0:00:00.814,0:00:04.340 ♪ [music] ♪ 0:00:15.000,0:00:19.100 - [Professor Alex Tabarrok] Is the economy growing? [br]Are people better off today than they were 0:00:19.100,0:00:24.720 four years ago? What about 40 years[br]ago? The GDP statistic can help us to 0:00:24.720,0:00:30.620 answer all of these questions. But first,[br]we do need to make some modifications. As 0:00:30.620,0:00:35.780 we discussed in our first video, GDP sums[br]up the prices of all finished goods and 0:00:35.780,0:00:43.290 services. So that means that there are two[br]ways the GDP can increase. First, prices 0:00:43.290,0:00:49.550 can increase. In this case, the GDP number[br]goes up, but the economy isn't actually 0:00:49.550,0:00:55.490 producing more goods and services. It's[br]inflation which is driving the higher GDP. 0:00:55.490,0:01:02.000 The increase in GDP - it might look good on[br]paper - but it's a mirage, a nominal 0:01:02.000,0:01:09.720 increase only. The other way the GDP can[br]increase is if we DO produce more valuable 0:01:09.720,0:01:16.300 goods and services. That could mean simply[br]more goods and services, or better goods 0:01:16.300,0:01:22.420 and services, more highly-valued goods and[br]services. It's this second type of 0:01:22.420,0:01:31.640 increase in GDP that we want. This isn't a[br]mirage, this is a real increase in GDP. 0:01:31.640,0:01:37.340 Real GDP measures the second type of[br]growth. And the Real GDP statistic, it 0:01:37.340,0:01:42.140 controls for inflation by adding up all[br]the goods and services produced in an 0:01:42.140,0:01:49.740 economy using the same set of prices over[br]time. The same set of prices. Real GDP 0:01:49.740,0:01:56.710 tells us - if, if the prices of goods and[br]services hadn't changed, how much would 0:01:56.710,0:02:03.750 GDP have increased, or decreased? Real GDP -[br]it's typically what we really care about. 0:02:03.750,0:02:09.210 Let's give an example. We'll be using a[br]fantastic tool called the St. Louis 0:02:09.210,0:02:14.970 Federal Reserve Economic Database, or[br]FRED. FRED is every economist's best 0:02:14.970,0:02:25.760 friend. So let's Google "US nominal GDP[br]Fred." Here's what we get. We can see that 0:02:25.760,0:02:36.982 we've grown from a GDP in 1950 of $320[br]billion, to a GDP in 2015 of over $17 0:02:36.982,0:02:47.750 trillion. Wow! That suggests that our[br]economy has gotten 55 times bigger. But 0:02:47.750,0:02:53.023 hold on, hold on, wait a moment, you might[br]say. My grandmother told me that a loaf of 0:02:53.023,0:02:58.509 bread used to cost a dime. And now it[br]costs a couple of dollars. That's right. 0:02:58.509,0:03:05.457 If we want to compare our economy over[br]time, we need to control for changes in 0:03:05.457,0:03:11.776 prices. So we don't want to look at[br]Nominal GDP. We're more interested in Real 0:03:11.776,0:03:21.833 GDP. So let's Google "Real US GDP Fred."[br]Here's what we get. This graph measures 0:03:21.833,0:03:31.402 Real GDP in 2009 dollars. That means using[br]2009 prices. This graph tells us that 0:03:31.402,0:03:39.407 using 2009 prices consistently, that in[br]1950, all the goods and services produced 0:03:39.407,0:03:48.021 at that time were worth about $2 trillion.[br]In comparison, in 2015, all the goods and 0:03:48.021,0:03:57.489 services produced at that time were worth[br]about $16 trillion. So while Nominal GDP 0:03:57.489,0:04:05.860 says that the economy is 55 times bigger[br]in 2015 than in 1950, Real GDP shows us 0:04:05.860,0:04:11.162 that it's 8 times bigger. That's still[br]pretty good, but a big difference between 0:04:11.162,0:04:19.329 Nominal GDP and Real GDP. Okay. So now[br]we've controlled for prices, but there's 0:04:19.329,0:04:25.490 another big difference in the US economy[br]in 1950 compared to today. Right - there's 0:04:25.490,0:04:32.570 a lot more people today. We can control[br]for the population size by using Real GDP 0:04:32.570,0:04:39.870 per capita, or per person. By dividing[br]Real GDP by a country's population, we get 0:04:39.870,0:04:47.740 a good, albeit imperfect, measure of the[br]average standard of living in a county. So 0:04:47.740,0:04:56.440 once again, let's Google, "Real GDP per[br]capita FRED." Here's what we get. In 1950, 0:04:56.440,0:05:05.010 Real GDP per capita, measured in constant[br]prices, was about $14,000. In 2015, Real 0:05:05.010,0:05:15.020 GDP per capita is about $50,000. So on[br]average, people in 2015 have a standard of 0:05:15.020,0:05:22.820 living that's four times higher than the[br]people in 1950. That's a pretty big and a 0:05:22.820,0:05:29.570 remarkable increase in the standard of[br]living. By the way, since Real GDP 0:05:29.570,0:05:36.660 increased by eight times, and Real GDP per[br]capita increased by four times, we know 0:05:36.660,0:05:42.510 immediately that the population[br]approximately doubled between 1950 and 0:05:42.510,0:05:48.850 2015. Now let's take a closer look at[br]this graph. We can see another reason why 0:05:48.850,0:05:55.400 we're interested in the GDP statistic.[br]Real GDP per capita declines during 0:05:55.400,0:06:03.850 recessions. In fact, a decline in Real[br]GDP is part of what defines a recession. 0:06:03.850,0:06:09.910 Declines in Real GDP also tend to be[br]accompanied by increases in unemployment. 0:06:09.910,0:06:17.340 You can see here that when Real GDP dips,[br]the unemployment rate spikes. Now here's 0:06:17.340,0:06:23.770 another nice feature of the FRED database.[br]On the Real GDP per capita graph, click 0:06:23.770,0:06:32.430 "Edit data series" and then switch to[br]percent annual changes. So now we can see 0:06:32.430,0:06:36.830 immediately the annual changes in Real[br]GDP. You can see, for example, the big 0:06:36.830,0:06:45.836 recession in 2008 and 2009. In 2009, for[br]example, the economy shrank by 3.6% 0:06:45.836,0:06:51.849 compared to the year before. That's a very[br]big and a very unpleasant decline. Okay. 0:06:51.849,0:06:56.868 So now you've got your hands around Real[br]GDP as a way of measuring the health of 0:06:56.868,0:07:02.131 our economy. And I said that Real GDP per[br]capita is a good, albeit imperfect, 0:07:02.131,0:07:07.759 measure of the average standard of living[br]in a country. But is that really true? 0:07:07.759,0:07:13.203 Does an increase in Real GDP per capita[br]mean that we're better off? That's the 0:07:13.203,0:07:16.353 view that I'm going to defend [br]in the next video. 0:07:17.734,0:07:21.981 - [Narrator] If you want to test yourself,[br]click "Practice Questions." Or, if you're 0:07:21.981,0:07:28.525 ready to move on, you can click "Go [br]to the next video." You can 0:07:28.525,0:07:34.153 also visit MRUniversity.com to see our[br]entire library of videos and resources. 0:07:34.153,0:07:36.153 ♪ [music] ♪