AP Macroeconomics - Arlington Public Schools


Oct 28, 2013 (3 years and 7 months ago)


AP Macroeconomics

Daily Focus Objective / Question

Real GDP vs Nominal GDP, GDP
Short Falls

Created by Mr. Eric W. Breighton Underhill, All Rights Reserved

Arlington Public Schools.

Real GDP

Measures the value of all final goods and services
produced within the boundaries of a country. This is
measured over a specific time period, usually one
calendar year.

Economists use this number to determine the strength of
an economy.

Most often this number is given in terms of individual
members of a population (per capita)

RealGDP / total population = GDP / Capita

Takes into account depreciation / valuation and reflects
the changes in price level (adjusted or real)

Nominal GDP

The total value of goods and services
produced within a country using the
current market price for the good or
service. This calculation can also be made
by using prices from a specific target or
base year.

This approach may reflect a price level
increase in GDP without actual output
levels increasing.

GDP Price Index

Market Basket

a selected group of goods
and services that is compared to previous
years consumption models to measure
changes in GDP, price levels and

The Market Basket is identified by a base

Price Index Calculation

PI in a given yr = Price of Market Basket

of a specific year



Price of Same Basket in

Base Year

Calculate Real GDP

Nominal GDP

Real GDP =

Price Index (hundreths)

Short Falls of the Model

The GDP model does not include household
workers, laborers who work for their own
benefit (not traded in markets)

Accountants only receive data on market
transactions and therefore omit this sector.

The Black Market or Underground Trading.
Gamblers, smugglers, drug growers and dealers
do not have their incomes calculated in GDP.
This is because they seek to hide their incomes.

Short Falls of the Model

Leisure and Relaxation: paid vacation, paid time off,
benefit days, holidays.

This leisure time and the wage associated with it is not
included in GDP.

Quantitative values of measuring products do NOT take
into account the quality of the product or the increase in
the quality of a product. Thus GDP does not accurately
report economic well

being and improvement due to
qualitative controls.