00:01
Hello, in this video we are answering the following question.
00:04
Why does inflation make nominal gdp a poor measure of the increase in total production from one year to the next? how does the us bureau of economic analysis deal with this drawback? so let's first answer the first part of the question, right? why does inflation make nominal gdp a poor measure? so when we're calculating nominal gdp, what we do? do is simply use the price level of this year, for example, year one.
00:37
P1 is the price level of year one, using the price level of the year one and multiply it by the total amount of goods produced by this year.
00:49
Okay.
00:50
And for the next year, it would be p2 times q2.
00:57
The problem is when we have inflation, what we know is everything is more expensive in year two than year one.
01:04
So p2 is larger than p1.
01:07
And when we're comparing nominal gdp, it is hard to say whether the difference between year 2 gdp and year one gdp coming from p1, coming from price level change or coming from quantitative change.
01:27
So obviously we care more about the production change, quantity change, than the price level change, right? if, you know, everything, if the amount of goods and services produce are the same from year one to year two, it is just that everything is more expensive.
01:43
Basically, everybody in the economy did not enjoy much more, right? because they enjoy the same amount of good and they're paying more money...