GDP and CPI Flashcards
GDP formula
Break down of components of GDP
value of US GDP =
Real GDP
is the total value of final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the level of some given base year. A real GDP number always comes with information about what the base year is.
Nominal GDP
A GDP number that has not been adjusted for changes in prices is calculated using the prices in the year in which the output is produced.
Nominal GDP calculation
ompute price × quantity for each good, then add them up
real GDP calculation
- Pick a “base year.”
- Collect data on prices in base year.
- Collect data on quantities for all years (base year + another year).
- Compute value of GDP in each year using base year prices.
aggregate price level
a single number that represents the overall price level for final goods and services in the economy
market basket
a hypothetical consumption bundle of consumer purchases of goods and services, used to measure changes in overall price level.
price index
a hypothetical consumption bundle of consumer purchases of goods and services, used to measure changes in overall price level.
price index on a given year =
inflation rate
the annual percent change in a price index — typically the consumer price index. The inflation rate is positive when the aggregate price level is rising (inflation) and negative when the aggregate price level is falling (deflation).
inflation rate equation
Consumer Price Index
a measure of prices; calculated by surveying market prices for a market basket intended to represent the consumption of a typical urban American family of four. The CPI is the most commonly used measure of prices in the United States.
Other factors in measuring inflation
Seasonally adjusted. The inflation index can adjust for seasonal changes in price e.g. high prices in December – sales in Jan.
Adjusting for quality. A complication in measuring inflation is how to do we measure the price of mobile phones if – every year, the quality of the phone increases. If the iPhone increases in price – is this inflation or is it because it has more features. Inflation measures take into account the type of good may be changing so every price increase may not be inflationary but changing good.
Producer price index (PPI)
a measure of the cost of a typical basket of goods and services purchased by producers. Because these commodity prices respond quickly to changes in demand, the PPI is often regarded as a leading indicator of changes in the inflation rate.
GDP deflator
a price measure for a given year that is equal to 100 times the ratio of nominal GDP to real GDP in that year.
The GDP deflator for a given year is equal to 100 times the ratio of nominal GDP for that year to real GDP for that year. Since real GDP is currently expressed in 2012 dollars, the GDP deflator for 2012 is equal to 100. If nominal GDP doubles but real GDP does not change, the GDP deflator indicates that the aggregate price level doubled.
GDP Price Deflator =
equation
(Nominal GDP ÷ Real GDP) × 100
Understanding the GDP Price Deflator
RGDP per person is a measure of of
“the standard of living.”
Growth Rate =
Percentage Change
A price index:
characteristics
is normalized so that it equals 100 in the base year.
is used to measure the cost of a market basket across different years.
always includes a base year.
Intermediate goods are NOT counted in GDP because:
doing so would result in double counting
Productivity is declining when:
population growth exceeds real GDP growth.
