Why Do Economists Use Real GDP Rather Than Nominal GDP To Gauge Economic Well
1. Why do economists use real GDP rather than nominal GDP to gauge economic well-being?
Real GDP is the production of goods and services valued at constant prices. Nominal GDP is the production of goods and services valued at current prices.
Real GDP rather than nominal GDP to gauge economic well-being because real GDP is not affected by changes in prices, so it reflects only changes in the amounts being produced. If nominal GDP rises, you do not know if that is because of increased production or higher prices.
2. Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising. However, these two statistics may not always tell the same story. Discuss two important differences that can cause them to diverge.
The first difference : the GDP deflator reflects the prices of all goods and services produced domestically the consumer price index reflects the prices of all goods and services bought by consumers.
For example : suppose that the price of an airplane produced by Boeing and sold to the Air Force rises. Even though the plane is part of GDP, it is not part of the basket of goods and services bought by a typical consumer. Thus, the price increase shows up in the GDP deflator but not in the consumer price index
The second difference:
( concerns how various prices are weighted to yield a single number for the overall level of prices)
The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year
(This difference is not important when all prices are changing proportionately. But if the prices of different goods and services are changing by varying amounts, the way we weight the various prices matters for the overall inflation rate.)
3. Describe the three problems that make the consumer price index an
Real GDP is the production of goods and services valued at constant prices. Nominal GDP is the production of goods and services valued at current prices.
Real GDP rather than nominal GDP to gauge economic well-being because real GDP is not affected by changes in prices, so it reflects only changes in the amounts being produced. If nominal GDP rises, you do not know if that is because of increased production or higher prices.
2. Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising. However, these two statistics may not always tell the same story. Discuss two important differences that can cause them to diverge.
The first difference : the GDP deflator reflects the prices of all goods and services produced domestically the consumer price index reflects the prices of all goods and services bought by consumers.
For example : suppose that the price of an airplane produced by Boeing and sold to the Air Force rises. Even though the plane is part of GDP, it is not part of the basket of goods and services bought by a typical consumer. Thus, the price increase shows up in the GDP deflator but not in the consumer price index
The second difference:
( concerns how various prices are weighted to yield a single number for the overall level of prices)
The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year
(This difference is not important when all prices are changing proportionately. But if the prices of different goods and services are changing by varying amounts, the way we weight the various prices matters for the overall inflation rate.)
3. Describe the three problems that make the consumer price index an