3 Real vs. nominal GDPGDP is the value of all final goods and services produced.nominal GDP measures these values using current prices.real GDP measure these values using the prices of a base year.
4 Example 1: Compute nominal GDP in each year. 200620072008PQgood A$30900$311,000$361,050good B$100192$102200205Compute nominal GDP in each year.Compute real GDP in each year using 2006 as the base year.
5 Nominal GDP200620072008PQgood A$30900$311,000$361,050good B$100192$102200205nominal GDP multiply Ps & Qs from same year 2006: $46,200 = $30 $100 : $51,400 = $31 $102 : $58,300 = $36 $100 205
6 Real GDP200620072008PQgood A$30900$311,000$361,050good B$100192$102200205real GDP multiply each year’s Qs by 2006 Ps 2006: $46,200 = $30 $100 : $50,000 = $30 $100 : $52,000 = $30 $100 205
7 Real GDP controls for inflation Changes in nominal GDP can be due to:changes in prices.changes in quantities of output produced.Changes in real GDP can only be due to changes in quantities,because real GDP is constructed using constant base-year prices.
8 Decreasing Increasing Example 2: 2006 2007 2008 P Q good A $30 900 $32 870$36850good B$100192$112182$130179DecreasingIncreasingNominal GDPReal GDP(2006 dollar)Year : $46200Year 2006 : $46200Year : $48224Year 2007 : $44300Year : $53870Year 2008 : $ 43400
9 U.S. Nominal and Real GDP, 1950–2006 Real GDP (in 2000 dollars)Source:Nominal GDP
10 GDP DeflatorThe inflation rate is the percentage increase in the overall level of prices.One measure of the price level is the GDP deflator, defined as
11 GDP Deflator in Example 1 200620072008PQgood A$30900$311,000$361,050good B$100192$102200205Nominal GDPReal GDP(2006 dollar)GDP deflatorInflation rate2006$46,200100.0n.a.200751,40050,000102.82.8%200858,30052,000112.19.1%
12 Consumer Price Index (CPI) A measure of the overall level of pricesPublished by the Bureau of Labor Statistics (BLS)Uses:tracks changes in the typical household’s cost of livingadjusts many contracts for inflationallows comparisons of dollar amounts over time
13 How the BLS constructs the CPI 1. Survey consumers to determine composition of the typical consumer’s “basket” of goods.2. Every month, collect data on prices of all items in the basket; compute cost of basket3. CPI in any month equals
14 Example: Compute the CPI Basket contains 20 pizzas and 10 compact discs.prices:pizza CDs2002 $10 $152003 $11 $152004 $12 $162005 $13 $15For each year, computethe cost of the basketthe CPI (use 2002 as the base year)the inflation rate from the preceding year
19 CPI vs. GDP Deflator prices of capital goods included in GDP deflator (if produced domestically)excluded from CPIprices of imported consumer goodsincluded in CPIexcluded from GDP deflatorthe basket of goodsCPI: fixedGDP deflator: changes every year
20 Two measures of inflation in the U.S. Percentage change from 12 months earlier
21 Categories of the population employed working at a paid jobunemployed not employed but looking for a joblabor force the amount of labor available for producing goods and services; all employed plus unemployed personsnot in the labor force not employed, not looking for work
22 Two important labor force concepts unemployment rate percentage of the labor force that is unemployedlabor force participation rate the fraction of the adult population that “participates” in the labor force
23 U.S. adult population by group, June 2006 Example: Compute labor force statisticsU.S. adult population by group, June 2006Number employed = millionNumber unemployed = 7.0 millionAdult population = millionUse the above data to calculatethe labor forcethe number of people not in the labor forcethe labor force participation ratethe unemployment rate
24 data: E = 144.4, U = 7.0, POP = 228.8labor force L = E +U = = 151.4not in labor force NILF = POP – L = – = 77.4unemployment rate U/L x 100% = (7/151.4) x 100% = 4.6%labor force participation rate L/POP x 100% = (151.4/228.8) x 100% = 66.2%