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Economics of Social Issues 21th Edition by Charles Register ,Paul Grimes
Edition 21ISBN: 978-0078021916Economics of Social Issues 21th Edition by Charles Register ,Paul Grimes
Edition 21ISBN: 978-0078021916 Exercise 2
Explain how GDP and real GDP differ.
Explanation
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The gross domestic product (GDP) represents the market value of all the goods and services produced in a country, usually for a given year, and typically expressed in dollars. Because GDP is calculated using the current market prices belonging to the year that the measurement is made, increases in market prices will also increase the GDP, even if the economy did not actually grow. Therefore, an increase in GDP does not necessarily mean that the economy of the country increased. High inflation could increase GDP even when the economy shrinks.
To account for the effects of changes in market prices, the GDP can be adjusted using a price index. The price index for a given year represents the relative cost of goods and services relative to other years. For example, if the price index for year A iS₁00 and the price index for year B iS₁10, then prices in year B were 110% of the prices in year B. Usually a certain year is selected as the reference year to express GDP values in. The price index for the reference year is set to 100, and the price indices for other years are scaled proportionately. Multiplying GDP by the price index (in percent) causes GDP to be expressed in terms of dollars in the reference year. This is referred to as real GDP.
Therefore, GDP is the value of goods and services in current-year market prices, while real GDP is the value of goods in service in reference-year market prices.
To account for the effects of changes in market prices, the GDP can be adjusted using a price index. The price index for a given year represents the relative cost of goods and services relative to other years. For example, if the price index for year A iS₁00 and the price index for year B iS₁10, then prices in year B were 110% of the prices in year B. Usually a certain year is selected as the reference year to express GDP values in. The price index for the reference year is set to 100, and the price indices for other years are scaled proportionately. Multiplying GDP by the price index (in percent) causes GDP to be expressed in terms of dollars in the reference year. This is referred to as real GDP.
Therefore, GDP is the value of goods and services in current-year market prices, while real GDP is the value of goods in service in reference-year market prices.
Economics of Social Issues 21th Edition by Charles Register ,Paul Grimes
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