Lecture 5 - Oct 7, 2013
Measuring Economic Performance
Purpose of an economic system:
Assemble / organise factors
Make things that people want
So everyone is happy
GDP: It represents the total dollar value of all goods and services produced over a
specific time period - you can think of it as the size of the economy. Usually, GDP is
expressed as a comparison to the previous quarter or year. For example, if the year-
to-year GDP is up 3%, this is thought to mean that the economy has grown by 3%
over the last year.
Inflation- Inflation makes everyone poorer
Prices go up – but goods are the same
People can afford to buy less.
Hurts people on fixed incomes (pensioners)-> Old people.
How it happens:
Definition of inflation by Prof’s friend Jack:
Government prints too much money; especially if you print out money
at a faster rate than the economy grows
They made a decision to print lots of money in US.
Interest rates are supposed to fall when you print lots of dollar bills.
Money slowly loses its value
Hyper-inflation: when money has no real value
You can’t take the hyper inflation GDP year to year of a country at face value
Why might people pay extra money for a bicycle? Better looks, better
functionality, and mainly, better marketing.
Inflating in Canada: Typically, 2% - 3% per year “Nominal” vs “Real” GDP
“Nominal” GDP is the value of GDP, simply as it is measured.
Value of red bicycles produced 2009
= 1,000,000 bicycles x $100 each
Value of red bicycles produced 2010
= 1,000,000 bicycles x $120 each
What if bicycles made in 2010 are not any faster or better?
What if price change (from $100 to $120) is result of inflation?
Q. Is the economy really bigger?
A. No. Same number of bicycles made
“Nominal” value is = $120,000,000
“Real” volume of production is same
“Real” value of production
= $120,000,000 = $100,000,000
“Real” GDP discounts inflation