Econ 100 Lecture 3

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Gross Domestic Product (GDP)

• What it Means
• How it is Calculated

GDP is the total value of goods and serviced produced by an economy in a given year

compare across countries; compare over time

Which movie had the highest gross of all time? How does "Love Story" (1970) compare?

Three answers:

• MovieWeb says "Titanic" (1997) is #1 and "Love Story" is not on the list.
• Wikipedia says that "Gone with the Wind" (1939) is #1 and "Love Story" is #70
• Box Office Mojo says that "Gone with the Wind" is #1 and "Love Story" is #33

No adjustment for inflation; adjusted for general inflation (average of all consumer prices); adjusted for movie ticket prices

Box Office Mojo says "Shrek 2" has grossed $437 million; population in 2004 of 294 million; per capita gross = $1.48

"Love Story's" ticket-price-adjusted gross is $430 million; population was 205 million; per capita gross = $2.10

If "Gone with the Wind" had used today's ticket prices, gross would be $1.2 billion, compared to Titanic's actual gross of $600 million and adjusted gross of $788 million

Nominal GDP = unadjusted gross

Inflation = change in ticket prices

Real GDP = gross adjusted for inflation

Nominal GDP is the dollar value of all goods and services produced in the economy. For example, suppose that the entire economy consisted of movies, and $4.2 billion of tickets were sold in 2003. Then nominal GDP = $4.2 billion

To Calculate Real GDP in 2003:

1. Pick a Base Year (for example, 2000)
2. Take the quantities produced in 2003 and multiply by base-year prices. For example, if 500 million movie tickets were sold in 2003, and the average price of a movie ticket in 2000 was $8, then real movie ticket sales in 2003 were $4 billion. So real GDP in 2003 is $4 billion.
3. To calculate economy-wide price level (called the GDP deflator), divide nominal GDP by real GDP. In 2003, this is $4.2 billion/$4 billion = 1.05

You can follow this procedure with two goods. For example, suppose that in addition to movies, our economy produced popcorn. $1.25 billion in popcorn in 2003, when the price of popcorn was $1.25 an ounce. Suppose that in 2000 the price of popcorn was $1.00 an ounce.

1. Let 2000 be the base year
2. In 2003, one billion ounces of popcorn were sold ($1.25 billion divided by $1.25 per ounce). Multiply by the base year price of $1 to get $1 billion in real popcorn. Add this to real movie tickets of $4 billion for total real GDP in 2003 of $5 billion.
3. Nominal GDP = $4.2 billion + $1.25 billion = $5.45 billion.
   Price deflator = $5.45 billion/$5.00 billion = 1.09

Useful formulas:

Let Q = quantity (number of movie tickets), P = price

Let 2003 be the current year and 2000 be the base year

Nominal GDP in current year = (Q_{current year})(P_{current year})

Nominal GDP in 2003 = (Q₂₀₀₃)(P₂₀₀₃)

Real GDP in current year = (Q_{current year})(P_{base year})

Real GDP in 2003 = (Q₂₀₀₃)(P₂₀₀₀)

GDP deflator = (nominal GDP)/(real GDP)

With two goods, A and B, real GDP in 2003 =
(Q^A₂₀₀₃)(P^A₂₀₀₀) + (Q^B₂₀₀₃)(P^B₂₀₀₀)