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♪ [music] ♪

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- [Professor Alex Tabarrok]
Is the economy growing?

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Are people better off today
than they were four years ago?

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What about 40 years ago?

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The GDP statistic can help us to answer
all of these questions.

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But first, we do need
to make some modifications.

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As we discussed in our first video,

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GDP sums up the prices
of all finished goods and services.

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So that means that there are two ways
the GDP can increase.

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First, prices can increase.
In this case, the GDP number goes up,

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but the economy isn't actually producing
more goods and services.

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It's inflation which is driving
the higher GDP.

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The increase in GDP
- it might look good on paper -

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but it's a mirage,
a nominal increase only.

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The other way the GDP can increase

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is if we DO produce
more valuable goods and services.

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That could mean
simply more goods and services,

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or better goods and services,
more highly-valued goods and services.

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It's this second type
of increase in GDP that we want.

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

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Real GDP measures
the second type of growth.

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And the Real GDP statistic,
it controls for inflation

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by adding up all the goods
and services produced in an economy

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using the same set of prices over time.
The same set of prices.

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Real GDP tells us - if, if the prices
of goods and services hadn't changed,

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how much would GDP
have increased, or decreased?

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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

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called the St. Louis Federal Reserve
Economic Database, or FRED.

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FRED is every economist's best friend.

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So let's Google "US nominal GDP Fred."

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Here's what we get.

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We can see that we've grown
from a GDP in 1950 of $320 billion,

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to a GDP in 2015 of over $17 trillion.

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

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But hold on, hold on,
wait a moment, you might say.

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My grandmother told me
that a loaf of bread used to cost a dime.

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And now it costs a couple of dollars.

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That's right.

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If we want to compare
our economy over time,

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we need to control
for changes in prices.

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So we don't want to look at Nominal GDP.

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We're more interested in Real GDP.

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So let's Google "Real US GDP Fred."

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Here's what we get.

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This graph measures
Real GDP in 2009 dollars.

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That means using 2009 prices.

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This graph tells us
that using 2009 prices consistently,

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that in 1950, all the goods and services
produced at that time

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were worth about $2 trillion.

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In comparison, in 2015,

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all the goods and services
produced at that time

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were worth about $16 trillion.

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So while Nominal GDP says that the economy

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is 55 times bigger in 2015 than in 1950,

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Real GDP shows us
that it's 8 times bigger.

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That's still pretty good,
but a big difference

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between Nominal GDP and Real GDP.

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Okay. So now we've controlled for prices,
but there's another big difference

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in the US economy in 1950
compared to today.

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Right - there's a lot more people today.
We can control for the population size

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by using Real GDP
per capita, or per person.

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By dividing Real GDP
by a country's population,

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we get a good, albeit imperfect, measure
of the average standard of living

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in a county.

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So once again, let's Google,
"Real GDP per capita FRED."

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Here's what we get. In 1950,

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

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In 2015, Real GDP per capita
is about $50,000.

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So on average, people in 2015
have a standard of living

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that's four times higher
than the people in 1950.

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That's a pretty big
and a remarkable increase

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in the standard of living.

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By the way, since Real GDP
increased by eight times,

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and Real GDP per capita
increased by four times,

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we know immediately

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that the population approximately doubled
between 1950 and 2015.

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Now let's take a closer look
at this graph.

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We can see another reason
why we're interested in the GDP statistic.

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Real GDP per capita
declines during recessions.

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

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Declines in Real GDP

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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.

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Now here's another nice feature
of the FRED database.

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On the Real GDP per capita graph,
click "Edit data series"

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and then switch to percent annual changes.

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So now we can see immediately
the annual changes in Real GDP.

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You can see, for example,
the big recession in 2008 and 2009.

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In 2009, for example,
the economy shrank by 3.6%

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compared to the year before.

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That's a very big
and a very unpleasant decline.

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Okay. So now you've got
your hands around Real GDP

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as a way of measuring
the health of our economy.

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And I said that Real GDP per capita
is a good, albeit imperfect, measure

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of the average standard
of living in a country.

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But is that really true?

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

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That's the 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."

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Or, if you're ready to move on,
you can click "Go to the next video."

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You can also visit MRUniversity.com

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to see our entire library
of videos and resources.

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♪ [music] ♪