As we have seen, GDP measures the total spending on goods and services in all markets in the economy. If total spending rises from one year to the next, one of two things must be true: (1) the economy £’s producing a larger output of goods and services, or (2) goods and services are being sold at higher price . When studying changes in the economy over time, economists want to separate these two effects. particular, they want a measure of the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services To do this, economists use a measure called real GDP Real GDP answers a hypothetical question What would be the value of the goods and services produced this year if we valued these goods and services at the prices that prevailed in some -specific year in the past? By evaluating current production using prices that are fixed at past levels, real GDP shows how the economy’s overall production of goods and services changes over time. To see more precisely how real GDP is constructed, let’s consider an example

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