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 |  Economics, 6/e Stephen L. Slavin
Gross Domestic Product
Extra Help with Math & GraphsChapter 9. Gross Domestic Product#1: GDP versus Real GDP
Suppose that GDP rose from 10,000 in 2000 to 15,000 in 2006. How much of that increase in GDP happened because output rose and how much of that increase was due to inflation? If we know how much the GDP deflator was in 2006, we can answer both questions. OK, assume the GDP deflator were 125. See if you can tell me how much of the increase in GDP was due to an increase in output. In other words, how much was real GDP in 2006, and by what percentage did real GDP increase since 2000?
Solution: What we do is write down our formula, plug in the numbers, and solve for real GDP in 2006.| Real GDP (current year) | = GDP (current year) x | GDP deflator (base year) | | GDP deflator (current year) |
Which is the current year and which is the base year? The current year is the later year and the base year is the earlier year. So 2006 is the current year and 2000 is the base year.
| Real GDP (2006) | = GDP (2006) x | GDP deflator (2000) | | GDP deflator (2006) |
| Real GDP (2006) | = 15,000 x | 100 | | 125 |
We've substituted 15,000 for GDP in 2006 and 125 for the GDP deflator in 2006. Where did we get the 100 for the GDP deflator in 2000? The GDP deflator is always 100 in the base year. So the GDP deflator in 2000, the base year, is 100.
Now we're ready to solve the equation. We do that by placing 15,000 over 1, which will enable us to do cancellation. Remember, we can place any number over 1 without changing its value.
| Real GDP (2006) = | 1500 | x | 100 | = | 12 | x | 100 | = 12,000 | | 1 | 125 | 1 | 1 |
If real GDP rose from 10,000 to 12,000, by what percentage did real GDP rise?
| Percentage change = | Change | = | 2,000 | = 20 percent. | | original number | 10,000 |
So output rose by 20 percent between 2000 and 2006.
# 2. Calculating Per Capita GDP
Per capita GDP is the amount of money that would be available to every person in the country if its GDP were divided equally. To find per capita GDP, we use this formula:
| Per capita GDP = | GDP | | population |
If a country had a GDP of $1 trillion and a population of 200 million, find that country's per capita GDP.
| Per capita GDP = | GDP | = | $1,000,000,000,000 | = | $10,000 | = $5,000 | | population | 200,000,000 | 2 |
It's easy to make a mistake with all these zeros, so first, be sure to write out the $1 trillion and the 200 million with the proper number of zeros. Then cancel out 8 zeros from the numerator and 8 zeros from the denominator. That gives us a much more manageable $10,000 divided by 2, which comes to $5,000. |
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2002 McGraw-Hill Higher Education