Gross Domestic Product, also known as GDP, can help tell us the health of our economy. It indicates the size of our economy and the rate of our economic growth or contraction. In other words, it’s the indicator that helps us gauge how we are doing with the goal, a promoting long-run economic growth. But GDP can be deceiving. It may appear to be doing one thing but actually might be doing another. Using inaccurate GDP data can provide false conclusions about how an economy is doing and therefore misguide economists and policymakers, which can make economic problems worse.
So, it’s really important to use the most accurate GDP data possible. The biggest contributor to false GDP data is inflation. Inflation is the general rising of prices over time. An inflation can cause gross domestic product to appear larger than it actually is, giving us the false conclusion that the economy is growing when it actually is [falling].
We must take inflation into account when investigating gross domestic product and comparing GDP to other countries, other years, and the public policy. As a result, there are two types of GDP: nominal GDP and real GDP.
Nominal GDP is the dollar value of all final goods and services produced within the country’s borders in one year, expressed in a current dollar value, meaning it is unadjusted for inflation. For example, to calculate the nominal GDP in 2015, we would use 2015 prices and 2015 output. To calculate the nominal GDP in 2016, we would use 2016 prices and 2016 output.
Real GDP is the dollar value of all final goods and services produced within a country borders in one year, expressed in constant dollar value, meaning it is adjusted for inflation.
When comparing GDP between two years to investigate whether an economy has experienced growth or contraction, nominal GDP can be inaccurate. Because if inflation has occurred between those two years, nominal GDP can increase due to an increase in price level, even if the economy contracted or production remained the same nationwide. In other words, nominal GDP can increase simply because goods and services are more expensive not because the economy actually increased its output and experience GDP growth. As a result, the most accurate way to gauge economic growth or contraction is with real GDP. And in order to calculate real GDP, gross domestic product must be counted using a constant dollar value for every year of comparison. Using a constant dollar value eliminates the effects of inflation and tells us the real value of what a country produced in a given year.
For example, when using price level and domestic output for the United States in 2015, the US nominal GDP in 2015 is 5 million dollars. When using price level and domestic output for 2016, the United States’ nominal GDP in 2016 is 10 million dollars. Nominally, it appears that the United States has doubled its GDP between 2015 and 2016; however, we can also see that price levels doubled between those two years. In order to determine whether or not the United States truly experienced economic growth in 2016, we need to use a constant dollar value and adjust for inflation that has occurred between the two years, thus giving us the United States real GDP for 2016. To find the 2016 real GDP for the United States, we must use the 2016 domestic output and multiply it by the 2015 prices. When adjusting for inflation, we can conclude that the United States’ real GDP in 2016 was 5 million dollars. As a result, we can conclude that the United States gross domestic product in 2016 remains stagnant, meaning that it did not produce any more goods and services than it did in 2015. And the apparent growth in nominal GDP was due entirely to inflation.
In this example, we’ll analyze GDP data for the country of Germany. When using prices and domestic output for 2015, we can determine that Germany’s nominal GDP in 2015 was 10 million euro. When using prices and domestic output for 2016, we can determine that Germany’s nominal GDP in 2016 was 12 million euro. Nominally, it would appear that Germany’s GDP experienced 2 million euro of economic growth in 2016. But to truly determine if the economy grew in Germany, we must find the 2016 real GDP by using 2016 domestic output and 2015 price levels. When adjusting for inflation, we can determine that Germany’s real GDP in 2016 was 7.5 million euro. When comparing nominal GDP in 2015 with real GDP in 2016, we can conclude that the German GDP contracted by 2.5 million euro in 2016. Nominally, it appeared Germany experienced economic growth but that was due entirely to inflation. In fact, Germany experienced economic contraction in 2016.
This is a great example of how inflation can make nominal GDP data inaccurate and why it is important to find real GDP. When determining whether or not a country is accomplishing the goal of promoting long-run economic growth, real GDP gives you the real story.
WORD BANK:
contraction /kənˈtræk.ʃən/ (n): sự suy giảm
indicator /ˈɪn.dɪ.keɪ.tər/ [C2] (n): chỉ số
gauge /ɡeɪdʒ/ (v): đánh giá, đo lường
promote /prəˈməʊt/ [B2] (v): thúc đẩy
deceiving /dɪˈsiːv ɪŋ/ (adj): lừa dối
inaccurate /ɪnˈæk.jə.rət/ [B2] (adj): không chính xác
misguide /ˌmɪsˈɡaɪ.d/ (v): gây hiểu lầm
contributor to sth /kənˈtrɪb.jə.tər/ (n): yếu tố tác động tới cái gì
inflation /ɪnˈfleɪ.ʃən/ [B2] (n): lạm phát
take sth into account [B2] (v): cân nhắc điều gì
investigate /ɪnˈves.tɪ.ɡeɪt/ [B2] (v): điều tra
nominal GDP (business term): GDP danh nghĩa
real GDP (business term): GDP thực tế
adjust /əˈdʒʌst/ [B2] (v): điều chỉnh
constant /ˈkɒn.stənt/ [B2] (adj): không đổi, ổn định
contract /ˈkɒn.trækt/ [B1] (v): suy giảm
nationwide /ˌneɪ.ʃənˈwaɪd/ [B2] (adv): trên toàn quốc
eliminate /iˈlɪm.ɪ.neɪt/ [C1] (v): loại bỏ
determine /dɪˈtɜː.mɪn/ [C1] (v): xác định
multiply sth by sth /ˈmʌl.tɪ.plaɪ/ (v): nhân cái gì với cái gì
stagnant /ˈstæɡ.nənt (adj): trì trệ
analyze /ˈæn.əl.aɪz/ (v): phân tích
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