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ECON 1 Lecture Notes - Lecture 31: Market Basket, Income Approach

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School
ELAC
Department
Economics
Course
ECON 1
Professor
Coson

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Document Summary

Discuss the nature and function of a gdp price index, and describe the difference between nominal gdp and real gdp. A measure of the market or money value of all final goods and services produced. Gdp by the economy in a given year. Gdp measured in terms of the price level at the time of measurement (unadjusted for inflation) A gdp based on prices when the output was produced. A gdp that has been deflated or inflated to reflect changes in the price level. Links each year to the previous year through the use of both the prior-year prices and current-year prices. For example, the calculation of the chain-weighted index would use both 2011 and 2012 prices to calculate real gdp growth in 2012. Since the 2011 chain-weighted index was arrived at using both 2010 and. 2011 prices, the year 2010 is linked back - as the links of a chain are - to.

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Related Questions

Why is real GDP a more accurate measure of an economy's production than nominal GDP? 
 
(i) Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.
(ii) Real GDP is not influenced by price changes, but nominal GDP is.
(iii) Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and services an economy consumes. 

Real versus nominal GDP

Consider a simple economy that produces two goods: apples and muffins. The following table shows the prices and quantities of the goods over a three-year period.

Year

Apples

Muffins
Price Quantity Price Quantity
(Dollars per apple) (Number of apples) (Dollars per muffin) (Number of muffins)
2008 1 150 2 160
2009 2 135 4 230
2010 3 110 4 165

Use the information from the previous table to fill in the following table.

Year Nominal GDP Real GDP
(Dollars) (The base year 2008, dollars)
2008    
2009    
2010    

1. From 2009 to 2010, nominal GDP (decreased or increased), and real GDP (decreased or increased).

2. Why is real GDP a more accurate measure of an economy's production than nominal GDP?

A. Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and services an economy consumes.

B. Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.

C. Real GDP is not influenced by price changes, but nominal GDP is.

Real GDP is preferred to nominal GDP as a measure of economic performance because:
A) nominal GDP uses current prices and thus may over- or understate true changes in output.
B) nominal GDP only includes goods and excludes services.
C) nominal GDP is not adjusted for population changes.
D) real GDP accounts for changes in the quality of goods and services produced.
)