Nominal and Real GDP

February 3, 2017

Nominal and real GDP

Nominal GDP

• Value of output produced in current year prices
• formula = price x quantity
• Can increased from year to year if either output/prices increase.

Real GDP

• Value of output produced in constant base year prices
• Formula = price x quantity
• Can increase from year to year if only the output increases

Also:

1. In the base year, current price will always be equal to constant price
2. In base year nominal and real GDP are the same
3. In the years after the base year, nominal GDP will exceed real GDP
4. In years before base year, real GDP will exceed nominal GDP

GDP Deflator

• Price index used to adjust from nominal to real GDP
• In base year GDP deflator will always equal 100
• For years after base year, GDP deflator is greater than 100
• Years before base year, GDP deflator is less than 100
• Formula: nominal GDP/ real GDP x 100

Consumer Price Index (CPI)

• 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 baskets in base year x 100