Self-Check Questions

6.2 Adjusting Nominal Values to Real Values

The nominal value of an economic statistic is the commonly announced value. The real value is the value after adjusting for changes in inflation. To convert nominal economic data from several different years into real, inflation-adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that economists measure them in the money prevailing in the base year.

6.3 Tracking Real GDP over Time

Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the business cycle's peak and end at the trough.

6.4 Comparing GDP among Countries

Since we measure GDP in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to do that is with the exchange rate, which is the price of one country’s currency in terms of another. Once we express GDPs in a common currency, we can compare each country’s GDP per capita by dividing GDP by population. Countries with large populations often have large GDPs, but GDP alone can be a misleading indicator of a nation's wealth. A better measure is GDP per capita.

6.5 How Well GDP Measures the Well-Being of Society

GDP is an indicator of a society’s standard of living, but it is only a rough indicator. GDP does not directly take account of leisure, environmental quality, levels of health and education, activities conducted outside the market, changes in inequality of income, increases in variety, increases in technology, or the (positive or negative) value that society may place on certain types of output.

Self-Check Questions

1 . Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion. What is the dollar value of GDP? 2 . Which of the following are included in GDP, and which are not? a. The cost of hospital stays b. The rise in life expectancy over time c. Child care provided by a licensed day care center d. Child care provided by a grandmother e. A used car sale f. A new car sale g. The greater variety of cheese available in supermarkets h. The iron that goes into the steel that goes into a refrigerator bought by a consumer. 3 . Using data from Table 6.5 how much of the nominal GDP growth from 1980 to 1990 was real GDP and how much was inflation? 4 . Without looking at Table 6.7, return to Figure 6.10. If we define a recession as a significant decline in national output, can you identify any post-1960 recessions in addition to the 2008-2009 recession? (This requires a judgment call.) 5 . According to Table 6.7, how often have recessions occurred since the end of World War II (1945)? 6 . According to Table 6.7, how long has the average recession lasted since the end of World War II? 7 . According to Table 6.7, how long has the average expansion lasted since the end of World War II? 8 . Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it possible for GDP to fall while per capita GDP is rising? 9 . The Central African Republic has a GDP of 1,107,689 million CFA francs and a population of 4.862 million. The exchange rate is 284.681CFA francs per dollar. Calculate the GDP per capita of Central African Republic. 10 . Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living. a. The environment becomes dirtier b. The crime rate declines c. A greater variety of goods become available to consumers d. Infant mortality declines

Review Questions

11 . What are the main components of measuring GDP with what is demanded? 12 . What are the main components of measuring GDP with what is produced? 13 . Would you usually expect GDP as measured by what is demanded to be greater than GDP measured by what is supplied, or the reverse? 14 . Why must you avoid double counting when measuring GDP? 15 . What is the difference between a series of economic data over time measured in nominal terms versus the same data series over time measured in real terms? 16 . How do you convert a series of nominal economic data over time to real terms? 17 . What are typical GDP patterns for a high-income economy like the United States in the long run and the short run? 18 . What are the two main difficulties that arise in comparing different countries's GDP? 19 . List some of the reasons why economists should not consider GDP an effective measure of the standard of living in a country.

Critical Thinking Questions

20 . U.S. macroeconomic data are among the best in the world. Given what you learned in the Clear It Up "How do statisticians measure GDP?", does this surprise you, or does this simply reflect the complexity of a modern economy? 21 . What does GDP not tell us about the economy? 22 . Should people typically pay more attention to their real income or their nominal income? If you choose the latter, why would that make sense in today’s world? Would your answer be the same for the 1970s? 23 . Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago? 24 . Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down? 25 . Cross country comparisons of GDP per capita typically use purchasing power parity equivalent exchange rates, which are a measure of the long run equilibrium value of an exchange rate. In fact, we used PPP equivalent exchange rates in this module. Why could using market exchange rates, which sometimes change dramatically in a short period of time, be misleading? 26 . Why might per capita GDP be only an imperfect measure of a country’s standard of living?