Week 1: Real and nominal GDP Flashcards
What strategies can you use to deal with the problem of big numbers? (4)
1) evaluate what it means per person
2) compare to the size of the economy
3) compare numbers to their own history
4) use the rule of 70 to compare growth rates
What is the rule of 70?
this rule says that you can approximate the time it takes for a value to double, by dividing 70 by the growth rate in percent
for example, if covid cases were increasing by 5% per day, to work out how long it would take for them to double, do 70/5 which equals 14 days approximately
What is nominal GDP?
GDP measured in today’s prices
How do you calculate nominal GDP?
add up the market value of total production in a year using the current prices prevailing in that year
What is nominal GDP not very useful for?
making comparisons over time as a result of inflation
What will nominal GDP be referred to as in ONS data?
current price GDP
What is Real GDP?
GDP measured in constant prices
When should you use real GDP?
when you’re trying to evaluate changes over time in economic activity
What does real GDP exclude?
the effects of price changes
What does real GDP isolate and how?
real GDP isolates economic growth by focusing only on the quantity of output produced
What will real GDP be referred to as in ONS data?
Chained Volume or Constant Price GDP
What is the equation for calculating nominal GDP?
nominal GDP = Actual price x Quantity sold
P (Actual price) x Q (Quantity sold)
What is the equation for calculating real GDP?
real GDP =Average price x Quantity sold
p̅ x Q
When the growth rates of prices and quantities are small, what approximation is accurate?
% change in nominal GDP ~ / = % change in real GDP + % change in prices
OR
% change in real GDP ~ / = % change in nominal GDP - % change in prices
OR
% change in prices ~ / = % change in nominal GDP - % change in real GDP
What is the approximation for % change in nominal GDP?
% change in nominal GDP ~ / = % change in real GDP + % change in prices
