Vaughn Economics - Chapter 22

ECON 111 - Chapter 22

GDP, price indexes, inflation, and real output

GDP is a disciplined accounting measure of current domestic production, not a complete measure of welfare. Price indexes let us separate changes in prices from changes in production.

Opening question

What did an hour of work buy—and what did a house cost?

McDonald's cheeseburger

1960

10.53 burgers/hour

$0.19 cheeseburger ÷ $2.00 median hourly wage

2024

11.43 burgers/hour

$2.49 cheeseburger ÷ $28.47 median hourly wage

Constant-size 1,289-square-foot home

1960

2.87 years of work

$2.00 median hourly wage; 2,080 hours per year

2024

5.04 years of work

$28.47 median hourly wage; 2,080 hours per year

The burger comparison implies an 8.55% increase in burger purchasing power, while the constant-size home requires more years of work. These are Royce's original examples. They motivate the need for broad, consistently defined price and output measures; neither example alone is a complete cost-of-living index.

Original teaching data1960 and 2024 values from Royce Vaughn's Chapter 22 opening example. The home calculation uses median price per square foot and assumes 2,080 paid hours per year. Calculations verified September 13, 2026.

Chapter measurements

Explore the measurements in this chapter

Open the live Data Lab for graphs, comparisons, exact dates and downloads. The accessible table below is fixed evidence verified September 18, 2026. Live data may differ after later releases and revisions. The chapter’s original teaching tables and homework retain their own September 13, 2026 vintage.

Official measurements: dated static fallback, not a live feed. Select a measurement to open its configured graph.
MeasurementPeriod and published valueUnits and frequencySource and verification date
Real GDP growth2026-04-01: 1.5Percent Change from Preceding Period; Quarterly; Seasonally Adjusted Annual RateU.S. Bureau of Economic Analysis · A191RL1Q225SBEA
Verified 2026-09-18
Real GDP2026-04-01: 24269.613Billions of Chained 2017 Dollars; Quarterly; Seasonally Adjusted Annual RateU.S. Bureau of Economic Analysis · GDPC1
Verified 2026-09-18
Headline CPI2026-08-01: 334.131Index 1982-1984=100; Monthly; Seasonally AdjustedU.S. Bureau of Labor Statistics · CPIAUCSL
Verified 2026-09-18
Core CPI2026-08-01: 337.765Index 1982-1984=100; Monthly; Seasonally AdjustedU.S. Bureau of Labor Statistics · CPILFESL
Verified 2026-09-18
Headline PCE inflation2026-07-01: 131.659Index 2017=100; Monthly; Seasonally AdjustedU.S. Bureau of Economic Analysis · PCEPI
Verified 2026-09-18
Core PCE inflation2026-07-01: 130.658Index 2017=100; Monthly; Seasonally AdjustedU.S. Bureau of Economic Analysis · PCEPILFE
Verified 2026-09-18
30-year mortgage rate2026-09-17: 6.95Percent; Weekly,Ending Thursday; Not Seasonally AdjustedFreddie Mac · MORTGAGE30US
Verified 2026-09-18
Nominal GDP2026-04-01: 32486.066Billions of Dollars; Quarterly; Seasonally Adjusted Annual RateU.S. Bureau of Economic Analysis · GDP
Verified 2026-09-18
GDP implicit price deflator2026-04-01: 133.855Index 2017=100; Quarterly; Seasonally AdjustedU.S. Bureau of Economic Analysis · GDPDEF
Verified 2026-09-18
Real GDP per capita2026-04-01: 70809Chained 2017 Dollars; Quarterly; Seasonally Adjusted Annual RateU.S. Bureau of Economic Analysis · A939RX0Q048SBEA
Verified 2026-09-18
Headline CPI · NSA2026-08-01: 334.98Index 1982-1984=100; Monthly; Not Seasonally AdjustedU.S. Bureau of Labor Statistics · CPIAUCNS
Verified 2026-09-18
CPI-W2026-08-01: 328.481Index 1982-1984=100; Monthly; Not Seasonally AdjustedU.S. Bureau of Labor Statistics · CWUR0000SA0
Verified 2026-09-18
Chained CPI-U2026-08-01: 185.739Index Dec 1999=100; Monthly; Not Seasonally AdjustedU.S. Bureau of Labor Statistics · SUUR0000SA0
Verified 2026-09-18
CPI shelter2026-08-01: 430.227Index 1982-1984=100; Monthly; Seasonally AdjustedU.S. Bureau of Labor Statistics · CUSR0000SAH1
Verified 2026-09-18
Rent of primary residence2026-08-01: 449.321Index 1982-1984=100; Monthly; Seasonally AdjustedU.S. Bureau of Labor Statistics · CUSR0000SEHA
Verified 2026-09-18
Owners’ equivalent rent2026-08-01: 443.713Index Dec 1982=100; Monthly; Seasonally AdjustedU.S. Bureau of Labor Statistics · CUSR0000SEHC
Verified 2026-09-18
PPI final demand2026-08-01: 157.411Index Nov 2009=100; Monthly; Seasonally AdjustedU.S. Bureau of Labor Statistics · PPIFIS
Verified 2026-09-18
Manufacturing hourly earnings2026-08-01: 30.37Dollars per Hour; Monthly; Seasonally AdjustedU.S. Bureau of Labor Statistics · CES3000000008
Verified 2026-09-18
FHFA house prices2026-04-01: 719.87Index 1980:Q1=100; Quarterly; Not Seasonally AdjustedU.S. Federal Housing Finance Agency · USSTHPI
Verified 2026-09-18

