Download Goal 1: Compare and Contrast Nominal and Real GDP Nominal

February 7, 2012
Goal 1: Compare and Contrast Nominal and Real GDP
Nominal GDP vs. Real GDP
Nominal GDP
-GDP measured in terms of the price level at the time of
the measurement, unadjusted for inflation or deflation
-If prices never changed nominal GDP would be a good
measure from year to year
Real GDP- is GDP corrected for changes in prices
(inflation or deflation) from year to year.
-uses prices from a base year to calculate GDP
Example:
$110
GDP II Per 8 Page 1
$110
Goal 2: Examine what GDP does not measure.
Limitations to GDP as a Measure
Nonmarket Activities
-GDP does not include certain productive activities do
not take place in a market
-unpaid work of housewives, househusbands, do-ityourself repairmen
Leisure
-GDP does not account for the value of increased leisure
time
-more vacation time and holidays are valuable to
peoples production at work
Improved Product Quality
-GDP does not take into account how much products
have improved
GDP II Per 8 Page 2
Example: $200 cell phone bought today vs. a $200 cell
phone purchased in 2000.
The Underground Economy
-does not include income made from illegal gambling,
prostitution, and drug dealing
GDP and the Environment
-GDP does not take into account the negative costs of
dirty air, dirty water, toxic waste, congestion and noise.
GDP II Per 8 Page 3
Exit Question: What is the difference between nominal
GDP and Real GDP?
2008 2009 2010
MP3 Players Produced 200 200 225
Price
$75 $100 $100
Nominal GDP
Real GDP Base: 2008
GDP II Per 8 Page 4