Econ 105, Lecture 7 Jan 28th
Chapter 5: Measuring a nation's income
***** see notebook for table + calculations***** ( 1 )
**Notice that some of this growth is due to increased production and some due to
To isolate production growth we se a statistic called real GDP.
-Nominal GDP = value goods at current prices
-Real GDP = value goods at constant prices from some base year.
In our example, let's choose 2010 as our base year.
-the base year is an arbitrary choice. Base year is adjusted every couple of years.
Real GDP in 2010 = 1000 x 3 + 100 x 70
**Notice that in the base year, real GDP = nominal GDP
real GDP in 2011 = 1050 x 3 + 110 x 70
Growth rate of real GDP = ((10850 - 10000)/10000) x 100%
Some issues with real GDP:
1) Relative prices change, a lot.
- In 1910 domestic servants cheap ; silverware cheap ; cars very
- When there are a lot of something, it gets cheap (demand curves slope
- Things that are expensive in the base year and are cheap now, they are
going to be over-valued.