Download Nominal GDP Vs Real GDP

Nominal GDP Vs
Real GDP
Part II of Unit 3—measuring
domestic output
GDP
 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
 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
 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 &
oranges
 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
Apples
Oranges
P
$.50
$.25
Q
60
80
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
Item
Apples
Oranges
For
Q
160
220
2006
P
$1.00
$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”
measure (taken inflation out)
2 purposes of estimating
Real GDP
 To compare the standard of living over
time (based on quantity, not price)
 To compare the standard of living among
countries
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
PI
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 = (NGDP / RGDP) 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
Level
Deflating the GDP Balloon
Nominal GDP increases because production—
real GDP– increases.
Real GDP and the Price
Level
Deflating the GDP Balloon
Nominal GDP also increases because prices rise.
Real GDP and the Price
Level
Deflating the GDP Balloon
We use the GDP deflator to let the air out of the
nominal GDP balloon and reveal real GDP.
The Consumer Price Index
(CPI)
 Index the gov’t uses to measure
inflation
 Gov’t uses it to adjust SS benefits
and income tax brackets
 Reports 300 items in a market
basket
Inflation
 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) = %
Year1