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Chapter 7: Problem 10

Economists prefer to compare Real GDP figures for different years instead of comparing GDP figures. Why?

Short Answer

Expert verified
Economists prefer to compare Real GDP figures because it eliminates the effects of inflation and presents a more accurate picture of a country's economic growth or contraction.

Step by step solution

01

Understanding GDP

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. It serves as a comprehensive scorecard of a country’s economic health.
02

Understanding Real GDP

Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices, often used to compare the economic growth of countries. Real GDP is a 'constant dollar' figure without the impacts of inflation or deflation.
03

Reason for Comparing Real GDP

Economists prefer comparing 'Real GDP' figures for different years because it allows for the comparison of economic output from one year to another, taking into account the effects of inflation. Comparing Real GDP figures essentially allows economists to draw conclusions about the growth or contraction of an economy, eliminating the distortion caused by inflation or deflation. Comparing nominal GDP figures could be misleading because they can be inflated by price increases rather than actual growth.

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Most popular questions from this chapter

Why does GDP omit the sales of used goods? Of financial transactions? Of government transfer payments?

Discuss the problems you see in comparing the GDPs of two countries, say, the United States and the People's Republic of China.

Which of the following are included in the calculation of this year's GDP? (a) 12 -year-old Johnny mowing his family's lawn; (b) Dave Malone buying a used car; (c) Barbara Wilson buying a bond issued by General Motors; (d) Ed Ferguson's receipt of a Social Security payment; and (e) the illegal drug transaction at the corner of \(\mathrm{Elm}\) and Fifth.

The manuscript for this book was keyed by the author. Had he hired someone to do the keying, GDP would have been higher than it was. What other activities would increase GDP if they were done differently? What activities would decrease GDP if they were done differently?

In the first quarter of the year, Real GDP was \(\$ 400\) billion; in the second quarter, it was \(\$ 398\) billion; in the third quarter, it was \(\$ 399\) billion; and in the fourth quarter, it was \(\$ 395\) billion. Has there been a recession? Explain your answer.
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