for all other years The index expresses the price of goods & services in a given year as a percentage of the price of those goods during the base year 2 nd, select the market basket- representative selection of commonly purchased goods & services

Then record the price of each item in the market basket Finally, total the prices The total represents the base year market basket price & has a value of 100%

To track inflation, we have to track the price of the goods & services in the market basket at regular intervals Then compare them to the base year

Major Price Indices Constructed for various reasons Measures change in price of single items, imported goods, agricultural products, etc Base years dont have to be different The index numbers for individual series are only compared w/ numbers of the same series

Producer Price Index measures price changes paid by domestic producers for their inputs Based on a sample of +100,000 commodities Reported every month Broken down into subcategories ex: farm products, fuels, chemicals, processed foods etc

Real vs Current GDP To compare GDP over time, you have to distinguish between changes There are changes due to the effects of inflation And changes that represent increases in production and income

When GDP isnt adjusted to remove the effects of inflation, it is called nominal GDP; or just GDP When distortions of inflation have been removed, its called real GDP Real GDP reflects what GDP would have been if prices had not changed from what they were in the base year

Unlike nominal GDP, real GDP shows changes in the price level This provides a more accurate figure Ex. Say in 2004, nominal GDP is $200 billion. However, due to an increase in the level of prices from 2000 (the base year) to 2004, real GDP is actually $170 billion. The lower real GDP reflects the price changes while nominal does not.