1. Interpreting Real Gross Domestic Product

2. Objective:
What is the difference between real GDP and nominal GDP?

3. GDP What does GDP tell us? Is a measurement of the size of the economy
Provides a scale against which to compare the economic performance of others years or other countries
Have to be careful using GDP:
Part of the increase in the value of GDP over time represents increases in the prices of good and services rather than an increase in output

4. Real GDP
GDP is a good measure to compare the size of different economies but not a good measure of the economy’s growth over time
GDP can grow because the economy grows but it can also grow simply because of inflation
Have to measure aggregate output
The total quantity of final goods and services the economy produces
Measurement used is real GDP

5. Calculating GDP and Real GDP in a Simple Economy
Real vs. Nominal GDP
Calculating GDP and Real GDP in a Simple Economy
Year 1
Year 2
Quantity of apples (billions)
2,000
2,200
Price of apple
$0.25
$0.30
Quantity of oranges (billions)
1,000
1,200
Price of orange
$0.50
$0.70
GDP (billions of dollars)
1,500
Real GDP (billions of year 1 dollars)
$1,000
$1,150

6. Real vs. Nominal GDP
Real GDP is the total value of final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the level of some given base year
Real GDP numbers come with information about what the base year is
Nominal GDP is GDP at current prices

7. Nominal vs. Real GDP Nominal GDP (billions of current dollars)
Real GDP (billions of 2000 dollars)
2001
$10,286
$11,347
2005
12,683
12,638
2009
14,259
12,989

8. Real vs. Nominal GDP
In reality, the government economists who put together the U.S. national accounts have adopted a method to measure the change in real GDP – chain- linking
Uses the average between the GDP growth rate calculated using an early base year and the GDP growth rate calculated using a late base year
U.S. statistics on real GDP are always expressed in chained dollars – splits the difference between using early and late base years

9. What Real GDP Doesn’t Measure
GDP = country’s aggregate output
Larger population = higher GDP
GDP per capita – GDP divided by the size of the population, equivalent to the average GDP per person
Real GDP per capita = average real GDP per person