Question

Per capita real GDP is found by (LO7) a) dividing population by real GDP b) dividing real GDP by population c) adding population to real GDP d) multiplying real GDP by population

Short answer

Per capita real GDP is calculated by dividing real GDP by population, which is option (b).

Step-by-step solution

Identify Real GDP and Population

Real GDP is the inflation-adjusted value of all goods and services produced in an economy during a given period. The population refers to the total number of individuals living in a specific area. To calculate per capita real GDP, we'll need both the real GDP and population.

Understand the Concept of Per Capita Real GDP

Per capita real GDP is defined as the average output per person in an economy, which means we need to find a way to divide the total output (real GDP) among the total population. This will give us an idea of how much output each individual produces on average.

Evaluate Given Options

Let's go through the choices given: a) Dividing population by real GDP: This would give us the number of people per unit of output, which is not the average output per person. b) Dividing real GDP by population: This would give us the average output per person, which matches our definition of per capita real GDP. c) Adding population to real GDP: Since we are trying to find the average output per person, adding population to real GDP wouldn't make any sense. d) Multiplying real GDP by population: This would give us the total output squared, not the average output per person.

Choose the Correct Option

Based on the evaluation of the given options, the correct choice for calculating per capita real GDP is: b) Dividing real GDP by population Thus, per capita real GDP can be found by dividing real GDP by population.

Key concepts

Real GDP

Real Gross Domestic Product (GDP) is one of the most critical measures to understand the economic performance of a region or country. Unlike nominal GDP, real GDP takes into account the effects of inflation, providing a more accurate representation of an economy's value over time. By adjusting for price changes, real GDP measures the true volume of an economy's production of goods and services rather than being influenced by shifts in purchasing power or price level increments.

To make this concept even clearer, imagine two countries that both produce toys. If one country produces a thousand toys at one dollar each, and the other produces eight hundred toys, but due to inflation, they are valued at two dollars each, the nominal GDP would be the same. However, real GDP would correctly reflect that the first country produces more actual toys, signifying higher economic output despite the lower prices.

Economic Output

Economic output refers to the total value of all goods and services produced within an economy. It's essentially the output of the 'economic engine' and is a vital indicator of the health and size of the economy. When economists talk about increasing economic output, they mean that an economy is producing more goods and services which can lead to a higher standard of living.

In terms of practical impacts, an increase in economic output can mean better infrastructure, improved public services, and overall prosperity for the population. However, it's essential to consider not just the total output but how it's shared across the population, which is where measures like per capita real GDP come in. This metric helps us understand if the increased output leads to widespread benefits or if it's pooled among a select part of society, potentially signaling inequality.

GDP Calculation

The GDP calculation is fundamental in economics as it quantifies the size and growth of an economy. To calculate GDP, one can use several methods, including the expenditure approach, the income approach, or the output approach. Each lens offers a different perspective – how much is being spent by different sectors (like households, government, etc.), how much income is generated by the production process, or the value of the output produced.

The most commonly referred-to measure is the expenditure approach, which sums up consumer spending, investment, government spending, and net exports (exports minus imports). To get to real GDP from nominal GDP, the GDP deflator, an inflation measure, is used to adjust the nominal figures to remove the effects of price changes. In essence, the GDP calculation is not just about tallying, but entails specific adjustments to ensure the resulting figure reflects real economic conditions without distortions from inflation.