ECON 102 Lecture Notes - Lecture 14: Investment Goods, Gdp Deflator
Document Summary
Corrections for inflation: reason to adjust for inflation. Gdp is measured in terms of money values. We use money values because it makes the aggregation of different types of goods and services possible. However, using nominal gdp presents a problem when we want to compare gdp figures during two different years (as we would want to do to calculate. To solve this problem, economists have developed methods to remove the effect of inflation from gdp measures and, in particular, gdp growth rates: real gdp. To correct gdp for inflation, economists use a "price index. " This index is based on the prices of all goods and services produced in the economy. In constructing the gdp price index (also called the implicit price deflator ), economists arbitrarily choose a year to be the base year, and the index for that year is by definition set to 100. Recent statistics use 2005 as the base year.
