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Nominal vs. Real GDP
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Nominal vs. Real GDP

Introduction to GDP

In this video, we learn about Gross Domestic Product (GDP), which is a measure of the economic output of a country. We explore how GDP can be used to answer questions about the economy and discuss the two ways in which GDP can increase.

Understanding GDP

  • Alex asks if the economy is growing and if people are better off today than they were four years ago.
  • The GDP statistic helps us answer these questions by measuring the total value of all finished goods and services produced in an economy.
  • There are two ways that GDP can increase: prices can increase or more valuable goods and services can be produced.
  • If prices increase, it's inflation driving higher GDP, but it's not real growth.
  • Real growth occurs when more valuable goods and services are produced.

Real vs Nominal GDP

  • Real GDP measures the second type of growth by controlling for inflation using a set of constant prices over time.
  • Real GDP tells us how much would have been produced if prices had not changed over time.
  • Nominal GDP does not control for changes in prices, so it doesn't give an accurate picture of economic growth over time.

Using FRED to Analyze US Economic Growth

  • The St. Louis Federal Reserve Economic Database (FRED) is a useful tool for analyzing economic data.
  • Comparing nominal and real US GDP from 1950 to 2015 shows that while nominal GDP suggests the economy has grown 55 times bigger, real GDP shows it has only grown eight times bigger when adjusted for inflation.
  • Real GDP per capita is a better measure of the average standard of living in a country because it controls for changes in population size.

Real GDP and Standard of Living

In this section, we learn about the relationship between real GDP and standard of living. We also see how recessions affect real GDP and unemployment rates.

Real GDP per capita

  • In 2015, real GDP per capita is about $50,000.
  • People in 2015 have a standard of living that's four times higher than people in 1950.
  • The population approximately doubled between 1950 and 2015.

Real GDP as a measure of the economy's health

  • Real GDP per capita declines during recessions.
  • A decline in real GDP is part of what defines a recession.
  • Declines in real GDP tend to be accompanied by increases in unemployment.
  • When real GDP dips, the unemployment rate spikes.

Annual changes in Real GDP

  • On the Real GDP per capita graph, click "Edit data series" and then switch to percent annual changes.
  • We can see immediately the annual changes in Real GDP.
  • For example, the big recession in 2008 and 2009 caused the economy to shrink by 3.6% compared to the year before.

Is an increase in Real GDP per capita indicative of better living standards?

  • An increase in Real GDP per capita means that we're better off.
  • This view will be defended further in the next video.

Overall, this section explains how real GDP is used as a measure of economic health and how it relates to standard of living. We also learn about the impact of recessions on real GDP and unemployment rates. Finally, we see how annual changes in Real GDP can be visualized and analyzed.

Playlists: Economics [Intermediate] Pt.1 Principles of Economics: Macroeconomics Unit 1: GDP
Video description

"Are you better off today than you were 4 years ago? What about 40 years ago?" These sorts of questions invite a different kind of query: what exactly do we mean, when we say “better off?” And more importantly, how do we know if we’re better off or not? To those questions, there’s one figure that can shed at least a partial light: real GDP. In the previous video, you learned about how to compute GDP. But what you learned to compute was a very particular kind: the nominal GDP, which isn’t adjusted for inflation, and doesn’t account for increases in the population. A lack of these controls produces a kind of mirage. For example, compare the US nominal GDP in 1950. It was roughly $320 billion. Pretty good, right? Now compare that with 2015’s nominal GDP: over $17 trillion. That’s 55 times bigger than in 1950! But wait. Prices have also increased since 1950. A loaf of bread, which used to cost a dime, now costs a couple dollars. Think back to how GDP is computed. Do you see how price increases impact GDP? When prices go up, nominal GDP might go up, even if there hasn’t been any real growth in the production of goods and services. Not to mention, the US population has also increased since 1950. As we said before: without proper controls in place, even if you know how to compute for nominal GDP, all you get is a mirage. So, how do you calculate real GDP? That’s what you’ll learn today. In this video, we’ll walk you through the factors that go into the computation of real GDP. We’ll show you how to distinguish between nominal GDP, which can balloon via rising prices, and real GDP—a figure built on the production of either more goods and services, or more valuable kinds of them. This way, you’ll learn to distinguish between inflation-driven GDP, and improvement-driven GDP. Oh, and we’ll also show you a handy little tool named FRED — the Federal Reserve Economic Data website. FRED will help you study how real GDP has changed over the years. It’ll show you what it looks like during healthy times, and during recessions. FRED will help you answer the question, “If prices hadn’t changed, how much would GDP truly have increased?” FRED will also show you how to account for population, by helping you compute a key figure: real GDP per capita. Once you learn all this, not only will you see past the nominal GDP-mirage, but you’ll also get an idea of how to answer our central question: "Are we better off than we were all those years ago?" Macroeconomics Course: http://bit.ly/39ltfFi Next video: http://bit.ly/3bsTBXh Help us caption & translate this video! http://amara.org/v/H0PX/ 00:00 Intro 00:36 2 Ways GDP Can Increase 01:31 Real GDP 02:05 Example - US Nominal GDP FRED 03:13 Example - Real US GDP FRED 04:14 Real GDP Per Capita (Controlling for Population Changes) 04:47 Example - Real US GDP Per Capita FRED 05:44 Recessions 06:16 Percent Annual Changes