1
00:00:00,814 --> 00:00:04,340
♪ [music] ♪

2
00:00:15,000 --> 00:00:19,100
- [Professor Alex Tabarrok] Is the economy growing? 
Are people better off today than they were

3
00:00:19,100 --> 00:00:24,720
four years ago? What about 40 years
ago? The GDP statistic can help us to

4
00:00:24,720 --> 00:00:30,620
answer all of these questions. But first,
we do need to make some modifications. As

5
00:00:30,620 --> 00:00:35,780
we discussed in our first video, GDP sums
up the prices of all finished goods and

6
00:00:35,780 --> 00:00:43,290
services. So that means that there are two
ways the GDP can increase. First, prices

7
00:00:43,290 --> 00:00:49,550
can increase. In this case, the GDP number
goes up, but the economy isn't actually

8
00:00:49,550 --> 00:00:55,490
producing more goods and services. It's
inflation which is driving the higher GDP.

9
00:00:55,490 --> 00:01:02,000
The increase in GDP - it might look good on
paper - but it's a mirage, a nominal

10
00:01:02,000 --> 00:01:09,720
increase only. The other way the GDP can
increase is if we DO produce more valuable

11
00:01:09,720 --> 00:01:16,300
goods and services. That could mean simply
more goods and services, or better goods

12
00:01:16,300 --> 00:01:22,420
and services, more highly-valued goods and
services. It's this second type of

13
00:01:22,420 --> 00:01:31,640
increase in GDP that we want. This isn't a
mirage, this is a real increase in GDP.

14
00:01:31,640 --> 00:01:37,340
Real GDP measures the second type of
growth. And the Real GDP statistic, it

15
00:01:37,340 --> 00:01:42,140
controls for inflation by adding up all
the goods and services produced in an

16
00:01:42,140 --> 00:01:49,740
economy using the same set of prices over
time. The same set of prices. Real GDP

17
00:01:49,740 --> 00:01:56,710
tells us - if, if the prices of goods and
services hadn't changed, how much would

18
00:01:56,710 --> 00:02:03,750
GDP have increased, or decreased? Real GDP -
it's typically what we really care about.

19
00:02:03,750 --> 00:02:09,210
Let's give an example. We'll be using a
fantastic tool called the St. Louis

20
00:02:09,210 --> 00:02:14,970
Federal Reserve Economic Database, or
FRED. FRED is every economist's best

21
00:02:14,970 --> 00:02:25,760
friend. So let's Google "US nominal GDP
Fred." Here's what we get. We can see that

22
00:02:25,760 --> 00:02:36,982
we've grown from a GDP in 1950 of $320
billion, to a GDP in 2015 of over $17

23
00:02:36,982 --> 00:02:47,750
trillion. Wow! That suggests that our
economy has gotten 55 times bigger. But

24
00:02:47,750 --> 00:02:53,023
hold on, hold on, wait a moment, you might
say. My grandmother told me that a loaf of

25
00:02:53,023 --> 00:02:58,509
bread used to cost a dime. And now it
costs a couple of dollars. That's right.

26
00:02:58,509 --> 00:03:05,457
If we want to compare our economy over
time, we need to control for changes in

27
00:03:05,457 --> 00:03:11,776
prices. So we don't want to look at
Nominal GDP. We're more interested in Real

28
00:03:11,776 --> 00:03:21,833
GDP. So let's Google "Real US GDP Fred."
Here's what we get. This graph measures

29
00:03:21,833 --> 00:03:31,402
Real GDP in 2009 dollars. That means using
2009 prices. This graph tells us that

30
00:03:31,402 --> 00:03:39,407
using 2009 prices consistently, that in
1950, all the goods and services produced

31
00:03:39,407 --> 00:03:48,021
at that time were worth about $2 trillion.
In comparison, in 2015, all the goods and

32
00:03:48,021 --> 00:03:57,489
services produced at that time were worth
about $16 trillion. So while Nominal GDP

