Nominal and Real GDP and Prices Indices Jake Reid Kevin Sercia Robert Slye VytautasDrejeris
Government Expenditures- Spending by federal, state, and local governments on final goods and services. • Transfers- Outlays that transfer purchasing power from one group of economic agents to another, including such items as Social Security and unemployment payments. Transfers are NOT counted in GDP. • Price Index- A weighted average of the prices of a set of the goods and services produced in the economy over a period of time. • Price Level- The average level of prices across goods and services.
Inflation Rate- Rate of change in the price level from one period of time to another. • Nominal GDP Change- Change in GDP that occurs only because the price level changed. • Real GDP Change- Increase in the actual quantity of goods and services.
The base year used when calculating GDP matters! • Relative prices of goods change over time • Chain-weighting: removing the biases associated with new products, changes in quality, and discounted prices • Used by NIPA for a more accurate year to year GDP changes
Measuring Price level • Implicit GDP Price Deflator • = Nominal GDP X100 Real GDP • Depends upon base year • Consumer Price Index • Less broadly based and only contains goods and services purchased by consumers • Current Year CPI = Cost of base year quantities at current prices cost of base year quantities at base year price X100
CPI inflation rate tends to be more volatile than the GDP deflator rate. • This difference matters for contracts which are geared to the inflation rate and formulation of monetary policy. • GDP price deflator measures the inflation rate better than CPI.