Week 2 — Measuring Output: Gross Domestic Product

Welcome to your Week 2 Start Here page.

Why this matters

A small-business owner checking whether customers are spending more and a city budget office planning next year's tax revenue both need to tell real growth from higher prices.

In plain language

Every year an economy makes millions of different things, from haircuts to houses. This week you learn how economists add all of it up into one number, gross domestic product, or GDP (the market value of everything newly made inside a country in a year). You will add up spending in four groups, decide which sales count and which do not, and learn why a bigger number does not always mean more stuff was made. The key move is to separate nominal values (measured at today's prices) from real values (measured at fixed prices), so that higher prices are not mistaken for more output. In one small example this week, the dollar total grows 21 percent while the amount of stuff made grows only 10 percent.

• Already covered: Week 1, the economy as a whole, opportunity cost, the frontier, and the circular flow.
• This week: GDP, what counts, and real versus nominal.
• How they connect: every dollar spent is a dollar of income, so spending measures output.
• Where we're going next: Week 3, Measuring Inflation & Unemployment.

Focus

How big is an economy, and when GDP rises, did it make more or did prices rise?

By the end of this module, you should be able to:

• [ ] compute GDP as C + I + G + NX
• [ ] decide whether a sale counts in GDP
• [ ] compute nominal and real GDP by hand
• [ ] compute and read the GDP deflator

To-do

Plan your week

1. Read Chapter 2 (about 40 minutes), then the lecture and slides.
2. Work the lecture tutorial (60–90 minutes) and the practice set (about 20 minutes).
3. Do the Model Workshop (about 90 minutes), the discussion, and the assignment.
4. Take the quiz.

This week's checkpoint: split a rise in nominal GDP into real growth and higher prices.

You've got this

Take it in order, and ask your instructor if a step snags.

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