33
00:03:57,489 --> 00:04:05,860
says that the economy is 55 times bigger
in 2015 than in 1950, Real GDP shows us

34
00:04:05,860 --> 00:04:11,162
that it's 8 times bigger. That's still
pretty good, but a big difference between

35
00:04:11,162 --> 00:04:19,329
Nominal GDP and Real GDP. Okay. So now
we've controlled for prices, but there's

36
00:04:19,329 --> 00:04:25,490
another big difference in the US economy
in 1950 compared to today. Right - there's

37
00:04:25,490 --> 00:04:32,570
a lot more people today. We can control
for the population size by using Real GDP

38
00:04:32,570 --> 00:04:39,870
per capita, or per person. By dividing
Real GDP by a country's population, we get

39
00:04:39,870 --> 00:04:47,740
a good, albeit imperfect, measure of the
average standard of living in a county. So

40
00:04:47,740 --> 00:04:56,440
once again, let's Google, "Real GDP per
capita FRED." Here's what we get. In 1950,

41
00:04:56,440 --> 00:05:05,010
Real GDP per capita, measured in constant
prices, was about $14,000. In 2015, Real

42
00:05:05,010 --> 00:05:15,020
GDP per capita is about $50,000. So on
average, people in 2015 have a standard of

43
00:05:15,020 --> 00:05:22,820
living that's four times higher than the
people in 1950. That's a pretty big and a

44
00:05:22,820 --> 00:05:29,570
remarkable increase in the standard of
living. By the way, since Real GDP

45
00:05:29,570 --> 00:05:36,660
increased by eight times, and Real GDP per
capita increased by four times, we know

46
00:05:36,660 --> 00:05:42,510
immediately that the population
approximately doubled between 1950 and

47
00:05:42,510 --> 00:05:48,850
2015. Now let's take a closer look at
this graph. We can see another reason why

48
00:05:48,850 --> 00:05:55,400
we're interested in the GDP statistic.
Real GDP per capita declines during

49
00:05:55,400 --> 00:06:03,850
recessions. In fact, a decline in Real
GDP is part of what defines a recession.

50
00:06:03,850 --> 00:06:09,910
Declines in Real GDP also tend to be
accompanied by increases in unemployment.

51
00:06:09,910 --> 00:06:17,340
You can see here that when Real GDP dips,
the unemployment rate spikes. Now here's

52
00:06:17,340 --> 00:06:23,770
another nice feature of the FRED database.
On the Real GDP per capita graph, click

53
00:06:23,770 --> 00:06:32,430
"Edit data series" and then switch to
percent annual changes. So now we can see

54
00:06:32,430 --> 00:06:36,830
immediately the annual changes in Real
GDP. You can see, for example, the big

55
00:06:36,830 --> 00:06:45,836
recession in 2008 and 2009. In 2009, for
example, the economy shrank by 3.6%

56
00:06:45,836 --> 00:06:51,849
compared to the year before. That's a very
big and a very unpleasant decline. Okay.

57
00:06:51,849 --> 00:06:56,868
So now you've got your hands around Real
GDP as a way of measuring the health of

58
00:06:56,868 --> 00:07:02,131
our economy. And I said that Real GDP per
capita is a good, albeit imperfect,

59
00:07:02,131 --> 00:07:07,759
measure of the average standard of living
in a country. But is that really true?

60
00:07:07,759 --> 00:07:13,203
Does an increase in Real GDP per capita
mean that we're better off? That's the

61
00:07:13,203 --> 00:07:16,353
view that I'm going to defend 
in the next video.

62
00:07:17,734 --> 00:07:21,981
- [Narrator] If you want to test yourself,
click "Practice Questions." Or, if you're

63
00:07:21,981 --> 00:07:28,525
ready to move on, you can click "Go 
to the next video." You can

64
00:07:28,525 --> 00:07:34,153
also visit MRUniversity.com to see our
entire library of videos and resources.

65
00:07:34,153 --> 00:07:36,153
♪ [music] ♪