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Someone Said Comparing Real and Nominal GDP

Real GDP measures the total value of goods and services produced in an economy adjusted for inflation, while nominal GDP does not account for inflation. To calculate real GDP, nominal GDP is adjusted using prices from a base year to remove the effects of price changes. The GDP deflator is used to measure inflation by dividing nominal GDP by real GDP and multiplying by 100, with an increase indicating inflation.

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146 views6 pages

Someone Said Comparing Real and Nominal GDP

Real GDP measures the total value of goods and services produced in an economy adjusted for inflation, while nominal GDP does not account for inflation. To calculate real GDP, nominal GDP is adjusted using prices from a base year to remove the effects of price changes. The GDP deflator is used to measure inflation by dividing nominal GDP by real GDP and multiplying by 100, with an increase indicating inflation.

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bachir awayda
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© © All Rights Reserved
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Someone said

Comparing Real and Nominal GDP


Calculating Real GDP
Real GDP growth is the value of all goods produced in a given
year; nominal GDP is value of all the goods taking price changes
into account.

LEARNING OBJECTIVES
Calculate real and nominal GDP growth
KEY TAKEAWAYS
Key Points
• The following equation is used to calculate the GDP: GDP = C +
I + G + (X – M) or GDP = private consumption + gross
investment + government investment + government
spending + (exports – imports).
•
• Nominal value changes due to shifts in quantity and price.
• In economics, real value is not influenced by changes in price, it
is only impacted by changes in quantity. Real values
measure the purchasing power net of any price changes
over time.
• Real GDP accounts for inflation and deflation. It transforms the
money-value measure, nominal GDP, into an index for
quantity of total output.
Key Terms
• nominal: Without adjustment to remove the effects of inflation
(in contrast to real).
• gross domestic product: Known also as GDP, this is a
measure of the economic production of a particular territory
in financial capital terms over a specific time period.
Gross Domestic Product
The Gross domestic Product (GDP) is the market value of all final
goods and services produced within a country in a given period of
time. The GDP is the officially recognized totals. The following
equation is used to calculate the GDP:
GDP: GDP = C + I + G + (X – M)

Written out, the equation for calculating GDP is:


GDP = private consumption + gross investment + government
investment + government spending + (exports – imports).
For the gross domestic product, “gross” means that the GDP
measures production regardless of the various uses to which the
product can be put. Production can be used for immediate
consumption, for investment into fixed assets or inventories, or for
replacing fixed assets that have depreciated. “Domestic” means
that the measurement of GDP contains only products from within
its borders.
Nominal GDP
The nominal GDP is the value of all the final goods and services
that an economy produced during a given year. It is calculated by
using the prices that are current in the year in which the output is
produced. In economics, a nominal value is expressed in
monetary terms. For example, a nominal value can change due to
shifts in quantity and price. The nominal GDP takes into account
all of the changes that occurred for all goods and services
produced during a given year. If prices change from one period to
the next and the output does not change, the nominal GDP would
change even though the output remained constant.
Nominal GDP: This image shows the nominal GDP for a given year in the United
States.
Real GDP
The real GDP is the total value of all of the final goods and
services that an economy produces during a given year,
accounting for inflation. It is calculated using the prices of a
selected base year. To calculate Real GDP, you must determine
how much GDP has been changed by inflation since the base
year, and divide out the inflation each year. Real GDP, therefore,
accounts for the fact that if prices change but output doesn’t,
nominal GDP would change.
Real GDP Growth: This graph shows the real GDP growth over a specific period of
time.
In economics, real value is not influenced by changes in price, it is
only impacted by changes in quantity. Real values measure the
purchasing power net of any price changes over time. The real
GDP determines the purchasing power net of price changes for a
given year. Real GDP accounts for inflation and deflation. It
transforms the money-value measure, nominal GDP, into an
index for quantity of total output.
The GDP Deflator
The GDP deflator is a price index that measures inflation or
deflation in an economy by calculating a ratio of nominal GDP to
real GDP.
LEARNING OBJECTIVES
Explain how the calculation of the GDP deflator can measure
inflation
KEY TAKEAWAYS
Key Points
• The GDP deflator is a measure of price inflation. It is calculated
by dividing Nominal GDP by Real GDP and then multiplying
by 100. (Based on the formula).
• Nominal GDP is the market value of goods and services
produced in an economy, unadjusted for inflation. Real GDP
is nominal GDP, adjusted for inflation to reflect changes in
real output.
• Trends in the GDP deflator are similar to changes in the
Consumer Price Index, which is a different way of measuring
inflation.
Key Terms
• GDP deflator: A measure of the level of prices of all new,
domestically produced, final goods and services in an
economy. It is calculated by computing the ratio of nominal
GDP to the real measure of GDP.
• real GDP: A macroeconomic measure of the value of the
economy’s output adjusted for price changes (inflation or
deflation).
• nominal GDP: A macroeconomic measure of the value of the
economy’s output that is not adjusted for inflation.
The GDP deflator (implicit price deflator for GDP) is a measure of
the level of prices of all new, domestically produced, final goods
and services in an economy. It is a price index that measures
price inflation or deflation, and is calculated using nominal GDP
and real GDP.
Nominal GDP versus Real GDP
Nominal GDP, or unadjusted GDP, is the market value of all final
goods produced in a geographical region, usually a country. That
market value depends on the quantities of goods and services
produced and their respective prices. Therefore, if prices change
from one period to the next but actual output does not, nominal
GDP would also change even though output remained constant.
In contrast, real gross domestic product accounts for price
changes that may have occurred due to inflation. In other words,
real GDP is nominal GDP adjusted for inflation. If prices change
from one period to the next but actual output does not, real GDP
would be remain the same. Real GDP reflects changes in real
production. If there is no inflation or deflation, nominal GDP will be
the same as real GDP.
Calculating the GDP Deflator
The GDP deflator is calculated by dividing nominal GDP by real
GDP and multiplying by 100.

GDP Deflator Equation: The GDP deflator measures price inflation in an economy.
It is calculated by dividing nominal GDP by real GDP and multiplying by 100.
Consider a numeric example: if nominal GDP is $100,000, and
real GDP is $45,000, then the GDP deflator will be 222 (GDP
deflator = $100,000/$45,000 * 100 = 222.22).
In the U.S., GDP and GDP deflator are calculated by the U.S.
Bureau of Economic Analysis.
Relationship between GDP Deflator and CPI
Like the Consumer Price Index (CPI), the GDP deflator is a
measure of price inflation/deflation with respect to a specific base
year. Similar to the CPI, the GDP deflator of the base year itself is
equal to 100. Unlike the CPI, the GDP deflator is not based on a
fixed basket of goods and services; the “basket” for the GDP
deflator is allowed to change from year to year with people’s
consumption and investment patterns. However, trends in the
GDP deflator will be similar to trends in the CPI.

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