February 3, 2017

Real and Nominal GDP

Nominal GDP: The value of output produced in current prices; can increase from year to year if either output or prices increase.

• Current Prices

• P * Q

Real GDP: The value of output produced in constant base year prices; Adjusted for inflation; Can increase from year to year only if output increases

• P * Q

• Accurate Sample of Economic Growth

• Only in the base year is real GDP = Nominal GDP

• Years AFTER the base year, nominal GDP will exceed real GDP

• Years BEFORE the base year, real GDP will exceed nominal GDP 

BASE YEAR IS THE EARLIEST YEAR IF NOT GIVEN!!!

Example:

CARS (2012)

Quantity: 10

Price: $15,000

CARS (2015)

Quantity: 20

Price: $16,000

TRUCKS (2012)

Quantity: 10

Price: $20,000

TRUCKS (2015)

Quantity: 20

Price: $21,000

Nominal GDP for 2012:

Cars: 10 * 15,000 = $150,000

Trucks: 10 * 20,000 = $200,000

TOTAL: $350,000

Nominal GDP for 2013:

Cars: 20 * 16,000 = $320,000

Trucks: 20 * 21,000 = $420,000

TOTAL: $740,000

Real GDP:

Cars: 20 * 15,000

Trucks: 20 * 20,000

TOTAL: $700,000

GDP Deflator: A price index that is used to adjust from nominal to real GDP

Nominal GDP/Real GDP * 100

Consumer Price Index (CPI): Measures inflation by tracking changes in the price of a market basket of goods 

• Market Basket of Goods: Cars, Trucks, Boats

Price of Market Basket in Current Year/Price of Market Basket in Base Year * 100