Real GDP vs. Nominal GDP GDP (gross domestic product) is the most important economic variable to macroeconomists. Nominal or current GDP, or just GDP, is the total value of all new goods and services produced in an economy during a specified period of time without a change in the price level (inflation or deflation) taken into account. GDP includes spending by consumers ( C) + business investments (I)_± the government (G) + foreigners (X) (net exports: exports­imports). For example, if a country makes only watches and sold 100 in 2017 at $10.00 each, the country's GDP for 2017 would be $1,000 (100 x $10). Inflation is the percentage increase in the average price (P) level of all goods and services from one year to the next. But because the quantities of goods and services as well as their prices (J:) chan ge over time, economists pref er to use real gross domestic product (real GDP) (Y), which is also called real output or output of production, to calculate economic growth from year to year.

Real GDP vs. Nominal GDP (cont.) Real GDP is a country's GDP that is adjusted to take into account the general change in the price level (inflation or deflation) over time (from year to year). Real GDP allows an equal comparison between years, apples to apples.

nominal GDP== consumer consumption ( C) + business investments (J) + government spending/expenditures ( G)

+ net exports (X) (net exports: exports-imports)

real GDP== nominal GDP+/- change in the price level (inflation or deflation)

For example, imagine a country with a GDP of $100 in a given year. In the next year the GDP rises to $105 and the inflation rate is 3%. Roughly, we can say that real GDP rose 2% to onl $102 when the inflation rate is accounted for. 1. C=$10b, J=7b, G=l4b, imports=4b, and exports=2b GDP=$29bi1Iion 2. C=$6b, /=3b, G=lOb, exports=2b, and imports=3b GDP=$18billio 1

15,

13, inflation

eal p•

1,

1 ' -0 2 5 6 2 1 1 11 2 12

Year

Real GDP vs. Nominal GDP (cont.) Real GDP focuses on the changes in quantity from year to year, not the price change. As we'll soon learn, decreases or increases in a country's money supply doesn't change real output (real GDP). An increase in aggregate supply (AS) (a country's total supply of resources (inputs)) increases real output, as does an initial decrease in workers' wages, while a decrease in AS, a recession, or a depression, decreases real output.

PL (price level) .t in real GDP PL (price level) ,t in real GDP SRAS 2 SRAS 1

Y1 Y2

SRAS 1 SRAS 2-.,

short-run aggregate p2

supply Pl

Ao aggregate 1 demand

~ (Real GDP)

~ Yl y A

__ .. __ , _, _ _ (Real GDP)

Real GDP vs. Nominal GDP- Questions 13. The table belo,v ho\\ 'S a country'

n1a roecononuc data in 2013.

Consun1ption pending $175 billion

Individual incotne tax $32 billion

Private investn1ent $30 billion pending

Corporate taxes $25 billion

Exports $75 billion

Governn1ent purcha e $40 billion

In1port $100 billion

The country's gro don1estic product ·

$220 billion $282 billion $304 billion $309 billion $347 billion

Real GDP vs. Nominal GDP-Questions 13. The table belo,v ho\\ 'S a country' rs (C) +

n1a roecononuc data in 2013. consume

Consun1ption pending C $175 billion

Individual incotne tax $32 billion

Private investn1ent $30 billion pending l

Corporate taxes $25 billion

Exports X- (e-i) $75 billion

Governn1ent purcha e G $40 billion

In1port X- (e-i) $100 billion

The country's gro don1estic product ·

. ) $220 billion B $282 billion C $304 billion D $309 billion E $347 billion

businesses (1) + the government ( G) + foreigners (X) (net exports: exports-imports)

• 1:

C:$175b I: 30b G: + 40b

$245b

$245b

Real GDP vs. Nominal GDP- Questions 60 .. ~ incre e in tl1e n1oney upply will affect the

price lev I and real gro don1estic produ t (GDP in whi h of the following way in tl1e long run?

Price L vel Real GDP

A ) De rea e No chat1ge B ) In rea Deciea C ) Iu rea No cl1ange D) De rea e Incre< e E) No hai1ge No chat1ge

30. A country·s real gro s dotne tic product is the annual value of all final goods and ervices that are

A) purcha ed in that country, adjt ted for change in the price level

B) produced in that country, expre ed in current price

(C) produced in that cotu1try, le exports D) produced in that country, les depre iation

(E) produced in that country, adju ted for change in the price level

Macroeconomics Do-Now

Please do 1-4: 1. Why is the Circular Flow Model sometimes ref erred to

as the resource/product market? 2. What are two other names for GDP? 3. What are two other names for real GDP? 4. What is the formula for GDP? 5. How do you determine net exports (X)?

Macroeconomics Do-Now

1. Why is the Circular Flow Model usually ref erred to as the factor or resource market?

Taxes

.. Pu b li c

Bu sin esses

Macroeconomics Do-Now

2. GDP is also called: nominal GDP or current GDP 3. Real GDP is also called: real output or output of

production 4. GDP= C + 1 + G +/- X 5. How do you determine net exports X? exports-imports