ECON202 Chapter 3.1: Real GDP and the Circular Flow
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Module 3: Macroeconomic Cycles and
At the end of this module, students should be able to do the following:
• Define a wide range of macroeconomic variables, including being most especially real GDP.
• Show how the circular flow can be used to explain the interrelations between production,
income, and expenditure.
• Given sufficient information on some elements of the circular flow, be able to calculate the
• Define economic growth and cycles, and explain their relationship to economic well-being
across time within a country, and to comparisons of economic well-being across countries.
• Explain the limitations of real GDP as a measure of economic well-being, give and understand
exact examples of this, and be able to discuss some potential alternative measures.
• In short, be able to begin to understand how the economic growth is measured, and start to
think whether it is good or bad.
3.1 Real GDP and the Circular Flow
We are always interested as individuals or societies whether or not we are going to be better off
in the future.
• There are many different measures of economic well-being, including education levels, health
levels, environmental cleanliness, size of houses, use of different products such as automobiles,
• Economists tend to focus on a more materialistic measure, the total economic output of a
country over a year, known as Gross Domestic Product (GDP).
• GDP is the measure of the total market value of all final goods and services produced in a
3.1.1 Nominal and Real GDP
Nominal GDP is the monetary or current market value of the total output, valued current year
prices – estimated in Jan 2015 at $2.0 trillion. [Source: Statistics Canada’s CANSIM II
Database, Table 3800064.]
Real GDP attempts to control for the impacts of inflation by measuring using the prices of a
single "base" year (the current base year is 2007).
Therefore, Real GDP = Nominal GDPPrice Level
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