Hourly earnings here describe manufacturing production and nonsupervisory employees; they are not the median wage in the original burger example. FHFA house prices, shelter services and mortgage financing are distinct; none alone measures affordability. Headline PCE is the Federal Reserve’s target measure; core PCE is a trend gauge.

Burger prices, purchasing power, constant-size homes, hypothetical baskets, rebasing, annualization and Rule of 70 examples remain instructional calculations, not live national statistical series.

22.1

What GDP measures

Definition

Gross domestic product is the market value of final goods and services produced within a country's territory during a specified period.

The boundary has four essential ideas: current production, domestic territory, final output, and a period of time. GDP includes market output, government services valued by their production cost, and standard imputations such as owner-occupied housing services. Current unreported production belongs inside the conceptual boundary even when it is missed or only partly captured by statistical adjustments; that is a measurement gap, not a reason to redefine GDP.

Applying the production boundary
TestCountsDoes not count separately
CurrentGoods and services produced this periodExisting assets merely resold
DomesticProduction inside the territory, regardless of worker citizenship or firm ownershipProduction abroad
FinalOutput for final use and current dealer or broker servicesIntermediate inputs already embodied in final value
Measured flowMarket output, nonmarket government output, and imputationsPure transfers and unpaid household work outside the accounts

Limit: GDP is not a welfare score. It is a measure of production.

22.2

Transaction boundary practice

For each case, decide whether this year's GDP contains current production associated with the transaction. Use Tab to reach the buttons and Enter or Space to answer.

Transaction sorter

0 of 5 answered

Source and vintageInstructional cases based on the GDP production boundary; wording and feedback verified September 12, 2026.

Static transaction-sorter answers
CaseAnswer
New bicycle bought by a householdCounted in C: current final good
Steel sold to an appliance makerCurrent intermediate input; counted indirectly
Used car sold by a dealerCar excluded; current dealer margin counted
Existing stock sold through a brokerAsset excluded; current brokerage service counted
Current unreported landscapingConceptually production; potentially omitted or estimated in measured GDP
22.3

The expenditure identity and imports

Y=C+I+G+(X−M)

C is household consumption, I is newly produced capital and inventory investment, G is government purchases of goods and services, X is exports, and M is imports. Transfers are not G, and purchases of existing financial assets are not I.

GDP accounting flow

One production flow measured three waysFirms produce final goods and services. Final expenditure pays firms, factor income pays households, and value added measures production at each firm. Each meter records the same total.Householdsspend and supply factorsFirmsproduce and pay incomeExpenditure on final outputWages, rent, interest, profitValue added at production stagesExpenditure = income = value added

Accessible alternative: final expenditure, factor income, and value added are three meters placed on the same current production flow.

SourceNational-income accounting identity; instructional figure created for ECON 111, September 12, 2026.

Why imports are subtracted

An imported laptop is first included in C because a household bought it. Subtracting M removes that foreign production. Imports are not subtracted because they are economically bad.

Practice 1

C = $620, I = $140, G = $210, X = $85, and M = $105 billion. Classify each component and calculate GDP.

Check: NX = -$20 billion and GDP = $950 billion.

