Class 10 - GDP and CPI

Real and Nominal GDP

See Table 2 on pg 332. "Real" means adjusted for inflation. Nominal is not adjusted.

See example of Babe Ruth making $80k in 1931 and A-Rod making $28m in 2007. You have to adjust for inflation. Still, Babe Ruth's $80k in 1931 is only worth about $1m in today's dollars.

The example in table 2 shows the number of hot dogs and hamburgers fluctuating and some inflation happening at the same time.

To calculate the Real GDP, you have to use a consistent price for the hot dogs and hamburgers and ignore the inflation. Pick an arbitrary base year and use that for the fixed price.

To calculate the GDP Deflator, divide Nominal GDP by Real GDP. This is an index value. For the base year, it'll always be 100.

See Figure 2, page 335 - Real GDP in the US vs. time. 2000 is the base year.

Recession is when real GDP declines for 2 successive quarters. NBER.org is an independent, non-governmental research organization that defines when a recession begins and ends.

There is no pattern of recurrence of recessions, no consistency, no periodicity. This makes macroeconomic forecasting is very difficult.

However, you can predict the results of presidential elections based on these economic data. Only the 2000 election doesn't follow the pattern.

See Table 3 - GDP and the Quality of Life, pg 339.

Consumer Price Index - CPI

Data comes from the BLS - Bureau of Labor Statistics

CPI is set up to measure changes in the cost of living for the average US urban household.

It used to be for the avg urban "worker". Now, since it is used for COLA for social security, it includes retirees also.

They conduct surveys, focus groups, spending logs and estimate the typical budget for an urban household and where they spend their money. They construct a theoretical "basket of goods and services". They "buy" those goods and services every month and calculates how much much they cost.

The basket changes over time, slowly, as technology changes, ex: 8 track tape, cassette tapes, lps, CDs, etc. But in general, the basket is fixed.

See table 1, pg 347. Calculate the CPI as (current year cost/base year cost) x 100.

Inflation rate = [(CPI₂ - CPI₁)/CPI₁] x 100
(They don't use a midpoint formula.)

See figure 2 pg 353. CPI and GDP Deflator go together, but the CPI is more sensitive to oil prices.

European central bank considers 2% inflation to be stable prices.