Nominal GDP Vs Real GDP

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					Nominal GDP Vs
  Real GDP
Part II of Unit 3—measuring
       domestic output

 Reminder: GDP is a figure
  including every item produced in
  the economy.
 Money is the common
  denominator that allows us to
  add the total output.
Nominal GDP (GDPn)
 Is the market value of all final g & s
  produced in a year.
 Calculated using current prices when the
  output was produced
 Includes inflation
 It is hard to compare market values from
  year to year when the value of the $ itself
  changes (inflation or deflation)
   To measure changes in the quantity of output,
    we need a “yardstick” that stays the same size.
Real GDP (GDPr)

  The value of the final g & s produced
   in a given year expressed in the
   prices of a base year
    2000

 Nominal Vs Real
Traditional Method of
Calculating Real GDP
 This economy produces apples &
 The base year is 2000. Since 2000 is
  the base year, real and nominal GDP
  are the same.
 To find the real GDP in 2000, + the value of
  apples & oranges produced in 2000 using
  the table:
                GDP Data For   2000

                Item      Q    P
                Apples    60   $.50
                Oranges   80   $.25
Value of apples = 60 apples X $.50 = $30
Value of oranges = 80 oranges X $.25 = $20
 Real GDP in 2000 = $30 + $20 = $50
 To calculate real GDP in 2006, + the value of
  apples and oranges using the prices of 2000

             GDP Data     For   2006
             Item         Q     P
             Apples       160   $1.00
             Oranges      220   $2.00
 Value of apples = 160 apples X $.50 = $80
 Value of oranges = 220 oranges X $.25 = $55
 Real GDP in 2006 = $80 + $55 = $135
   Real GDP is “constant dollars” or “2000 dollars”
2 purposes of estimating
  To compare the standard of living over
   time (based on quantity, not price)
  To compare the standard of living among
Price Index
 A measure of the price of a specified
  collection of g & s (market basket) in a given
  year as compared to the price of an identical
  collection of g & s in a reference year.
 PI = price of market basket for a specific year X 100
       price of same market basket in the base year

 Find Real GDP = Nominal GDP X 100
GDP Deflator
  An average of current prices expressed
   as a percentage of base year prices.
  Measures the price level
    The average level of prices
  GDP deflator = (GDPn / GDPr) X 100
  ($135 / $50) X 100 = GDP deflator
    2.7 X100 = 270
 If NGDP rises but RGDP remains
    unchanged, prices have risen.
Real GDP and the Price
Deflating the GDP Balloon
 GDPn increases because of production, GDPr
 will increases.
Real GDP and the Price
Deflating the GDP Balloon
 Nominal GDP also increases because prices rise.
Real GDP and the Price
Deflating the GDP Balloon
 We use the GDP deflator to let the air out of the
 GDPn balloon and reveal GDPr.
 The Consumer Price Index
 Index the gov’t uses to measure
 Gov’t uses it to adjust SS benefits
  and income tax brackets
 Reports 300 items in a market

 A rise in the general level of prices
   Inflation rate = current CPI-Index CPI = rate (X 100)= %
                         index CPI

  or Year2 – Year1 = rate (X 100) = %

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