22.4

Expenditure, income, and value added

Everything produced is purchased or added to inventory; each dollar of sale becomes income to workers and owners; and each stage contributes value beyond its intermediate inputs. Independent source data create a statistical discrepancy in practice, but the concepts describe the same production.

One loaf of bread measured by value added
StageSalesIntermediate inputsValue added
Farmer$45$0$45
Grain Mill$110$45$65
Bakery$200$110$90
Total$200

Adding all sales would produce $355 and double count inputs. Adding value added produces $200, exactly the final value.

22.5

Nominal, real, and revised estimates

Nominal GDP can rise because quantities rise, prices rise, or both. Real GDP uses chain-type quantity measures to isolate changes in production. BEA publishes three current quarterly vintages. The advance estimate arrives near the end of the first month after the quarter, the second near the end of the second month, and the third near the end of the third month. Later estimates use more complete data; the labels identify the release sequence, not a guarantee that every headline must change.

BEA's three current quarterly GDP releases
ReleaseApproximate timing after quarter endInterpretation
AdvanceNear the end of month 1First look; some source data are incomplete
SecondNear the end of month 2More detailed and comprehensive data
ThirdNear the end of month 3Further source data and revisions
Clearly vintaged BEA example
Release2026 Q2 real GDP growthWhat changed
Advance, July 30, 20261.5% SAARInitial estimate
Second, August 26, 20261.5% SAARConsumer spending revised up; imports also revised up, leaving the rounded headline essentially unchanged

Source and vintageBEA, GDP release—additional information, release sequence verified September 13, 2026; BEA, GDP second estimate, 2026 Q2, released August 26, 2026. Next scheduled GDP release: September 30, 2026.

22.6

Build a price index and calculate inflation

A fixed basket is a useful introductory CPI model, not the definition of every price index. The index level compares a basket cost with its base-period cost; inflation is the percent change in the index.

Price index=current basket costbase basket cost×100Inflation rate=(new indexold index−1)×100

Basket and deflation calculator

Current index120.00
Inflation9.09%
Real GDP$25.33T

Change any input. Results are announced to assistive technology. Invalid base values produce an error rather than a fabricated result.

Static fallback using the default values
Base basketCurrent basketEarlier indexCurrent indexInflationNominal GDPReal GDP
$60$72110.00120.009.09%$30.40T$25.33T

Inflation

The price level rises.

Disinflation

The price level still rises, but its rate of increase slows.

Deflation

The price level falls.

U.S. CPI-U, 2019 to the latest available observation
PeriodCPI-U indexInflation calculation
2019255.657(255.657 ÷ 251.107 − 1) × 100 = 1.8%2018 annual average to 2019 annual average
2020258.811(258.811 ÷ 255.657 − 1) × 100 = 1.2%annual average to annual average
2021270.970(270.970 ÷ 258.811 − 1) × 100 = 4.7%annual average to annual average
2022292.655(292.655 ÷ 270.970 − 1) × 100 = 8.0%annual average to annual average
2023304.702(304.702 ÷ 292.655 − 1) × 100 = 4.1%annual average to annual average
2024313.689(313.689 ÷ 304.702 − 1) × 100 = 2.9%annual average to annual average
2025321.943(321.943 ÷ 313.689 − 1) × 100 = 2.6%annual average to annual average
August 2026334.980(334.980 ÷ 323.976 − 1) × 100 = 3.4%August 2025 to August 2026

The 2019–2025 rows compare annual averages. The August 2026 row instead reports the 12-month change from August 2025 because a full-year 2026 average does not yet exist. Always match the periods in the numerator and denominator.

Contested ground

Substitution and quality adjustment mean CPI approximates, rather than perfectly reproduces, each household's cost of living. A fixed basket can overstate the cost of maintaining a standard of living when consumers substitute toward relatively cheaper goods; imperfect quality adjustment can bias measured price change in either direction.

Source and vintageBLS annual CPI-U table, annual averages through 2025; BLS CPI-U, August 2026, index 334.980 (1982–84 = 100), up 3.4% over 12 months before seasonal adjustment; released September 11, 2026. Calculations verified September 13, 2026.

22.7

Deflate nominal GDP and interpret living standards

Real GDP=nominal GDPprice index÷100Real GDP per capita=real GDPpopulation

In a simple constant-basket example, $30.40 trillion divided by 1.25 equals $24.32 trillion in reference-year dollars. Real GDP is a flow: production per period valued in reference-year dollars. The underlying chain-type quantity index is an index; the dollar-denominated real GDP series is not itself merely an index.

