Exploration 12

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Exploration 12

• Real
• Gross Domestic Product

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You should be able to

• Distinguish between real GDP and nominal GDP
• Calculate real GDP

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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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Box Office Hits last weekend

• 1. Failure to Launch2. The Shaggy Dog3. The
  Hills Have Eyes4. 16 Blocks5. Madea's Family
  Reunion More Box Office Data Source New York
  Times, March 13, 2006

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Box Office GreatsUnadjusted

• Titanic (1997)
• Star Wars (1977)
• E. T. The Extra-Terrestrial (1982)
• Star Wars Episode I - The Phantom Menace (1999)
• Spider-Man (2002)
• Jurassic Park (1993)
• The Lord of the Rings The Two Towers (2002)
• Finding Nemo (2003)
• Forrest Gump (1994)
• The Lion King (1994)
• Harry Potter and the Sorcerer's Stone (2001)

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The previous list is misleading

• Average ticket price today (2005) 6.41
• 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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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

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Whats are some limits to GDP?
Link

• Treats goods and bads the same
• Treats crime, divorce and natural disasters as
  economic gain.
• Environmental spills and cleanups count
• Ignores non-market activity
• Depletion of natural capital as income
• Takes no account of income distribution

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Wrap up What did you learn?

• What is the difference between real GDP and
  nominal GDP?
• How can you calculate real GDP?
• What are some limitations of GDP?
• What is the GPI? Is it superior to GDP?