February 03, 2017

Nominal GDP

• The value of output produced in current prices
• Can increase from year to year if either output or prices increase
• Q*P

Real GDP

• The value of output produced in constant base year prices
• Can increase from year to year only if output increases
• To find economic growth, one would measure real GDP

Real GDP and normal GDP are only equal at the base year

In years after the base year, real GDP will exceed nominal GDP

	2012		2013
	Quantity	Price	Quantity	Price
Cars	10	$15,000	20	$16,000
Trucks	10	$20,000	20	$21,000

Nominal GDP for 2012:

Cars: 10*15000 = $150,000

Trucks: 10*20000 = $200,000

= $350,000

Real GDP for 2012 = $350,000 at base year, Real GDP and Nominal GDP are equal

Nominal GDP for 2013:

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

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

= $740,000

Real GDP for 2013:

Cars: 20*15000 = $300,000

Trucks: 20*20000 = $400,000

GDP deflator

• A price index used to adjust from nominal to real GDP
• Formula: (nominal GDP/real GDP)*100

Consumer Price Index

• Measures inflation by tracking changes in the price of a market basket of goods
• Formula: (price of market basket in current year/price of market basket in base year)*100