Real GDP per capita is a useful average after adjusting for prices and population. It remains incomplete because an average does not show distribution, unpaid household production, leisure, environmental costs, health, safety, or every quality change.

Practice 2

Nominal GDP is $30.40 trillion, the price index is 125.0, and population is 342 million. Calculate real GDP and real GDP per capita, then name one limitation and explain its mechanism.

Check: $24.32 trillion and about $71,111 per person per year.

Chain-type measures

BEA links adjacent-period quantity comparisons using changing weights. Published chained-dollar components are therefore generally nonadditive except near the reference year. This does not contradict Y=C+I+G+NX, which is an exact current-dollar accounting identity.

22.8

Retrieval and exit check

  1. A household buys a used car from a dealer who earns a $1,500 margin. What enters current GDP?
  2. In one sentence, distinguish a price-index level from inflation.
  3. In one sentence, explain why nominal GDP growth is not necessarily real growth.

Appendix

Supplementary information

This appendix holds useful material that does not fit the 75-minute lecture route. It is available for reference, follow-up, or a later class meeting; required homework continues to assess the main lecture.

A.1

Industry composition and long-run output

Industry share of current-dollar GDP

Static industry-share data
GroupShare
Private services-producing industries73.1%
Private goods-producing industries15.8%
Government11.0%

Source and vintageBEA GDP by Industry, 2026 Q1, released June 25, 2026; broad groups rounded and verified September 13, 2026. Next industry release scheduled September 30, 2026.

Real GDP history

U.S. real GDP, 2017 through 2025Real GDP rises from 19.612 trillion chained 2017 dollars in 2017 to 23.850 trillion in 2025, with a decline in 2020. Vertical gridlines mark selected years and horizontal gridlines mark one-trillion-dollar intervals.19202122232420172019202120232025trillions of chained 2017 dollars
Static real-GDP series
YearTrillionsYearTrillionsYearTrillions
201719.612202020.285202322.724
201820.194202121.532202423.358
201920.716202222.076202523.850

Source and vintageBEA annual real GDP via FRED GDPCA, chained 2017 dollars, pulled September 12, 2026; verify after the September 30, 2026 annual update.

Long-run U.S. real GDP

Selected annual U.S. real GDP levels from 1947 to 2025Real GDP rises from 2.185 trillion chained 2017 dollars in 1947 to 23.850 trillion in 2025, with selected observations shown for 1960, 1980, 2000, 2010, and 2020. Vertical gridlines mark selected years and horizontal gridlines mark five-trillion-dollar intervals.0510152025194719601980200020202025trillions of chained 2017 dollars
Selected long-run observations, trillions of chained 2017 dollars
YearReal GDPYearReal GDP
19472.185200014.096
19603.500201016.790
19807.257202020.285
202523.850

Source and vintageBEA annual real GDP via FRED GDPCA, pulled September 12, 2026. Selected observations provide a readable long-run scale; the adjacent table supplies exact displayed values.

A.2

GDP, GNP, and GNI

GDP follows territory: it counts production inside the country. GNI follows resident-supplied labor and property: it adjusts GDP for primary income receivable by residents from abroad minus primary income payable to nonresidents.

GNI=GDP+primary income receivable from abroad−primary income payable abroad

Do not use a whole-firm ownership shortcut. A foreign-owned factory's domestic production is in GDP, while the income adjustment depends on which labor and property suppliers are resident or nonresident. GNP is the older U.S. product term closely related to GNI.

A.3

Burgers, housing, and purchasing power

The opening comparison can be repeated with other wage benchmarks, but each choice changes the population described. Minimum wages, median wages, and average hourly earnings are not interchangeable.

Different housing questions require different measures
QuestionRelevant measureWhat it does not answer alone
What happened to the asset price?House-price index or transaction priceCurrent shelter-service inflation
What happened to tenant shelter costs?Rent of primary residenceOwner financing cost
What is the implicit price of owner shelter services?Owner's equivalent rent (OER)Home purchase price
What happened to financing?Mortgage rate and interest expensePurchase price or shelter service alone
Can a household buy the home?Price, rate, income, down payment, taxes, insuranceAny single inflation rate

Source and measurement noteBLS CPI treats owner-occupied housing primarily as a shelter service through OER. House prices, mortgage interest, and affordability answer distinct questions and should not be collapsed into one inflation claim. Framework verified September 12, 2026.

