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# Econ 311 Jan 21 Ch20 continued.docx

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Department
Economics
Course
ECON 311
Professor
Ratna Shrestha
Semester
Winter

Description
Page 1 of 2 Econ 311 Jan 21 Ch20 continued. Real GDP and the Price Level (this is not included in the textbook)  Stat Canada’s New Method (2001)  The new method of calculating real GDP, which is called the chain-weighted output index method (Fisher Approach), uses the prices of two adjacent years to calculate the real GDP growth rate.  This calculation has four steps described on the next slide.  Step 1: Value last year’s production and this year’s (2003) production at last year’s prices (2002) and then calculate the growth rate of this number from last year to this year.  Step 2: Value last year’s production and this year’s production at this year’s prices and then calculate the growth rate of this number from last year to this year.  Step 3: Calculate the average of the two growth rates. This average growth rate is the growth rate of real GDP from last year to this year.  Step 4: Repeat steps 1, 2, and 3 for each pair of adjacent years to link real GDP back to the base year’s prices. Example: Item Quantity Price 2005 Balls 100 \$1.00 Bats 20 \$5.00 2006 Balls 160 \$0.50 Bats 22 \$22.50 Step 1. – Value of 2005 quantities at 2005 prices (GDP in 2005) is \$200. (100x1+20x5=200) – Value of 2006 quantities at 2005 prices is \$270. (160x0.5+22x22.5=270) – At 2005 prices, the value of production increased from \$200 to 270— an increase of 35%. [(270-200)/200 ] – Step 2. – Value of 2005 quantities at 2006 prices is \$500. – Value of 2006 quantities at 2006 prices (GDP in 2006) is \$575. – At 2006 prices, the value of production increased from \$500 to \$575—an increase of 15 percent. Step 3. – At 2005 prices, the 2006 growth rate = 35 %. Page 2 of 2 – At 2006 prices, the
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