Real GDP

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Real GDP the CPI

• Chapter 5
• Sections 5 - 7

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Whats the most popular movie?

• Last weeks most popular movie? (as measured by
  gross box office receipts)
• Most popular of all time? USA
• And the winner is ....

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http//movies.nytimes.com/pages/movies/boxoffice/w
eekend_us/index.html
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Box Office GreatsUnadjusted

• Titanic (1997)
• Star Wars (1977)
• Shrek 2 (2004)
• E. T. The Extra-Terrestrial (1982)
• Star Wars Episode I (1999)
• Pirates of the Caribbean (2006)
• Spider-Man (2002)
• Star Wars Episode III (2005)
• The Lord of the Rings (2003)
• Spiderman 2 (2004)

http//www.filmsite.org/boxoffice.html
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The previous list is misleading

• Average ticket price today (2006) 6.55
• Average ticket price in 1939 0.23
• Box office receipts price x quantity.
• If we want to know the truly most popular
  American film we need to eliminate changes in
  prices
• We need to keep prices constant using some
  base year.
• If we do, the winner is . . .

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Box Office Greats AdjustedTo the average
ticket price in 2003

• Gone With the Wind (1939)
• Star Wars (1977)
• The Sound of Music (1965)
• E. T. The Extra-Terrestrial (1982)
• The Ten Commandments (1956)
• Titanic (1997)
• Jaws (1975)
• Doctor Zhivago (1965)
• The Exorcist (1973)
• Snow White and the Seven Dwarfs (1937)

Source http//www.filmsite.org/
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Real Gross 585.5M 1998
Real Gross 1299.4M 1998
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Real GDP

• Excludes the effects of price inflation
• Why is this necessary?
• Real GDP allows us to measure the QUANTITY of
  goods and services sold
• If real GDP increases, we know the economy is
  growing
• Nominal GDP is the product of two forces PQ
• So we cant know what is causing the increase

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Table 5.5 GDP in an Apples and Oranges Economy
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Table 5.6 Calculation of Constant Dollar Real GDP
and Growth Rates (to be continued)
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10971B
9121B
6657B
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Method of calculating real GDP

• Real GDP nominal GDP/price index100
• R N/PI100
• GDP deflator is the price index used
• In the previous balloon example
• 9121B 10971B/120.3100 1993 100

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No fault quiz
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Calculating Real GDP

• Team Exercise SG, 5th ed, p90

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Answers to exercise 6

• 6a R N/PI100 10082.2/109.4100 9215.9
• 6b N RPI/100 8859104.7/100 9275.4
• 6c PI N/R100 8318.4/8159.5100 101.9
• 6d ?N ?R ?PI
• ?N 3.8 (106.9 104.7)/104.7100
• ?N 3.8 2.1 5.9
• OR Real GDP 2000 88591.038 9195.6
• GDPnominal 9156.61.069 9830
• change (9830 9275)/9275 5.98 (or net of
  2.18)

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Measuring price inflation

• Definition of price inflation a continual rise
  in the general price level
• How do we know if overall prices are inflating?
• Calculate a ratio of prices back then to prices
  now?
• The North Jersey marketbasket survey
• Need to weight prices

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Table 5.7 Calculation of a Constant Weight Price
Index (for Year 2, when Year 1 is Base)
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Basic Price Index
times 100 by convention

• Cost of CPI basket at
• CPI current year prices X 100
• Cost of CPI basket at
• base period prices

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Price index

• How inflation is measured
• How prices in a market basket of goods changes
  over time
• Two features
• A market basket a selection of goods
• A base year or period a point of reference
• Basic idea -- what did the market basket cost
• In current year prices?
• In base year prices?

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Composition of CPI market basket
Figure 6-7
8 groups (pie chart) 200 sub-categories 80,000
actual goods and services are priced each month.
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Interpreting an index

• Generally the percentage change in prices is
  reported to the public not the level of the
  CPI.
• CPIJan1989 120 (base 1982/84)
• Prices increased 20 from the base period
• CPIJan1995 150 (base 1982/84)
• What is the increase from 1989 to 1995?
• chg (difference/initial number)100
• chg (150-120)/120100 30/120100 25

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Charts
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(Continued) Table 5.6 Calculation of Constant
Dollar Real GDP and Growth Rates
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Figure 5.1 U.S. GDP (Trillions of Dollars)
19902005
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No fault
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Table 5.7 Calculation of a Constant Weight Price
Index (for Year 2, when Year 1 is Base)
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Figure 5.2 The Traditional Macroeconomic Model
Circular Flow Diagram