Nominal vs. Real GDP
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0:01 - 0:04♪ [music] ♪
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0:15 - 0:19- [Professor Alex Tabarrok]
Is the economy growing? -
0:19 - 0:22Are people better off today
than they were four years ago? -
0:22 - 0:25What about 40 years ago?
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0:25 - 0:31The GDP statistic can help us to answer
all of these questions. -
0:31 - 0:33But first, we do need
to make some modifications. -
0:33 - 0:34As we discussed in our first video,
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0:34 - 0:36GDP sums up the prices
of all finished goods and services. -
0:36 - 0:43So that means that there are two ways
the GDP can increase. -
0:43 - 0:50First, prices can increase.
In this case, the GDP number goes up, -
0:50 - 0:52but the economy isn't actually producing
more goods and services. -
0:52 - 0:55It's inflation which is driving
the higher GDP. -
0:55 - 1:02The increase in GDP
- it might look good on paper - -
1:02 - 1:07but it's a mirage,
a nominal increase only. -
1:07 - 1:10The other way the GDP can increase
-
1:10 - 1:11is if we DO produce
more valuable goods and services. -
1:11 - 1:13That could mean
simply more goods and services, -
1:13 - 1:16or better goods and services,
more highly-valued goods and services. -
1:22 - 1:29It's this second type
of increase in GDP that we want. -
1:29 - 1:32This isn't a mirage,
this is a real increase in GDP. -
1:32 - 1:37Real GDP measures
the second type of growth. -
1:37 - 1:39And the Real GDP statistic,
it controls for inflation -
1:39 - 1:42by adding up all the goods
and services produced in an economy -
1:42 - 1:50using the same set of prices over time.
The same set of prices. -
1:50 - 1:57Real GDP tells us - if, if the prices
of goods and services hadn't changed, -
1:57 - 2:01how much would GDP
have increased, or decreased? -
2:01 - 2:04Real GDP -it's typically
what we really care about. -
2:04 - 2:09Let's give an example.
We'll be using a fantastic tool called -
2:09 - 2:12the St. Louis Federal Reserve
Economic Database, or FRED. -
2:12 - 2:15FRED is every economist's best friend.
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2:15 - 2:23So let's Google "US nominal GDP Fred."
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2:23 - 2:26Here's what we get.
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2:26 - 2:37We can see that we've grown
from a GDP in 1950 of $320 billion, -
2:37 - 2:45to a GDP in 2015 of over $17 trillion.
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2:45 - 2:48Wow! That suggests that our economy
has gotten 55 times bigger. -
2:48 - 2:53But hold on, hold on,
wait a moment, you might say. -
2:53 - 2:56My grandmother told me
that a loaf of bread used to cost a dime. -
2:56 - 2:57And now it costs a couple of dollars.
-
2:57 - 2:59That's right.
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2:59 - 3:02If we want to compare
our economy over time, -
3:02 - 3:05we need to control
for changes in prices. -
3:05 - 3:12So we don't want to look at Nominal GDP.
-
3:12 - 3:22We're more interested in Real GDP.
So let's Google "Real US GDP Fred." -
3:22 - 3:28Here's what we get.
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3:28 - 3:29This graph measures
Real GDP in 2009 dollars. -
3:29 - 3:31That means using 2009 prices.
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3:31 - 3:39This graph tells us
that using 2009 prices consistently, -
3:39 - 3:45that in 1950, all the goods and services
produced at that time -
3:45 - 3:48were worth about $2 trillion.
In comparison, in 2015, -
3:48 - 3:54all the goods and services
produced at that time -
3:54 - 3:57were worth about $16 trillion.
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3:57 - 4:06So while Nominal GDP says that the economy
is 55 times bigger in 2015 than in 1950, -
4:06 - 4:08Real GDP shows us that it's 8 times bigger.
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4:08 - 4:11That's still pretty good,
but a big difference -
4:11 - 4:16between Nominal GDP and Real GDP.
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4:16 - 4:19Okay. So now we've controlled for prices,
but there's another big difference -
4:19 - 4:25in the US economy in 1950
compared to today. -
4:25 - 4:33Right - there's a lot more people today.
We can control for the population size -
4:33 - 4:40by using Real GDP
per capita, or per person. -
4:40 - 4:48By dividing Real GDP
by a country's population, -
4:48 - 4:50we get a good, albeit imperfect, measure
of the average standard of living -
4:50 - 4:53in a county.
