! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Nominal GDP uses current prices to place a value on the economys production of goods and services. Real GDP uses constant base-year prices to place a value on the economys production of goods and services. Because real GDP is not affected by changes in prices, changes in real GDP reect only changes in the amounts being produced. Thus, real GDP is a measure of the economys production of goods and services.! ! ! ! ! ! ! ! !

! ! ! ! ! ! ! ! ! ! ! ! ! ! GDP deator, which reects only the prices of goods and services! ! GDP deator = (Nominal GDP/ Real GDP)" 100.! ! GDP deator reects whats happening to prices, not quantities.! ! ! ! ! ! ! ! ! ! ! ! ! The ination rate is the percentage change in some measure of the price level from one period to the next. Using the GDP deator, the ination rate between two consecutive years is computed as follows:! ! Ination rate in year 2 = ((GDP deator in year 2 GDP deator in year 1) / GDP deator in year 1)" 100. ! ! !

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Producer Price Index (PPI) :! a measure of the cost of a basket of goods and services bought by rms! ! ! ! ! ! ! ! ! Economists and policymakers monitor both the GDP deator and the consumer price index to gauge how quickly prices are rising! ! Yet two important differences can cause them to diverge.! The rst difference is that the GDP deator reects the prices of all goods and services produced domestically, whereas the consumer price index reects the prices of all goods and services bought by consumers! ! The second and subtler difference between the GDP deator and the consumer price index concerns how various prices are weighted to yield a single number for the overall level of prices! ! !

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Nominal interest rate :! the interest rate as usually reported without a correction for the effects of ination.! ! Real interest rate :! the interest rate corrected for the effects of ination! ! ! Real interest rate = Nominal interest rate Ination rate.! ! Productivity! The quantity of goods and services produced from each unit of labor input! ! ! ! ! ! !

! How Productivity Is Determined! ! Physical capital! the stock of equipment and structures that are used to produce goods and services! ! Human capital! the knowledge and skills that workers acquire through education, training, and experience! ! Natural resources! the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits! ! Technological knowledge! societys understanding of the best ways to produce goods and services