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Real GDP and Ination

Macroeconomics I

ECON222

Fall 2017

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Macroeconomic data in the national accounts are in nominal terms
(current prices)
,! they vary over time due to changes in quantities of goods/services
and changes in prices

But we want measures that reect only the change in quantities


,! that is we want to convert macroeconomic data into real terms
(constant prices)
,! for example, has real GDP increased over time?

Real GDP and price indexes are always dened relative to some base
year
,! the value of the index depends on the choice of base year

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Price Indexes

The GDP (implicit price) deator:

nominal GDP
GDP deator = 100
real GDP
,! reects changes in the prices of all goods/services included in GDP

The consumer price index (CPI):

current cost of basket of consumer goods


CPI = 100
cost of same basket in some base year
,! a weighted average of consumer goods prices
,! base year has to be updated to reect changes in tastes

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Example: Canadian real GDP since 1981

StatsCan publishes nominal GDP and a GDP deator (2007 base year)

We can then compute real GDP (2007 base year):

Real GDP Nominal GDP in year t


=
in year t GDP deator in year t / 100

To put into per person terms (2007 base year):

Real GDP per Real GDP in year t


=
person in year t Population in year t

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Implications

Real Canadian GDP per person was 27% higher in 2016 than in 1997.

Real GDP per person grew in most years, but fell in some

The average annual growth rate was 1.2%.

Like interest rates, growth rates are compounded over time


,! if annual growth were constant at 1.2%, over 20 years growth would
be calculated as
(1.012)20 1 = 0.27

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Ination

A measure of the growth in the cost of living

Usually measured as the growth in the CPI

If the CPI in year t is Pt , then ination between t and t + 1 is


Pt +1 Pt
t +1 =
Pt

The Canadian ination rate is currently around 2% but has been


much higher in the past

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Figure: Recent Ination

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