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Chapter 11: Problem 3

Why do economists compute real GDP?

Short Answer

Expert verified
Economists compute real GDP to obtain an accurate measurement of economic growth. By adjusting for inflation, real GDP provides a 'real' assessment of an economy's growth, comparing the quantities of goods and services produced each year, irrespective of variations in their prices. Thus, it gives a more accurate depiction of economic performance over time.

Step by step solution

01

Understanding GDP

GDP, or Gross Domestic Product, is a measure of all the goods and services a country produces in a specific period. It is a broad measure of a nation’s overall economic activity.
02

Grasping the concept of Real GDP

Real GDP is the economic output of a country with inflation taken into account. It is a measure that adjusts GDP for changes in price level, allowing us to see an economy's 'real' growth without the impact of inflation or deflation. The 'real' in real GDP signifies that it accounts for inflation, which can distort the value of GDP. Real GDP is computed by valuing every item produced in a particular year at the same price, usually referred to as the base-year prices.
03

Reason for computing Real GDP

Economists compute real GDP to get a more detailed and accurate gauge of economic performance. It allows for comparison of economic growth from one year to another, offering a more accurate projection of economic output. By disregarding price changes and focusing on quantities produced, real GDP lets economists gauge whether production increased or decreased, regardless of changes in the price of goods and services.

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Most popular questions from this chapter

A family has six people, five of whom produce goods and services that are sold directly to consumers. One person in the family is too young to work. How would you go about measuring the family's "GDP"?

Smith earned \(40,000\) in 2003 and \(50,000\) in 2004 The CPI was 184.0 in 2003 and 188.9 in \(2004 .\) Using the data presented, how can Smith figure out whether his earnings went up by more than, less than, or equal to the change in prices?

Which of the following are included in the calculation of this year's GDP? a. Twelve-year-old Bobby mowing his family's lawn c. Barbara Wilson buying 100 shares of Chrysler Corporation stock d. Stephen Sidwhali's receipt of a Social Security check e. An illegal sale at the corner of Elm and Jefferson

Define: a. price index b. consumer price index c. aggregate demand curve d. aggregate supply curve e. unemployment rate f. employment rate

An economist wants to know whether the "average person" in country \(\mathrm{X}\) has more goods and services to consume than the "average person" in country \(Y\). Do you recommend that the economist look at per capita GDP or per capita real GDP? Explain your answer.
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