Interpreting RGPD

Module 11

Learning Objectives

• The difference between real GDP and nominal GDP

• Why real GDP is the appropriate measure of economic activity

Key Economic Concepts

1. GDP will increase is prices increase. To measure actual changes in aggregate output, we need a modified version of GDP that is adjusted for price changes, known as real GDP.

2. RGDP adjusts nominal GDP by using prices at a fixed point in time; this point in time is called a base year.

3. Suppose you want to adjust nominal GDP in 2009 to RGDP, so that you can compare real economic activity to 2008, your base year. You would use 2008 prices and 2009 output levels to compute RGDP in 2009 to 2008 dollars.

Common Student Difficulties

1. The whole idea of RGDP can be confusing. Several simple examples should help to demonstrate why it is necessary to adjust nominal dollars to a base year so that comparisons across time can be made.

2. For example, you might want to talk about how the minimum wage was $0.25/hour in 1938. In a real sense, did that wage buy more soda pop in 1938 than the current minimum wage of $7.25?

What GDP Tells Us

• Value of current production at the current prices

• Valuing 2014 production with 2014 prices = nominal GDP for 2014– Current-dollar GDP/”money” GDP

• Measures size of the macroeconomy• Measure to compare across nations • Can be misleading!

RGDP: A Measure of Aggregate Output

GDP = P x Q --> this is misleading when prices rise • RGDP: value of current production that uses

fixed prices (the base year)– Constant-dollar GDP

Calculating RGDP

What RGDP Doesn’t Measure

• Many of the things that make people happy do not contribute to this statistic

• Some things that contribute to GDP do not make us happier