8.2 Real GDP, GDP per Capita and Economic Growth

Notes

• Nominal GDP uses current prices. It can rise just because prices rise.
• Real GDP is adjusted for price changes, so it measures changes in actual output. Using a price index called the GDP deflator: $\displaystyle \text{Real GDP} = \frac{\text{Nominal GDP}}{\text{price index}} \times 100$.
• Worked example: nominal GDP is $500 billion and the price index is 125. Real GDP is $\displaystyle \frac{500}{125} \times 100 = 400$, or $400 billion in base-year dollars.
• GDP per capita $\displaystyle = \frac{GDP}{\text{population}}$, a rough measure of the average standard of living. $2 trillion divided among 50 million people is $40,000 per person.
• Economic growth rate is the percent change in real GDP: $\displaystyle \frac{\text{new} - \text{old}}{\text{old}} \times 100\%$. Real GDP growing from $800 billion to $824 billion is $\displaystyle \frac{24}{800} = 3\%$ growth.
• Growth comes from more and better resources: capital deepening (more capital per worker), human capital, technology and good institutions.
• Limits of GDP: it ignores leisure, unpaid work, the environment, how income is shared and other parts of quality of life.