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1. GDP Facts
 GDP is called the single best measure of
economic well-being.
 GDP measures both the economy’s total income
and expenditures.
 Because most people would prefer to receive
higher incomes and enjoy higher levels of
spending, GDP seems a natural measure of
economic well-being.
 But the validity of GDP as a measure of societal
well-being can be disputed on several points.

2. GDP IS NOT A PERFECT MEASURE
 Does not include the value of leisure time.
 Does not include value of labor done at home
or on a volunteer basis.
 Excludes any measure of the quality of the
environment.
 Does not account for the unequal distribution
of income.
 May overstate incomes because of inflation

3. Nominal GDP versus Real GDP
 We use GDP to evaluate whether or not our
economy is growing.
 If we produce more goods and services this year
than last year we can conclude that we are
growing and that incomes are increasing.
 Because GDP is measured by adding up our
spending on output (PRICE X quantity) this is
not always clear since prices tend to rise from
year to year.

4. Nominal GDP versus Real GDP
 Nominal GDP is the dollar amount we
spent this year on goods and services.
It is found by multiplying output bought
at current price level.
 If we have inflation or produce more
nominal GDP goes up.

5.  Real GDP is corrected for the effects of
inflation.
It is found by multiplying output
bought at a constant price level.
Calculating Real GDP(baseyear 2001):
2001 ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002 ($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) = $350
2003 ($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) = $500
 If Real GDP has increased then output
has increased.

6. Real GDP per Capita
 An even better measure of economic well-being
is GDP per capita (total GDP / total population)
 China’s total GDP is $9.24 trillion
 United Kingdom’s total GDP is $2.94 trillion
 Whose citizens are better off?
 GDP per capita in China = $11,850 ppp
 GDP per capita in UK = $46,244 ppp