ork out the connection between the three ways to measure GDP growth: A) As a percentage change holding prices constant.
B) Expressing growth in terms of a common item (converting everything into a particular good (e.g. apples). And
C) as the weighted average of the growth in each of the goods weighted by their corresponding expenditure shares.
TY!!!
Real vs. Nominal GDP . Suppose everyone picks apples from trees. . Price of an apple in year t is Part. The number of apples picked in year t is at- . Nominal GDP in year t is Part * at . Real GDP in year t is at Real vs. Nominal GDP Growth in nominal GDP from year t to year t+1 is Pat+1 * att1 at . at and growth in real GDP from year t to year t+1 is at+1 Real GDP increases when apples are more plentiful. Nominal GDP increases by more than real GDP when the price of apples increases. Real GDP Growth Suppose households get utility from apples. GDP Then, when real GDP increases, utility has Utility increased. So in this simple example, growth in real GDP is informative about growth in living standards (utility). Real GDP Growth Suppose now that households get utility from both apples and bananas. The price of bananas in the year t is pot and the number of bananas picked is by- Nominal GDP in t is Pat * at + Pbt * by Real GDP Growth How do we define real GDP? And will it be informative about living standards? Suppose production of apples increases but production of bananas decreases? On net, is this bad or good? Real GDP Growth There are three ways to calculate real GDP growth 1 pick any arbitrary year t whose used before, during and after, to avoid price changes only account for quantity changes. one good saye annan's o (divide numerator and denominator by) An equivalent representation. Real GDP Growth 1. Fix a base year price, real GDP t+1 real GDP - Pat * atti + Pot * be+1 - 1 Pat * at + Pat . by 2. Or in terms of one good, say, apples (divide numerator and denominator by Paz) real GDP :+1_ real GDP: 1-1 = - at+1 + * b:+1 - -1 units of apples. In the first, real GDP is in constant year t dollars, in the second, real GDP is measured in Real GDP Growth An equivalent representation is a weighted average of the growth in each of the goods based on their expenditure shares. real GDP:+1 - 1 = 0, (at+1 ) + (1 -0,) (0,+1) - 1 real GDP where 0, is the fraction of nominal GDP accounted for by purchases of apples, and (1 -0,) the share accounted for by purchases of bananas. Real GDP Growth why does real GDP growth matte ? Well, suppose that households get utility from apples Ut = Oln(a,) + (1 - 0)In(b,) 4:+1 = Oln(at+1) + (1-0) In(b:+1) Then, Ut+1 - 141 =0 24+1 + (1 a, + (1-0) 41 -1 So, if 8 = 0, then utility increases whenever real GDP growth is positive. Measurement of GDP ( X -M ) GDP C = private consumption 1= private investment G = government purchases X = exports, M = imports, and X-M = net-exports economy's production . d on who buys the Measurement of GDP The expenditure approach to GDP sheds light on two often misunderstood issues about the economy. Trade Balance Government Spending
