Calculating Real GDP
Calculating Real GDP involves adjusting nominal GDP for inflation to reflect the true value of goods and services produced in an economy. This is typically done using a price index, such as the Consumer Price Index (CPI), to account for changes in prices over time. Real GDP provides a more accurate measure of an economy's output by accounting for changes in purchasing power.
8 Key excerpts on "Calculating Real GDP"
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...GDP was never intended to be a complete measure of economic well-being or the happiness of a nation’s residents. Real GDP versus Nominal GDP We often want to compare GDP figures from year to year. Many people think that we are economically better off if GDP increases from one year to the next. However, we must exercise caution when making such a comparison. So far, we have expressed GDP in terms of the prices existing in the year in which the goods and services were produced. Such an expression gives what is known as nominal GDP, or current-dollar GDP. To make comparisons over time when prices are changing, we must adjust nominal GDP so that it reflects only changes in output and not changes in prices. Real GDP, or constant-dollar GDP, is nominal GDP adjusted to eliminate changes in prices. It measures actual (real) production and shows how actual production—rather than the prices of what is produced—has changed. Real GDP is thus superior to nominal GDP for assessing the performance of the economy, especially rates of economic growth. Suppose, for example, that in 2014 a computer costs $2,000. The identical computer in 2015 costs $2,200. When the computer was counted as part of GDP in 2015, each computer added $200 more to GDP than it did in 2014. Even if the same number of computers were sold in 2015, GDP would have increased in 2015. The actual amount of goods available in the economy would not have increased, but the dollar value would have risen. The increase in the GDP would thus be the result of a rise in prices rather than an increase in output. When using GDP to assess growth, we must realize that part of the growth that we observe may be the result of rising prices. In order to convert nominal GDP to real GDP, it is necessary to have a measure of price changes over the years. Economists use a price index to adjust GDP figures so that the figures show only changes in actual output...
eBook - ePubUnderstanding Economic Equilibrium
Making Your Way Through an Interdependent World
- Thomas J. Cunningham, Mike Shaw(Authors)
- 2021(Publication Date)
- Business Expert Press(Publisher)
...If nominal GDP increases by 2 percent and inflation over the same period is also 2 percent, real GDP is zero. There is no real growth. Both measures are important to monitor, but changes in real GDP tell us how much more (or less) is being produced. By focusing on the final sales of goods and services GDP keeps us from being misled by double counting. For example, buying a car. The automobile you buy comes with tires; they’re an “intermediate good.” They are produced, of course, but if you count them as goods sold on their own, then count the purchase price of the car at its sale, you’re double-counting the tires—not to mention the many other parts that get made, sold to the auto manufacturer, and built into your car. The Good and Bad in GDP GDP is most valuable as a consistent scorecard over time, measuring the difference in production from one period to the next, or more importantly, to the previous period. Again, it might not be perfect, but it is consistent, and having a consistent and agreed upon measure for economic output is a vital part of understanding economies and making economic policy. Being able to judge relative economic performance across time and nations is vital to improving macroeconomic performance. That said, GDP has its defects. For one, the number typically reported doesn’t measure growth per capita. Economic output is a function of the number of workers producing goods and services and the amount of capital and technology they have to work with. Consider farming in the United States, now compared to a century ago. The United States produces more food today than ever, but it does it in a much more capital-intensive way. In 1900 there were thousands of small farms and thousands more farm workers. In the twenty-first century, there is a much greater concentration of output in fewer, larger farms with much more invested in capital and technology than workers. Our current standard of living reflects that increase in per capita output...
