1. What Part of GDP? (C, G, I or Not counted) 1.Chris buys 10 gallons of Rocky Road Ice Cream 2.Trenton buys 50 new police cars 3.Microsoft builds a new factory in the Philippines 4.Alice builds a new house in Phoenix 5.Jerry buys 100 shares of Microsoft stock 6.Loretta buys a case of beads with which she will make necklaces to sell 7.Sarah buys a new necklace from Loretta 8.Ford hires 100 new autoworkers

2. Comparing GDP across Time and Space Real v. Nominal GDP Per Capita GDP

3. Comparing GDP Over time, prices in an economy tend to rise As a result the value of a dollar (its purchasing power) tends to decline Over many years, what a dollar can buy can change dramatically e.g, $1.00 from 1980 would buy as much as $2.89 today! How do we account for this?

4. Nominal v. Real GDP Nominal GDP – the value of GDP expressed in dollars valued in that particular year – Does not account for changes in price level – Current Dollars Real GDP – The value of GDP expressed in dollars converted to a common year (base year) – Accounts for inflation – Constant Dollars

5. Nominal v. Real GDP How is this achieved? – Reporting current transactions as if they were conducted in base year dollars OR GDP Deflator – An index calculated to convert current dollars into constant dollars (base year = 1) – Real GDP = Nominal GDP x Deflator

6. GDP Exercise 20002010 Quantity of Apples3,0004,000 Price of Apples$0.20$0.30 Quantity of Oranges2,0003,000 Price of Oranges$0.40$0.50 1.Calculate Nominal GDP in both years. 2.Calculate Real GDP for both years in constant dollars based on the other year.

7. Comparing GDP Across Space Purchasing Power Parity – Converts GDP to “dollars” that represent equivalent purchasing power Per Capita GDP – GDP divided by population – Measure of standard of living