February 3, 2017

Nominal GDP vs Real GDP

Nominal GDP is value of output produce in current prices 
Price times Quantity can increase from year to year, it either output increase or prices increases

Real GDP is  the value of output produce inconstant base year prices adjusted for inflation 
measure economic growth use real GDP 
in the base year can increase year to year only its output can increases (only the quantity)

In the base year nominal and real GDP are equal. In years after the base year nominal exceed real GDP. In years before  the base year real GDP exceed nominal.
Real GDP = current quantity x base prices
GDP deflator- it is a price index use to adjust nominal to real GDP
Formula Nominal GDP/ Real GDP x 100

Consumer Price Index measure inflation by tracking changes in the price off a market basket of goods  for example (car, motorcycle)

Price a market basket of goods in a current year/ Price of market basket of goods in a base year x 100 Feburary 6, 2017

Inflation is a general rise in price level it reduces the purchasing power of a dollar
purchasing power is an amount of good and services that money buys


3 Causes of inflation
1) the government prints too much money ( the quality theory)
2) Demand pull inflation
too many dollars chasing too few goods excess of demand over output that pull prices upward
3) cost push inflation higher production costs increase prices

standard Inflation is 2to 3% inflation rate formula
Current - base/ base year price index x100

Rule of 70 is used to calcite the number of year it will take for the price level to double at any given rate of inflation

70/ annual inflation rate

Deflation vernal decline in the price level

Disinflation it occurs when the inflation rate it self declines

Real interest rate - the percentage increase in purchasing power that a borrower pays to the lender (adjusted for inflation)
Real = nominal interest rate - expected inflation

Hurt by inflation

• lenders  - people who fixed money (at fixed interest rates) 
• people with fixed incomes 
• savers 

Helped by inflation

• borrowers - people who brows money 
• a business where the price of the product increases faster than the price of resources 

Cost of living adjustment ( COLA)

Some Works have salaries that mirror inflation they negotiated wages that rise with inflation