Macroeconomics

‭due‬‭to‬‭changing‬‭price‬‭levels.‬‭By‬‭dividing‬‭nominal‬‭GDP‬‭by‬‭the‬‭GDP‬‭deflator,‬‭we‬‭arrive‬‭at‬‭the‬‭real‬ ‭GDP, which reflects economic output as if prices had remained constant.‬ ‭●‬ ‭Signifcance‬ ‭of‬ ‭Correcting‬ ‭for‬ ‭Price‬ ‭Index‬ ‭Changes:‬ ‭Correcting‬ ‭GDP‬ ‭for‬ ‭price‬‭index‬‭changes‬ ‭provides‬‭a‬‭clearer‬‭picture‬‭of‬‭an‬‭economy's‬‭actual‬‭growth.‬‭It's‬‭like‬‭peeling‬‭away‬‭the‬‭layer‬‭of‬‭price‬ ‭fluctuations‬ ‭to‬ ‭see‬ ‭the‬ ‭genuine‬ ‭changes‬ ‭in‬ ‭production‬ ‭and‬ ‭consumption.‬ ‭This‬ ‭is‬ ‭particularly‬ ‭important‬ ‭for‬ ‭comparing‬‭economic‬‭performance‬‭over‬‭different‬‭periods‬‭or‬‭assessing‬‭the‬‭impact‬ ‭of inflation or deflation on economic well-being.‬

‭●‬ ‭Informed‬ ‭Economic‬ ‭Analysis:‬ ‭By‬ ‭utilizing‬ ‭real‬ ‭GDP,‬ ‭economists,‬ ‭policymakers,‬ ‭and‬ ‭analysts‬ ‭can‬ ‭better‬ ‭understand‬ ‭the‬ ‭impact‬ ‭of‬ ‭changing‬ ‭prices‬ ‭on‬ ‭economic‬ ‭output.‬ ‭This‬ ‭allows‬ ‭for‬ ‭more‬ ‭accurate‬ ‭economic‬‭forecasting,‬‭informed‬‭policy‬‭decisions,‬‭and‬ ‭a‬ ‭deeper‬ ‭comprehension‬ ‭of‬ ‭how‬ ‭various‬ ‭economic‬ ‭factors interplay.‬ ‭Example of Correcting GDP for Price Index Changes Using Real GDP:‬

‭In‬ ‭the‬ ‭year‬‭2020,‬‭the‬‭nominal‬‭GDP‬‭for‬‭an‬‭economy‬‭is‬‭calculated‬‭to‬‭be‬‭$10‬‭million.‬‭However,‬‭we‬‭know‬ ‭that‬ ‭over‬ ‭time,‬ ‭prices‬ ‭tend‬ ‭to‬ ‭change.‬ ‭Due‬ ‭to‬ ‭inflation,‬ ‭the‬ ‭general‬ ‭price‬ ‭level‬ ‭has‬ ‭increased‬ ‭by‬ ‭5%‬ ‭compared to 2019.‬ ‭●‬ ‭Step 1: Nominal GDP Calculation for 2020:‬ ‭Nominal‬‭GDP (2020) = $10 million.‬ ‭●‬ ‭Step‬ ‭2:‬ ‭Calculating‬ ‭the‬ ‭GDP‬ ‭Deflator‬ ‭for‬ ‭2020:‬ ‭The‬ ‭GDP‬ ‭deflator‬ ‭reflects‬ ‭the‬ ‭average‬ ‭price‬ ‭level‬‭in‬‭the‬‭economy.‬‭If‬‭we‬‭assume‬‭that‬‭the‬‭base‬‭year‬‭is‬‭2019‬‭(which‬‭is‬‭often‬‭chosen‬‭arbitrarily),‬ ‭the GDP deflator for 2020 relative to 2019 is calculated as follows:‬ ‭GDP deflator (2020) = (Price of market basket in 2020/Price of market basket in 2019) × 100 =‬ ‭(105/100) × 100 = 105‬ ‭●‬ ‭Step‬‭3:‬‭Calculating‬‭Real‬‭GDP‬‭for‬‭2020:‬ ‭Using‬‭the‬‭GDP‬‭deflator,‬‭we‬‭can‬‭calculate‬‭the‬‭real‬‭GDP‬ ‭for 2020 by adjusting the nominal GDP for changes in the price index:‬ ‭●‬ ‭Step‬‭4:‬‭Analyzing‬‭the‬‭Result:‬ ‭In‬‭this‬‭example,‬‭the‬‭nominal‬‭GDP‬‭is‬‭$10‬‭million,‬‭whereas‬‭the‬‭real‬ ‭GDP‬‭is‬‭around‬‭$9.523‬‭million.‬‭Without‬‭adjusting‬‭for‬‭the‬‭price‬‭increase‬‭due‬‭to‬‭inflation,‬‭it‬‭might‬ ‭seem‬‭like‬‭the‬‭economy‬‭has‬‭produced‬‭an‬‭output‬‭value‬‭of‬‭$10‬‭million.‬‭By‬‭calculating‬‭the‬‭real‬‭GDP‬ ‭using‬‭the‬‭GDP‬‭deflator,‬‭we‬‭see‬‭that‬‭the‬‭economy's‬‭real‬‭output‬‭is‬‭actually‬‭lower‬‭than‬‭that,‬‭as‬‭the‬ ‭higher‬‭nominal‬‭GDP‬‭was‬‭due‬‭to‬‭price‬‭inflation.‬‭This‬‭example‬‭showcases‬‭how‬‭real‬‭GDP‬‭helps‬‭us‬ ‭understand‬‭the‬‭genuine‬‭changes‬‭in‬‭economic‬‭output‬‭by‬‭removing‬‭the‬‭effects‬‭of‬‭changing‬‭prices.‬ ‭It‬ ‭highlights‬ ‭the‬ ‭signifcance‬ ‭of‬ ‭correcting‬ ‭GDP‬‭for‬‭price‬‭index‬‭changes‬‭to‬‭get‬‭a‬‭more‬‭accurate‬ ‭picture of an economy's performance over time.‬ ‭Real GDP (2020) = (Nominal GDP 2020/GDP Deflator 2020) × 100‬ ‭Real GDP (2020) = ($10 million/105) × 100 ≈ $9.523 million‬

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