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- [Professor Alex Tabarrok] Is the economy growing? 
Are people better off today than they were

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four years ago? What about 40 years
ago? The GDP statistic can help us to

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answer all of these questions. But first,
we do need to make some modifications. As

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we discussed in our first video, GDP sums
up the prices of all finished goods and

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services. So that means that there are two
ways the GDP can increase. First, prices

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can increase. In this case, the GDP number
goes up, but the economy isn't actually

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producing more goods and services. It's
inflation which is driving the higher GDP.

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The increase in GDP - it might look good on
paper - but it's a mirage, a nominal

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increase only. The other way the GDP can
increase is if we DO produce more valuable

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goods and services. That could mean simply
more goods and services, or better goods

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and services, more highly-valued goods and
services. It's this second type of

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increase in GDP that we want. This isn't a
mirage, this is a real increase in GDP.

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Real GDP measures the second type of
growth. And the Real GDP statistic, it

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controls for inflation by adding up all
the goods and services produced in an

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economy using the same set of prices over
time. The same set of prices. Real GDP

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tells us - if, if the prices of goods and
services hadn't changed, how much would

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GDP have increased, or decreased? Real GDP -
it's typically what we really care about.

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Let's give an example. We'll be using a
fantastic tool called the St. Louis

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Federal Reserve Economic Database, or
FRED. FRED is every economist's best

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friend. So let's Google "US nominal GDP
Fred." Here's what we get. We can see that

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we've grown from a GDP in 1950 of $320
billion, to a GDP in 2015 of over $17

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trillion. Wow! That suggests that our
economy has gotten 55 times bigger. But

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hold on, hold on, wait a moment, you might
say. My grandmother told me that a loaf of

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bread used to cost a dime. And now it
costs a couple of dollars. That's right.

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If we want to compare our economy over
time, we need to control for changes in

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prices. So we don't want to look at
Nominal GDP. We're more interested in Real

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GDP. So let's Google "Real US GDP Fred."
Here's what we get. This graph measures

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Real GDP in 2009 dollars. That means using
2009 prices. This graph tells us that

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using 2009 prices consistently, that in
1950, all the goods and services produced

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at that time were worth about $2 trillion.
In comparison, in 2015, all the goods and

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services produced at that time were worth
about $16 trillion. So while Nominal GDP

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says that the economy is 55 times bigger
in 2015 than in 1950, Real GDP shows us

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that it's 8 times bigger. That's still
pretty good, but a big difference between

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Nominal GDP and Real GDP. Okay. So now
we've controlled for prices, but there's

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another big difference in the US economy
in 1950 compared to today. Right - there's

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a lot more people today. We can control
for the population size by using Real GDP

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per capita, or per person. By dividing
Real GDP by a country's population, we get

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a good, albeit imperfect, measure of the
average standard of living in a county. So

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once again, let's Google, "Real GDP per
capita FRED." Here's what we get. In 1950,

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Real GDP per capita, measured in constant
prices, was about $14,000. In 2015, Real

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GDP per capita is about $50,000. So on
average, people in 2015 have a standard of

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living that's four times higher than the
people in 1950. That's a pretty big and a

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remarkable increase in the standard of
living. By the way, since Real GDP

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increased by eight times, and Real GDP per
capita increased by four times, we know

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immediately that the population
approximately doubled between 1950 and

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2015. Now let's take a closer look at
this graph. We can see another reason why

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we're interested in the GDP statistic.
Real GDP per capita declines during

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recessions. In fact, a decline in Real
GDP is part of what defines a recession.

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Declines in Real GDP also tend to be
accompanied by increases in unemployment.

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You can see here that when Real GDP dips,
the unemployment rate spikes. Now here's

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another nice feature of the FRED database.
On the Real GDP per capita graph, click

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"Edit data series" and then switch to
percent annual changes. So now we can see

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immediately the annual changes in Real
GDP. You can see, for example, the big

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recession in 2008 and 2009. In 2009, for
example, the economy shrank by 3.6%

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compared to the year before. That's a very
big and a very unpleasant decline. Okay.

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So now you've got your hands around Real
GDP as a way of measuring the health of

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our economy. And I said that Real GDP per
capita is a good, albeit imperfect,

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measure of the average standard of living
in a country. But is that really true?

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Does an increase in Real GDP per capita
mean that we're better off? That's the

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view that I'm going to defend 
in the next video.

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- [Narrator] If you want to test yourself,
click "Practice Questions." Or, if you're

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ready to move on, you can click "Go 
to the next video." You can

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also visit MRUniversity.com to see our
entire library of videos and resources.

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