Monday, November 15, 2010

Essay on GDP

Essay on GDP

Two primary ways in which GDP is measured are “Real GDP” and “Real GDP in Chain-Weighted Prices.” The first way on constructing the real GDP in base-year prices is to create a price deflator for every good that we can in the economy. That price deflator is defined as the ratio of the price for that good in some base year relative to the price of the good in the current year. The way of looking at GDP is termed the expenditures approach Real GDP in base-year prices for good A=(price good A in one year/price good A in another year) * (price * Quanity of good A in that year.). The price deflator allows us to cancel out one years prices.

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So real GDP in base-year prices is equal tot he sum of (C+I+G+X-M), where each component is expressed in real (base year) terms. The other way of measuring GDP is a little more complicated but has an advantage. Real GDP in chain-weighted prices is a result of the introduction of new goods onto the economy. So real GDP in chain-weighted prices is a better measure of output growth. That growth rate will never be revised as the result of technological progress. Growth of real GDP in chain-weighted prices is defined as the square root of {the ratio of real GDP in last year’s prices relative to nominal GDP last year} multipled by {the ratio of nominal GDP relative to real Gdp last year in this year’s prices} That's some of he ways that the annual GDP is retrieved at the end of the year.

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