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asked ago in General Economics Questions by (240 points)
My book says the way we calculate real GDP in a given year is by adding the quantities of all goods and services produced in that year multiplied by their prices in some base year. There are actually two things I can't quite get:

How do we account for goods and services that exist now but weren't around in the base year? I mean, especially today, with things such as the market for apps, startups, and the increasing number of new products that get released on an almost daily basis, wouldn't the real GPD calculated that way become dated really fast?

This might turn out to be a really silly question, but how do we take into account quantities of services that are provided in a given year, such as lawyer services, marketing services etc.? All examples I've seen of calculating real GDP were of the sort "consider an economy that produces only apples an orange...".

Thanks very much in advance.

1 Answer

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answered ago by (2.7k points)
There are three methods in order to calculate GDP.

The product approach:
Adding the value added in every transaction of goods or services. (perfect for your example)
The expenditure approach:
Total expenditure = Consumption + Investment + Government Expenditures + Net Exports (it's good for your example too)
The income approach:
Adding Compensation of Employees, Rental Income, Corporate Profits, Net Interest, Indirect Business Taxes and Depreciation(taken out when calculating profits and added again to GDP)

In order to calculate a price Index, you can divide current prices by old prices and get an index, which you can use to divide GDP. This new GDP is calculated in old prices.

I hope it's helpful.

Kind regards.