eBook - ePubEconomic Indicators for Professionals
Putting the Statistics into Perspective
- Charles Steindel(Author)
- 2018(Publication Date)
- Routledge(Publisher)
...Financial markets pay attention to what policymakers pay attention to, so they too look long and hard at GDP. These relationships involve the growth of these variables (real GDP, nominal GDP, payroll employment, and tax revenue), not the levels. One can always back out relationships between the reported levels of these variables—for example, a level of real GDP of 16,716.2 billion chained (2009) dollars is associated with a level of nonfarm payroll employment of 141.865 million. 9 However, the fundamental relationships of true interest would be between changes, or more accurately, 16 growth rates: if real GDP were to grow three percent over the next year, what would the percentage change in employment be? What does GDP measure? It seems it is useful to be able to predict the growth of real and nominal GDP. But what, exactly, are real and nominal GDP? These statistics are not observed or measured in the same way as a physical science parameter. Estimating GDP is very different from taking a temperature. Real and nominal GDP are statistics designed and produced by BEA. The design and production are influenced by the realities faced by the agency—the availability of relevant information on various parts of the economy, and the resources BEA has to acquire and process such information. Knowledge of some of the production details can be valuable in getting a grip on the short-term dynamics of the series, and to distinguish between what may be the important changes in the trends that will impact the variables of real fundamental importance, from transient moves of no policy concern. Before getting into the production details, one should understand what the GDP statistic is designed to measure. The explanation typically used in economics textbooks is that GDP measures the amount of final goods and services produced (and sold) within the borders of the United States during a fixed time period (see, for instance, Hubbard and O’Brien, 2015, page 239)...
eBook - ePub- Richard Yamarone(Author)
- 2012(Publication Date)
- Bloomberg Press(Publisher)
...As more goods and services are considered, the problem gets bigger. Real GDP is a more accurate indicator of changes in production. Referring to a base year eliminates the uncertainty of whether an increase in the value of the goods and services produced was the result of increased prices or of higher production. The table below shows how real GDP would be calculated in another country with two products—in this case, telescopes and hockey sticks. To calculate Year 1 GDP, the quantities of the goods produced that year are multiplied by the prices at which they were sold and the results summed, to yield $6,000. For Year 2, instead of multiplying the quantities of goods produced by that year’s prices—which would yield the nominal value—they are multiplied by their prices in the base year, Year 1. This yields a real, or inflation-adjusted, GDP of $7,650. According to this calculation, Year 2 GDP advanced a real $1,650 over Year 1 GDP: Until 1996, the BEA used 1982 as the base year for calculating all real GDP estimates. Settling on one base year in this manner has the effect of imposing that year’s price structure on subsequent periods and fixing the relative weights given the goods associated with these prices in the GDP calculation. The BEA found, however, that this fixed-weight approach introduced distortions: The further away a period under study was from the chosen base year, the more inflated its real GDP growth rate tended to be. For example, Karl Whelan, an economist at the Federal Reserve Board, has observed in a working paper that the growth rate of fixed-weight real GDP in 1998 was 4.5 percent when calculated using a base year of 1995, 6.5 percent using 1990 prices, 18.8 percent using 1980 prices, and an incredible 37.4 percent when 1970 is the base year. The BEA constantly refines its measures...
- Richard Sattora(Author)
- 2012(Publication Date)
- Research & Education Association(Publisher)
...Thus, GDP is the sum of all the money spent purchasing final goods and services produced in the United States, regardless of firm ownership. Another way to measure economic activity is to measure the income derived or earned by creating those goods and services. Therefore, we can measure productivity by a national income approach or a national expenditure approach; in the end, they should be equal. This is a lagging indicator, in that it measures an event that has already happened. The expenditure measurement consists of four components: household consumption expenditure (C), gross business domestic investment (Ig), government purchases (G), and net foreign purchases (Xn) (subtract import value, as foreign goods are not a part of U.S. productivity). This can be stated as a simple formula: C + Ig + G + Xn The national income measurement totals five main sources of income: wages, salaries, rents, interest, and profits from business ownership (including sole proprietorships, partnerships, and private and public corporations). One of the key issues in the creation of this indicator is possible change in money value over time; that is, inflation or deflation. Economists deal with this issue by distinguishing between nominal measurement (current dollars) and real measurement (reflecting changes in price levels or constant dollars). If one wants to use GDP in a comparative manner—say, GDP in 1999 compared to the GDP in 2000—real GDP must be used, or any conclusion reached would be flawed. ECONOMIC PERFORMANCE OVER TIME Economic growth is an increase in real GDP. Economic contraction is a decrease in real GDP. Total expenditure is the immediate determinant of output, and thus of unemployment/employment and inflation/deflation...