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4:53 - 4:54So once again, let's Google,
"Real GDP per capita FRED." -
4:54 - 4:56Here's what we get. In 1950,
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4:56 - 5:05Real GDP per capita, measured
in constant prices, was about $14,000. -
5:05 - 5:15In 2015, Real GDP per capita
is about $50,000. -
5:15 - 5:20So on average, people in 2015
have a standard of living -
5:20 - 5:23that's four times higher
than the people in 1950. -
5:23 - 5:27That's a pretty big
-
5:27 - 5:30and a remarkable increase
in the standard of living. -
5:30 - 5:37By the way, since Real GDP
increased by eight times, -
5:37 - 5:43and Real GDP per capita
increased by four times, -
5:43 - 5:46we know immediately
-
5:46 - 5:47that the population approximately doubled
between 1950 and 2015. -
5:47 - 5:49Now let's take a closer look
at this graph. -
5:49 - 5:55We can see another reason
why we're interested in the GDP statistic. -
5:55 - 6:01Real GDP per capita
declines during recessions. -
6:01 - 6:04In fact, a decline in Real GDP
is part of what defines a recession. -
6:04 - 6:07Declines in Real GDP
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6:07 - 6:10also tend to be accompanied
by increases in unemployment. -
6:10 - 6:17You can see here that when Real GDP dips,
the unemployment rate spikes. -
6:17 - 6:24Now here's another nice feature
of the FRED database. -
6:24 - 6:32On the Real GDP per capita graph,
click "Edit data series" -
6:32 - 6:34and then switch to percent annual changes.
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6:34 - 6:37So now we can see immediately
the annual changes in Real GDP. -
6:37 - 6:46You can see, for example,
the big recession in 2008 and 2009. -
6:46 - 6:49In 2009, for example,
the economy shrank by 3.6% -
6:49 - 6:50compared to the year before.
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6:50 - 6:52That's a very big
and a very unpleasant decline. Okay. -
6:52 - 6:57So now you've got your hands
around Real GDP -
6:57 - 6:59as a way of measuring
the health of our economy. -
6:59 - 7:02And I said that Real GDP per capita
is a good, albeit imperfect, measure -
7:02 - 7:05of the average standard
of living in a country. -
7:05 - 7:08But is that really true?
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7:08 - 7:13Does an increase in Real GDP per capita
mean that we're better off? -
7:13 - 7:16That's the view that I'm going
to defend in the next video. -
7:18 - 7:22- [Narrator] If you want to test yourself,
click "Practice Questions." -
7:22 - 7:29Or, if you're ready to move on,
you can click "Go to the next video." -
7:29 - 7:31You can also visit MRUniversity.com
-
7:31 - 7:34to see our entire library
of videos and resources. -
7:34 - 7:36♪ [music] ♪
- Title:
- Nominal vs. Real GDP
- Description:
-
"Are you better off today than you were 4 years ago? What about 40 years ago?"
These sorts of questions invite a different kind of query: what exactly do we mean, when we say “better off?” And more importantly, how do we know if we’re better off or not?
To those questions, there’s one figure that can shed at least a partial light: real GDP.
In the previous video, you learned about how to compute GDP. But what you learned to compute was a very particular kind: the nominal GDP, which isn’t adjusted for inflation, and doesn’t account for increases in the population.
A lack of these controls produces a kind of mirage.
For example, compare the US nominal GDP in 1950. It was roughly $320 billion. Pretty good, right? Now compare that with 2015’s nominal GDP: over $17 trillion.
That’s 55 times bigger than in 1950!
But wait. Prices have also increased since 1950. A loaf of bread, which used to cost a dime, now costs a couple dollars. Think back to how GDP is computed. Do you see how price increases impact GDP?
When prices go up, nominal GDP might go up, even if there hasn’t been any real growth in the production of goods and services. Not to mention, the US population has also increased since 1950.
As we said before: without proper controls in place, even if you know how to compute for nominal GDP, all you get is a mirage.
So, how do you calculate real GDP? That’s what you’ll learn today.
In this video, we’ll walk you through the factors that go into the computation of real GDP.
We’ll show you how to distinguish between nominal GDP, which can balloon via rising prices, and real GDP—a figure built on the production of either more goods and services, or more valuable kinds of them. This way, you’ll learn to distinguish between inflation-driven GDP, and improvement-driven GDP.
Oh, and we’ll also show you a handy little tool named FRED — the Federal Reserve Economic Data website.
FRED will help you study how real GDP has changed over the years. It’ll show you what it looks like during healthy times, and during recessions. FRED will help you answer the question, “If prices hadn’t changed, how much would GDP truly have increased?”
FRED will also show you how to account for population, by helping you compute a key figure: real GDP per capita. Once you learn all this, not only will you see past the the nominal GDP-mirage, but you’ll also get an idea of how to answer our central question:
"Are we better off than we were all those years ago?"
Macroeconomics Course: http://www.mruniversity.com/courses/principles-economics-macroeconomics
Ask a question about the video: http://www.mruniversity.com/courses/principles-economics-macroeconomics/real-versus-nominal-gdp#QandA
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Macro
- Duration:
- 07:41
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Jenny Lam edited English subtitles for Nominal vs. Real GDP | ||
Jenny Lam edited English subtitles for Nominal vs. Real GDP | ||
Jenny Lam edited English subtitles for Nominal vs. Real GDP | ||
Jenny Lam edited English subtitles for Nominal vs. Real GDP |