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    Calculating GDP

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    Amit Choudhury
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    Calculating GDP

    Uploaded by

    Amit Choudhury
    26 views24 pages
    rdftgyuhijiokd5f7gyhu9jikxrctvybuihnjomkrctvybuinjmkoctvyubinjomk

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    26 views24 pages

    Calculating GDP

    Uploaded by

    Amit Choudhury
    rdftgyuhijiokd5f7gyhu9jikxrctvybuihnjomkrctvybuinjmkoctvyubinjomk

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 24

    Calculating GDP

    Nominal GDP, Real GDP, and


    the GDP Deflator

    There are two ways that GDP


    can increase:
    1.

    2.

    An increase in the PRICES of goods


    and services.
    An increase in the QUANTITY of
    goods and services.

    We need a method to calculate GDP


    that addresses rising prices

    Our Simple Economy

    Suppose an economy produces three


    goods or services, Window Washing,
    Baseballs, and Hammers. Data for
    the past three years can be found
    below.

    Prices and Quantities for our


    Simple Economy

    Nominal GDP
    Step 1: Calculate Nominal GDP (The value
    of final goods and services evaluated at
    current-year prices) for each year:
    NGDP2006 = Q2006 x P2006
    = (90 x $50.00) Window Washing
    + (75 x $2.00) Baseballs
    + (50 x $30.00) Hammers
    = $6,150

    Nominal GDP 2007


    NGDP2007 = Q2007 x P2007
    = (100 x $60.00) Window Washing
    + (100 x $2.00) Baseballs
    + (50 x $25.00) Hammers
    = $7,450

    Nominal GDP 2008


    NGDP2008 = Q2008 x P2008
    = (100 x $65.00) Window Washing
    + (120 x $2.25) Baseballs
    + (65 x $25.00) Hammers
    = $8,395

    Real GDP

    Step 2: Calculate Real GDP (The


    value of final goods and services
    evaluated at base-year prices) for
    each year. For our example assume
    2006 is the base year. This means
    that all values are in what we call
    2006 Dollars, or Constant
    Dollars.

    Real GDP

    By using the prices from the baseyear, (or holding prices constant over
    time), we eliminate the impact that
    rising prices have on GDP, to get a
    measure of Real economic activity.

    Real GDP in 2006


    RGDP2006 = Q2006 x P2006
    = (90 x $50.00) Window Washing
    + (75 x $2.00) Baseballs
    + (50 x $30.00) Hammers
    = $6,150
    Note: For the Base-Year Nominal GDP
    always equals Real GDP

    Real GDP in 2007


    RGDP2007 = Q2007 x P2006
    = (100 x $50.00) Window Washing
    + (100 x $2.00) Baseballs
    + (50 x $30.00) Hammers
    = $6,700
    Note: We use Current Quantities and
    Constant Prices.

    Real GDP in 2008


    RGDP2008 = Q2008 x P2006
    = (100 x $50.00) Window Washing
    + (120 x $2.00) Baseballs
    + (65 x $30.00) Hammers
    = $7,190
    Note: We still use Current Quantities and
    Constant Prices.

    The General Formula for


    Calculating a Growth Rate
    New _ Value Old _ Value
    Percent _ Change %
    100
    Old _ Value
    X t X t 1
    Percent _ Change %
    100
    X t 1

    Calculate the Growth Rate in


    Real GDP between 2006 and
    2007
    %Change = [(RGDP2007 RGDP2006)/RGDP2006] x 100
    %Change = [(6,700 6,150)/6,150] x 100
    %Change = 8.94%
    That is real GDP grew by 8.94% between 2006 and
    2007.

    Calculate the Growth Rate in


    Real GDP between 2007 and
    2008
    %Change = [(RGDP2008 RGDP2007)/RGDP2007] x 100
    %Change = [(7,190 6,700)/6,700] x 100
    %Change = 7.31%
    That is real GDP grew by 7.31% between 2007 and
    2008.

    The Price Level


    We can use our calculations of Nominal
    GDP and Real GDP to calculate the
    Price Level (A measure of the
    average prices of goods and services
    in the economy.)

    The GDP Deflator


    One example of a measure of the
    average price level is the GDP
    deflator.
    NGDPt
    GDP _ Deflatort
    100
    RGDPt

    Calculate the GDP Deflator for


    2006
    GDP Deflator2006 = (NGDP2006/RGDP2006) x 100
    GDP Deflator2006 = (6,150/6,150) x 100 = 100
    Note: The GDP Deflator is always equal to
    100 in the base-year.
    The Price Index is unitless

    Calculate the GDP Deflator for


    2007 and 2008
    GDP Deflator2007 = (NGDP2007/RGDP2007) x 100
    GDP Deflator2007 = (7,450/6,700) x 100 = 111.19
    GDP Deflator2008 = (NGDP2008/RGDP2008) x 100
    GDP Deflator2008 = (8,395/7,190) x 100 = 116.76

    The Inflation Rate


    We can use the growth rate formula
    from previous to calculate the
    Inflation Rate (the Inflation Rate is
    The percentage increase in the price
    level from one year to the next.)

    Calculate the Inflation Rate


    from 2006 to 2007
    Inflation Rate Between 2006 and 2007 =
    [(GDP Def.2007 GDP Def.2006)/GDP Def.2006] x 100

    Inflation Rate Between 2006 and 2007 =


    [(111.19 100)/100] x 100 = 11.19

    That is the inflation rate between 2006 and


    2007 was 11.19%.

    Calculate the Inflation Rate


    from 2007 to 2008
    Inflation Rate Between 2007 and 2008 =
    [(GDP Def.2008 GDP Def.2007)/GDP Def.2007] x 100

    Inflation Rate Between 2007 and 2008 =


    [(116.76 111.19)/111.19] x 100 = 5.01

    That is the inflation rate between 2007 and


    2008 was 5.01%.

    Nominal GDP in the U.S.


    1947 to 2008

    Real GDP in the U.S. 1929 to


    2008

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