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Dialogue: 0,0:00:00.81,0:00:04.34,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:15.00,0:00:19.10,Default,,0000,0000,0000,,- [Professor Alex Tabarrok] Is the economy growing? \NAre people better off today than they were
Dialogue: 0,0:00:19.10,0:00:24.72,Default,,0000,0000,0000,,four years ago? What about 40 years\Nago? The GDP statistic can help us to
Dialogue: 0,0:00:24.72,0:00:30.62,Default,,0000,0000,0000,,answer all of these questions. But first,\Nwe do need to make some modifications. As
Dialogue: 0,0:00:30.62,0:00:35.78,Default,,0000,0000,0000,,we discussed in our first video, GDP sums\Nup the prices of all finished goods and
Dialogue: 0,0:00:35.78,0:00:43.29,Default,,0000,0000,0000,,services. So that means that there are two\Nways the GDP can increase. First, prices
Dialogue: 0,0:00:43.29,0:00:49.55,Default,,0000,0000,0000,,can increase. In this case, the GDP number\Ngoes up, but the economy isn't actually
Dialogue: 0,0:00:49.55,0:00:55.49,Default,,0000,0000,0000,,producing more goods and services. It's\Ninflation which is driving the higher GDP.
Dialogue: 0,0:00:55.49,0:01:02.00,Default,,0000,0000,0000,,The increase in GDP - it might look good on\Npaper - but it's a mirage, a nominal
Dialogue: 0,0:01:02.00,0:01:09.72,Default,,0000,0000,0000,,increase only. The other way the GDP can\Nincrease is if we DO produce more valuable
Dialogue: 0,0:01:09.72,0:01:16.30,Default,,0000,0000,0000,,goods and services. That could mean simply\Nmore goods and services, or better goods
Dialogue: 0,0:01:16.30,0:01:22.42,Default,,0000,0000,0000,,and services, more highly-valued goods and\Nservices. It's this second type of
Dialogue: 0,0:01:22.42,0:01:31.64,Default,,0000,0000,0000,,increase in GDP that we want. This isn't a\Nmirage, this is a real increase in GDP.
Dialogue: 0,0:01:31.64,0:01:37.34,Default,,0000,0000,0000,,Real GDP measures the second type of\Ngrowth. And the Real GDP statistic, it
Dialogue: 0,0:01:37.34,0:01:42.14,Default,,0000,0000,0000,,controls for inflation by adding up all\Nthe goods and services produced in an
Dialogue: 0,0:01:42.14,0:01:49.74,Default,,0000,0000,0000,,economy using the same set of prices over\Ntime. The same set of prices. Real GDP
Dialogue: 0,0:01:49.74,0:01:56.71,Default,,0000,0000,0000,,tells us - if, if the prices of goods and\Nservices hadn't changed, how much would
Dialogue: 0,0:01:56.71,0:02:03.75,Default,,0000,0000,0000,,GDP have increased, or decreased? Real GDP -\Nit's typically what we really care about.
Dialogue: 0,0:02:03.75,0:02:09.21,Default,,0000,0000,0000,,Let's give an example. We'll be using a\Nfantastic tool called the St. Louis
Dialogue: 0,0:02:09.21,0:02:14.97,Default,,0000,0000,0000,,Federal Reserve Economic Database, or\NFRED. FRED is every economist's best
Dialogue: 0,0:02:14.97,0:02:25.76,Default,,0000,0000,0000,,friend. So let's Google "US nominal GDP\NFred." Here's what we get. We can see that
Dialogue: 0,0:02:25.76,0:02:36.98,Default,,0000,0000,0000,,we've grown from a GDP in 1950 of $320\Nbillion, to a GDP in 2015 of over $17
Dialogue: 0,0:02:36.98,0:02:47.75,Default,,0000,0000,0000,,trillion. Wow! That suggests that our\Neconomy has gotten 55 times bigger. But
Dialogue: 0,0:02:47.75,0:02:53.02,Default,,0000,0000,0000,,hold on, hold on, wait a moment, you might\Nsay. My grandmother told me that a loaf of
Dialogue: 0,0:02:53.02,0:02:58.51,Default,,0000,0000,0000,,bread used to cost a dime. And now it\Ncosts a couple of dollars. That's right.