eBook - ePub- Danny Myers(Author)
- 2018(Publication Date)
- Routledge(Publisher)
...GDP numbers cannot capture our true overall wellbeing as a nation. As the satellite accounts remind us, economic activity also produces external costs, such as pollution and accidents. Leisure, happiness and health cannot be measured simply in terms of income, output or expenditure. Monetary values do not encompass everything that we care about; some things will always remain beyond price. Chapter summary 8.1 • National accounts measure the annual level of economic activity, and economic growth is identified by changes in real GDP. • The simple circular flow model highlights (a) that households sell factors of production in return for incomes, (b) that businesses sell goods and services to households, and (c) that there is a close relationship between income, expenditure and output. • GDP represents the total money value of all production created within a country during a year. GNI includes the income generated for the nationals of that country by overseas activities. • In broad terms, economic activity in the property sector accounts for approximately 20% of UK GDP. • In most countries, informal output means that economic activity is under-reported in national accounts. • There is some debate regarding the validity of GDP figures as an accurate measure of a nation’s wellbeing. Measuring inflation Inflation A general increase in the level of prices. Stable prices form an important objective of macroeconomic policy and there is an explicit government target to keep price rises within a 1–3% band each year. This target refers to the general level of prices across a representative basket of goods and services. The italicised word is important, as the term inflation refers to price rises across the board The typical trend experienced in the UK, and across Europe, is for prices to broadly increase each year by a small percentage of 1% to 2%. Table 8.3 shows the UK annual average inflation rates for 2004–2018...
- Merijn Knibbe(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...Their estimate of GDP growth for the UK for the 1997–2015 period is more than 1% per year lower than the official estimate (25% for the entire period) which is just too much of a difference for me. They do not discuss the economic side of this. But as the official growth rate is based on single deflation it means that use of inputs has grown much, much faster than output. They also do not discuss the fact that even when a consistent set of prices does lead to real expenditure being equal to real production (contrary to the situation when single deflation is used) there is no guarantee that these prices are indeed the prices relevant to the budgets and decisions of companies and households. This is even more important when we move from the accounts to comparisons of different regions in different periods: consistent sets of price scan be used to estimate consumption of GDP in several regions but we do not know if the cattle or milk or silk price index used was relevant in an economic way. It is, however, a step ahead. Summarizing: we do seem to have reasonably stable long term deflation methods as well as methods to calculate real aggregate expenditure and output which match, just like nominal output and expenditure (and income, not treated by Oulton e.a.) match. Table 8.1 Use and prices of artificial fertilizer in the Netherlands, 1914–1923 So, what to do? Estimating ‘real’ economic growth is a worthwhile pursuit. But economists should take heed that value added is, fundamentally, a nominal and therewith a historical variable. Deflating will, among other problems, lead to all the well-known technical problems related to the use of deflators for constructing time series but also to problems of interpretation. There is no ‘right’ way to disentangle price increases from changes in relative prices and historical knowledge is necessary to understand the results. But knowledge of technical aspects of deflators is necessary, too, to do this...
eBook - ePubUK Business and Financial Cycles Since 1660
Volume I: A Narrative Overview
- Nicholas Dimsdale, Ryland Thomas(Authors)
- 2019(Publication Date)
- Palgrave Macmillan(Publisher)
...(Burns and Mitchell 1946) Given the increasing availability of national accounts data, later business cycle chronologies tended to use aggregate measures of economic activity such as GDP to identify turning points. In the post-WW2 period, the Central Statistical Office (CSO 1993), now the Office for National Statistics (ONS), maintained a quarterly “reference chronology”, covering from 1958 to 1992, based on turning points in real GDP. The Organisation for Economic Co-operation and Development (OECD 2019) continue to produce a set of turning points for the United Kingdom using (de-trended) real GDP and a version of the Bry and Boschan (1971) algorithm we discuss later. This chronology extends back to 1955 on a monthly basis. And leading research institutes, such as the Centre for Economic Policy Research (CEPR 2019) and National Bureau of Economic Research (NBER 2019), focus on real GDP (and some its components) and employment. Focusing on an aggregate measure of economic activity, such as real GDP, clearly has advantages. As we discuss in Chapter 4 real GDP can be measured in three different ways. On the expenditure side, it combines together consumption, investment and government spending by domestic residents plus net spending by overseas residents on exports (exports minus imports) using their share in total expenditure to weight them together. On the output side, it combines the production of the agricultural, industrial and services sectors weighted by their respective shares in the value added they contribute to the economy. These components are, in turn, aggregates of many more sub-components. And on the income side, GDP can be measured as the sum of employment earning and profits delated by the GDP deflator to give a measure of real output. So GDP weights together many different indicators of activity according to their overall importance in the economy. However there remain issues with using GDP as a sole representative indicator...
