1-3.3. GDP: Improvements in Real GDP Measurement
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So, we can actually find out how much the economy grew between these two
years using the same set of prices, because there are fewer changes in one
year compared to a longer period, the error is minimized here.
You can actually do this quarterly and reduce the error even further.
So when you want to calculate real GDP of 2015,
we start by first calculating nominal GDP of 2014
in its own prices calculating the GDP of 2015.
In the prices of 2014, we get two comparable numbers.
We compare the growth rate in that period and then use it for
comparing with GDP of 2015 with other years.
Which, I'm going to show you how that can be done.
Same thing for 2016.
Now, how to calculate GDP growth over many years.
Here, I've highlighted different numbers
that are comparable over the years so we can calculate growth rate.
For example, growth rate over time.
For example, we have growth rate of GDP in 2014,
being equal to 0 based on comparing nominal GDP of 2013,
and GDP of 2014 calculated in 2013 prices.
We do the same thing for 2015.
Here is the number.
We've taken the GDP of 2015, calculating the previous year prices,
compared it with the nominal GDP of the previous year,
come up with a growth rate of 6.7% and then we do the same thing for 2016.
If you want to compare everything over longer period of time,
we start with our base here, in this case we have 2013.
We get GDP of 100, we know that there was 0 growth in 2014,
so we increase this $100 at growth rate of 0, we get $100.
Then we increase the GDP of 2014 by the 6.7% growth that we saw in 2015,
and then we get the number here 106.70.
And finally,
we use the GDP of 2015 times
the growth rate that we experience in 2016 and
find out what the GDP should be in 2016.
Now, we have a series of numbers here, down here that are comparable.
They are all in terms of the dollars of 2013, and only increase
by the real growth rates from one year to the next, or one period to the next.
This new measure is called,
GDP in constant dollars, as opposed to constant prices.
You're keeping the processing power of the dollar equal to what it was in 2013
in our base year, and calculate the GDP of every year in terms of those dollars.
In terms of the purchasing power of the dollar in that base year.