Dialogue: 0,0:02:58.51,0:03:05.46,Default,,0000,0000,0000,,If we want to compare our economy over\Ntime, we need to control for changes in
Dialogue: 0,0:03:05.46,0:03:11.78,Default,,0000,0000,0000,,prices. So we don't want to look at\NNominal GDP. We're more interested in Real
Dialogue: 0,0:03:11.78,0:03:21.83,Default,,0000,0000,0000,,GDP. So let's Google "Real US GDP Fred."\NHere's what we get. This graph measures
Dialogue: 0,0:03:21.83,0:03:31.40,Default,,0000,0000,0000,,Real GDP in 2009 dollars. That means using\N2009 prices. This graph tells us that
Dialogue: 0,0:03:31.40,0:03:39.41,Default,,0000,0000,0000,,using 2009 prices consistently, that in\N1950, all the goods and services produced
Dialogue: 0,0:03:39.41,0:03:48.02,Default,,0000,0000,0000,,at that time were worth about $2 trillion.\NIn comparison, in 2015, all the goods and
Dialogue: 0,0:03:48.02,0:03:57.49,Default,,0000,0000,0000,,services produced at that time were worth\Nabout $16 trillion. So while Nominal GDP
Dialogue: 0,0:03:57.49,0:04:05.86,Default,,0000,0000,0000,,says that the economy is 55 times bigger\Nin 2015 than in 1950, Real GDP shows us
Dialogue: 0,0:04:05.86,0:04:11.16,Default,,0000,0000,0000,,that it's 8 times bigger. That's still\Npretty good, but a big difference between
Dialogue: 0,0:04:11.16,0:04:19.33,Default,,0000,0000,0000,,Nominal GDP and Real GDP. Okay. So now\Nwe've controlled for prices, but there's
Dialogue: 0,0:04:19.33,0:04:25.49,Default,,0000,0000,0000,,another big difference in the US economy\Nin 1950 compared to today. Right - there's
Dialogue: 0,0:04:25.49,0:04:32.57,Default,,0000,0000,0000,,a lot more people today. We can control\Nfor the population size by using Real GDP
Dialogue: 0,0:04:32.57,0:04:39.87,Default,,0000,0000,0000,,per capita, or per person. By dividing\NReal GDP by a country's population, we get
Dialogue: 0,0:04:39.87,0:04:47.74,Default,,0000,0000,0000,,a good, albeit imperfect, measure of the\Naverage standard of living in a county. So
Dialogue: 0,0:04:47.74,0:04:56.44,Default,,0000,0000,0000,,once again, let's Google, "Real GDP per\Ncapita FRED." Here's what we get. In 1950,
Dialogue: 0,0:04:56.44,0:05:05.01,Default,,0000,0000,0000,,Real GDP per capita, measured in constant\Nprices, was about $14,000. In 2015, Real
Dialogue: 0,0:05:05.01,0:05:15.02,Default,,0000,0000,0000,,GDP per capita is about $50,000. So on\Naverage, people in 2015 have a standard of
Dialogue: 0,0:05:15.02,0:05:22.82,Default,,0000,0000,0000,,living that's four times higher than the\Npeople in 1950. That's a pretty big and a
Dialogue: 0,0:05:22.82,0:05:29.57,Default,,0000,0000,0000,,remarkable increase in the standard of\Nliving. By the way, since Real GDP
Dialogue: 0,0:05:29.57,0:05:36.66,Default,,0000,0000,0000,,increased by eight times, and Real GDP per\Ncapita increased by four times, we know
Dialogue: 0,0:05:36.66,0:05:42.51,Default,,0000,0000,0000,,immediately that the population\Napproximately doubled between 1950 and
Dialogue: 0,0:05:42.51,0:05:48.85,Default,,0000,0000,0000,,2015. Now let's take a closer look at\Nthis graph. We can see another reason why
Dialogue: 0,0:05:48.85,0:05:55.40,Default,,0000,0000,0000,,we're interested in the GDP statistic.\NReal GDP per capita declines during
Dialogue: 0,0:05:55.40,0:06:03.85,Default,,0000,0000,0000,,recessions. In fact, a decline in Real\NGDP is part of what defines a recession.
Dialogue: 0,0:06:03.85,0:06:09.91,Default,,0000,0000,0000,,Declines in Real GDP also tend to be\Naccompanied by increases in unemployment.
Dialogue: 0,0:06:09.91,0:06:17.34,Default,,0000,0000,0000,,You can see here that when Real GDP dips,\Nthe unemployment rate spikes. Now here's
Dialogue: 0,0:06:17.34,0:06:23.77,Default,,0000,0000,0000,,another nice feature of the FRED database.\NOn the Real GDP per capita graph, click
Dialogue: 0,0:06:23.77,0:06:32.43,Default,,0000,0000,0000,,"Edit data series" and then switch to\Npercent annual changes. So now we can see
Dialogue: 0,0:06:32.43,0:06:36.83,Default,,0000,0000,0000,,immediately the annual changes in Real\NGDP. You can see, for example, the big
Dialogue: 0,0:06:36.83,0:06:45.84,Default,,0000,0000,0000,,recession in 2008 and 2009. In 2009, for\Nexample, the economy shrank by 3.6%
Dialogue: 0,0:06:45.84,0:06:51.85,Default,,0000,0000,0000,,compared to the year before. That's a very\Nbig and a very unpleasant decline. Okay.
Dialogue: 0,0:06:51.85,0:06:56.87,Default,,0000,0000,0000,,So now you've got your hands around Real\NGDP as a way of measuring the health of
Dialogue: 0,0:06:56.87,0:07:02.13,Default,,0000,0000,0000,,our economy. And I said that Real GDP per\Ncapita is a good, albeit imperfect,
Dialogue: 0,0:07:02.13,0:07:07.76,Default,,0000,0000,0000,,measure of the average standard of living\Nin a country. But is that really true?
Dialogue: 0,0:07:07.76,0:07:13.20,Default,,0000,0000,0000,,Does an increase in Real GDP per capita\Nmean that we're better off? That's the
Dialogue: 0,0:07:13.20,0:07:16.35,Default,,0000,0000,0000,,view that I'm going to defend \Nin the next video.
Dialogue: 0,0:07:17.73,0:07:21.98,Default,,0000,0000,0000,,- [Narrator] If you want to test yourself,\Nclick "Practice Questions." Or, if you're
Dialogue: 0,0:07:21.98,0:07:28.52,Default,,0000,0000,0000,,ready to move on, you can click "Go \Nto the next video." You can
Dialogue: 0,0:07:28.52,0:07:34.15,Default,,0000,0000,0000,,also visit MRUniversity.com to see our\Nentire library of videos and resources.
Dialogue: 0,0:07:34.15,0:07:36.15,Default,,0000,0000,0000,,♪ [music] ♪