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Other National Accounts
Nominal GDP vs. Real GDP
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GDP: measure of money value of all
final goods and services produced in a
given year.
How can we compare GDP from year to
year?
What if prices change from year to year
yet quantity unchanged?
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P
Q
GDP2002
P
Q
GDP2003
A: 2
2
4
A: 2
2
4
B: 1
2
2
B: 2
2
4
6
8
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Note that GDP2003 > GDP2002
This is not true since quantity produced
is the same in the two years
The increase in only b/c of the increase
in prices
This is “Nominal GDP”
Need to use “Real GDP”
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P
Q
GDP2002
P
Q
A: 2
2
4
A: 2
2
4
B: 1
2
2
B: 1
2
2
6
GDP2003
6
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As we use the prices of year 2002, we
note that GDP2002 = GDP2003
Real GDP inform us about any REAL
change in production of final goods and
services from year to year taking into
account the effect of price change!
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Price index:
(PI) = Nominal GDP / Real GDP
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Consumer Price Index (CPI): another
price index, commonly used since it
gives an indicator of inflation level
CPI reports the price of a market basket
of several consumer goods and services
purchased by a typical consumer.
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Shortcomings of GDP
The effect on wellbeing?
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1. Non-market transactions:
i.e.: services of homemakers.
And any other service that never show up
in the GDP.
This is because GDP measures only
market value of outputs.
Estimate some goods (farmers C.)
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2. Leisure:
The increase in leisure had positive effect
of productivity and wellbeing
But can we measure leisure's value?
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3. improved product quality:
quantitative measure not a qualitative
one.
 4. The underground economy:
Illegal activities: “off-the-books” and
“cash-only”
USA: $789 billion in 2000
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5. The environment:
social cost of the negative by-product
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6. Distribution of income:
Who gets what?
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7. Per capita output?
= Real GDP ÷ population, Good estimate?
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8. Noneconomic sources:
Can increase society's wellbeing without
raising GDP? Crime, violence…
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Read: p. 125, the circular flow, figure
7.3
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