Gross Domestic Product (GDP)
What are the three ways GDP can be calculated?
Using expenditures, production, or incomes.
What is the GDP price deflator?
how much prices for all of the goods and services produced in an economy has changed
What is GDP?
the market value of all domestic production in a country (how much money a country makes through its production)
What does a Base-Year Analysis help companies determine?
whether they are growing or shrinking.
Negative nominal GDP growth could be a signal for a
recession
Who calculates GDP in the US? How do they do it?
the Bureau of Economic Analysis (BEA) calculates the GDP using data from surveys of retailers, manufacturers, and builders, and by looking at trade flows.
What Is Base-Year Analysis?
the comparison of economic trends with those of a specific base year.
If the nominal GDP output for 2008 was $2,000,000, but the GDP deflator showed a 1% increase in prices since the base year 2005, what is the real GDP for 2008?
$1,980,198 $2,000,000/1.01 = $1,980,198
the base year 2000 has a nominal GDP of $10.2 trillion and a consumer price index of 169 the 2018 GDP is $20.5 trillion, when the consumer price index was 248. calculate the 2000 real GDP in terms of 2018, which is the reference year.
$10.2 trillion x 248/169 = $15.0 trillion
say an economy has a nominal GDP of $10 billion and a real GDP of $8 billion. What is the economy's GDP price deflator? What does this mean?
(10/8) x 100 = 125 This means that the economy has inflated by 25% from the base year to the current year.
How does foreign trade affect GDP?
+GDP = exports > imports --- Trade Surplus -GDP = exports < imports --- Trade Deficit
What is the relationship between inflation and nominal GDP?
+inflation = higher nominal GDP -inflation (deflation) = lower nominal GDP
1) What is the deflating number if an economy's prices have increased by 1% since the base year 2) If nominal GDP was $1 million, what is the real GDP?
1) 1.01 2) 1,000,000 / 1.01 = $990,099.01
1. Which GDP is used to compare different quarters of output within the same year? 2. What GDP compares two or more years?
1. Nominal 2. Real
if prices rose by 5% since the base year, what would be the deflator?
1.05
Why does the GDP deflator have an advantage over Consumer Price Index?
Because GDP is not based on a fixed basket of goods The GDP deflator captures any changes in an economy's consumption or investment patterns, such as new goods. The fixed basket used in CPI calculations misses changes in prices of goods outside of the basket of goods.
What is Negative nominal GDP growth called? How does this happen?
Deflation = decreasing prices > production growth rate
GDP Price Deflator Calculation
GDP Price Deflator = (Nominal GDP ÷ Real GDP) × 100
A widespread theory that people's standard of living rises when
GDP rises
Since GDP is based on the monetary value of goods and services, it is subject to
Inflation
Is inflation a positive or negative force for people in the economy? Why? What entails inflation?
Inflation is a negative force because it lowers purchasing power Higher nominal GDP entails inflation
If a company is profitable every year, should they worry about performing a base-year analysis? Why or why not?
It's important to always perform an analysis. Even though a company may be making profit, their revenues may be shrinking without them noticing. By comparing revenues and profits to those of a previous year, a more detailed picture emerges.
Of all the components of the GDP equation, what is the most important one?
Net exports
What are the four types of GDP?
Nominal GDP: gross domestic product at current market prices Real GDP: the inflation-adjusted monetary value that domestic outputs produced. GDP Growth Rate: comparison between one quarter of the country's GDP with the previous one to measure how fast an economy is growing GDP Per Capita: measurement of the GDP per person in a country
-the U.S. produces $10 million worth of goods and services in 2001 -In 2002, the GDP increased to $12 million. -Between 2001 and 2002, prices rose by 10% From a nominal standpoint, what is the GDP of 2002? Now use the GDP price deflator. What is the real GDP for 2002?
On the surface, it would appear that total output grew by 20%. The Nominal GDP for year 2002 is $12 million But this 10% rise in prices has inflated GDP, meaning that the economy has only grown by 10%. The real GDP for 2002 is actually $11 million.
a country in the year 2009 had a nominal GDP of $100 billion. By 2019, this country's nominal GDP had grown to $150 billion. Over the same period of time, prices also rose by 100%. if you were to look solely at the nominal GDP, how would the economy appear to be performing? Now adjust for inflation. What is the real GDP, and what does this mean for the economy?
On the surface, the economy seems to be doing very well. But when you find the real GDP: 100% rise = double original price (0.5) 150 x 0.5 = 75 Real GDP = $75 billion The country's overall output has actually declined
How often is GDP calculated?
Quarterly. After each fiscal year, an annual estimate is released.
Which GDP is a better method for expressing long-term national economic performance?
Real GDP
Formula for real GDP using CPI
Real GDP = Nominal GDP x CPI base / CPI reference CPI base = price index for base year CPI reference = price index for reference year
Real GDP equation (how is nominal GDP adjusted for inflation)
Real GDP = Nominal GDP ÷ R R = GDP Deflator
Which type of GDP reflects the change in quantity and value of goods and services? Which one doesn't?
Real GDP shows the change in quantity and value of output by comparing the GDP from previous years Nominal GDP does not because it is difficult to tell whether growth has risen because of expansion in production or because prices rose.
What are three other names for Real GDP
constant-price GDP inflation-corrected GDP constant dollar GDP
When performing a base-year analysis it's important to adjust an analysis for any regime changes. Give a few examples
changes in accounting methods, the tax code, political party control, demographics, and social/cultural shifts.
When is nominal GDP higher than real GDP? When is real GDP higher than nominal GDP?
inflation = nominal > real deflation = real > nominal
What is the function of GDP?
it functions as a scorecard of a country's economic health.
How often does the BEA provide the GDP deflator?
quarterly