A.4

Annualization and seasonal adjustment

An annualized value scales a period amount to a yearly rate. An annualized growth rate compounds a shorter-period rate. These are different operations.

Annual-rate value=V×nAnnualized rate=(1+r)n−1

Annualization calculator

Annual-rate value$30.00T
Annualized growth2.02%
Static annualization example
Quarter amountAnnual-rate valueQuarter growthAnnualized growth
$7.5T$30.0T0.5%2.02%

Source and vintageInstructional annualization formulas; default calculations verified September 12, 2026.

Seasonal adjustment estimates recurring calendar patterns so adjacent periods can be compared. It is a statistical transformation, not a claim that the raw events did not occur. Check whether a series is seasonally adjusted and whether a reported rate is annualized before interpreting it.

A.5

The price indexes students see in the news

Five common U.S. price indexes
IndexWhat it coversHow to interpret it
CPI-UOut-of-pocket prices paid by urban consumers, with a largely fixed expenditure-weight structureThe most familiar consumer inflation measure; used in many escalators
Core CPICPI-U excluding food and energyA trend gauge; it does not represent the full household budget and is not the Federal Reserve's target index
PCE price indexBroader personal-consumption scope, including some spending on households' behalf, with chain weightingThe headline measure named in the Federal Reserve's 2% longer-run inflation goal
Core PCEPCE excluding food and energyA commonly watched trend gauge; not itself the stated longer-run target
PPISelling prices received by domestic producers for their outputAn upstream price measure; it is not a direct measure of consumer living costs

Do not compare CPI-U over an arbitrary window directly with the Federal Reserve's 2 percent goal. The goal is stated for headline PCE inflation over the longer run.

A.6

Missing CPI data and quality adjustment

October 2025 CPI gap

CPI-U values around the missing October 2025 observationSeptember 2025 is 324.800, October is missing, November is 324.122, and December is 324.054. The line is broken at October rather than interpolated. Vertical gridlines mark months and horizontal gridlines mark quarter-index intervals.No observation324.00324.25324.50324.75325.00SepOctNovDecCPI-U index
Static CPI-U values, not seasonally adjusted
MonthIndex
September 2025324.800
October 2025Not available
November 2025324.122
December 2025324.054

Source and vintageBLS CPI historical table; October 2025 unavailable because of the 2025 lapse in appropriations. The chart preserves the gap and does not invent an observation.

Quality adjustment asks how much of a higher price reflects a better product. A smartphone with more storage and a better camera is not identical to its predecessor, but hedonic methods estimate only the relationship between observed characteristics and price. They do not prove that every user values the improvement equally.

A.7

Rule of 70 and exact compounding

Approximate doubling time≈70growth rate in percentExact doubling time=ln(2)ln(1+r)

Doubling-time calculator

Rule of 7020.0 years
Exact20.15 years
Static doubling-time comparison
RateRule of 70Exact
2.0%35.0 years35.00 years
3.5%20.0 years20.15 years

Source and vintageRule-of-70 approximation and exact compound-growth formula; default calculations verified September 12, 2026.

A.8

Rebasing and chain-type nonadditivity

Rebasing changes the reference value, not the underlying percent changes. If an index is 120 in Year A and 150 in Year B, rebasing Year A to 100 makes Year B equal 125: the 25 percent change is preserved.

In a fixed-base teaching example, real components can be added because the same reference prices value every component. BEA's chain-type measures instead link adjacent-period quantity comparisons with changing weights. Chained-dollar component series are therefore generally nonadditive; use contribution tables rather than forcing them to sum.

A.9

OER, financing, and affordability

Shelter service

OER asks what rent a homeowner would pay for the same shelter service, excluding utilities and furnishings.

Asset price

A house-price index tracks the market value of the asset and land, not just current shelter service.

Financing cost

Mortgage interest depends on the loan balance and rate; it can change even when the house price does not.

Affordability

Affordability combines price, mortgage rate, income, taxes, insurance, down payment, and credit conditions.

A mortgage-rate increase can raise user cost and reduce affordability without appearing directly as CPI shelter inflation. Over time, financing conditions may affect rents and OER indirectly through supply, demand, and landlords' costs, but that feedback is not the same as inserting mortgage interest into CPI.

Source and vintageBLS, Rent and owner's equivalent rent fact sheet; measurement comparison verified September 12, 2026.

A.10

Sources and data vintages