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NOMINAL NOMINAL GDP GDP
vs.vs. REAL GDPREAL GDP
NOMINAL NOMINAL GDP GDP
vs.vs. REAL GDPREAL GDP
……measures the price of a specially measures the price of a specially
selected collection of goods and selected collection of goods and
services. services.
… “… “a market basket” in a given a market basket” in a given
year is compared to the price of the year is compared to the price of the
same collection of goods and same collection of goods and
services in a reference year. services in a reference year.
……measures the price of a specially measures the price of a specially
selected collection of goods and selected collection of goods and
services. services.
… “… “a market basket” in a given a market basket” in a given
year is compared to the price of the year is compared to the price of the
same collection of goods and same collection of goods and
services in a reference year. services in a reference year.
Any Price IndexAny Price IndexAny Price IndexAny Price Index
……measures the combined price of a measures the combined price of a
particular collection of goods and particular collection of goods and
services that make up the GDP (C, services that make up the GDP (C,
IIgg, G, X, G, Xnn).).
… … helps to adjust the Nominal GDP helps to adjust the Nominal GDP
to a Real GDP figure. to a Real GDP figure.
……measures the combined price of a measures the combined price of a
particular collection of goods and particular collection of goods and
services that make up the GDP (C, services that make up the GDP (C,
IIgg, G, X, G, Xnn).).
… … helps to adjust the Nominal GDP helps to adjust the Nominal GDP
to a Real GDP figure. to a Real GDP figure.
GDP DeflatorGDP Deflator
NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP
Nominal GDPNominal GDP … … reflects the current price level reflects the current price level of goods and services of goods and services … … ignores the effect of inflation on ignores the effect of inflation on the growth of GDP. the growth of GDP. … … this measure is called this measure is called Current Current Dollar GDP. Dollar GDP.
Nominal GDPNominal GDP … … reflects the current price level reflects the current price level of goods and services of goods and services … … ignores the effect of inflation on ignores the effect of inflation on the growth of GDP. the growth of GDP. … … this measure is called this measure is called Current Current Dollar GDP. Dollar GDP.
Real GDP Real GDP … … measures the value of goods and services measures the value of goods and services adjustedadjusted for change in the price level. It reflects for change in the price level. It reflects the real change in output.the real change in output.
… … This measure is called This measure is called Constant Dollar GDP Constant Dollar GDP
… … indicates what the GDP would be indicates what the GDP would be if the if the
purchasing power of the dollar has not changedpurchasing power of the dollar has not changed
from what it was in a base year. The government from what it was in a base year. The government
currently uses 2000 as its base year for GDP currently uses 2000 as its base year for GDP
Deflator.Deflator.
NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP
GDP Price IndexGDP Price Index
Price IndexPrice Indexin a givenin a given
yearyear==
Price of market basketPrice of market basketin specific yearin specific year
Price of same marketPrice of same marketbasket in base yearbasket in base year
x 100x 100
Real GDPReal GDP ==Nominal GDPNominal GDP
Price IndexPrice Index(in hundredths)(in hundredths)
Price Index(in hundredths)
=Nominal GDP
Real GDP
An Alternative MethodAn Alternative Method
NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP
Nominal Values• Deflate GDP when prices rise• Inflate GDP when prices fall
NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP
1122334455
557788
10101111
$ 10$ 102020252530302828
100100200200250250
----
$ 50$ 50140140200200----
$ 50$ 5070708080----
(2)(2)PricePricePizzaPizza
Per UnitPer Unit
(1)(1)Units ofUnits ofOutputOutput
YearYear
(3)(3)Price IndexPrice Index
Year 1 =Year 1 =100100
(4)(4)Unadjusted,Unadjusted,or Nominal,or Nominal,
GDP,GDP,(1)x(2)(1)x(2)
(5)(5)Adjusted,Adjusted,Or Real,Or Real,
GDPGDP
Calculating Real GDP
280280300300
1122334455
557788
10101111
$ 10$ 102020252530302828
100100200200250250
$ 50$ 50140140200200----
$ 50$ 5070708080
----
(2)(2)PricePricePizzaPizza
Per UnitPer Unit
(1)(1)Units ofUnits ofOutputOutput
YearYear
(3)(3)Price IndexPrice Index
Year 1 =Year 1 =100100
(4)(4)Unadjusted,Unadjusted,or Nominal,or Nominal,
GDP,GDP,(1)x(2)(1)x(2)
(5)(5)Adjusted,Adjusted,Or Real,Or Real,
GDPGDP
Price IndexPrice Indexin a givenin a given
yearyear==
Price of market Price of market basketbasket
in specific yearin specific year
Price of same marketPrice of same marketbasket in base yearbasket in base year
x 100x 100
Year 1 Base Year 100Year 1 Base Year 100
Year 2 $20/10 x 100 = 200Year 2 $20/10 x 100 = 200
Year 3Year 3 $25/10 x 100 = 250 $25/10 x 100 = 250
Year 4Year 4 $30/10 x 100 = 300 $30/10 x 100 = 300
Year 5Year 5 $28/10 x 100 = 280 $28/10 x 100 = 280
Real GDPReal GDP == Nominal GDPNominal GDP
Price IndexPrice Index(in hundredths)(in hundredths)
Year 1 NGDP=RGDPYear 1 NGDP=RGDP
Year 2 $140/2 = $70 RGDPYear 2 $140/2 = $70 RGDP
Year 3Year 3 $200/2.5 = $80 RGDP $200/2.5 = $80 RGDP
Year 4Year 4 $300/3 = $100 RGDP $300/3 = $100 RGDP
Year 5Year 5 $308/2.8 = $110 RGDP $308/2.8 = $110 RGDP
280280300300
1122334455
557788
10101111
$ 10$ 102020252530302828
100100200200250250
$ 50$ 50140140200200
$ 50$ 5070708080
(2)(2)PricePricePizzaPizza
Per UnitPer Unit
(1)(1)Units ofUnits ofOutputOutput
YearYear
(3)(3)Price IndexPrice Index
Year 1 =Year 1 =100100
(4)(4)Unadjusted,Unadjusted,or Nominal,or Nominal,
GDP,GDP,(1)x(2)(1)x(2)
(5)(5)Adjusted,Adjusted,Or Real,Or Real,
GDPGDP
300300308308
100100110110
GDP Index NumbersGDP Index NumbersGDP Index NumbersGDP Index Numbers
YearYear GDP IndexGDP Index
20002000 100.00100.00
20012001 102.402102.402
20022002 104.097104.097
20032003 106.003106.003
20042004 110.393110.393
www.bea.gov 1/28/05 report
20042004
Nominal GDPNominal GDP
$11,728,000,000,000$11,728,000,000,000
Real GDPReal GDP
10,837,200,000,00010,837,200,000,000
… … a measure of the a measure of the average change over average change over time in the prices paid time in the prices paid by by urban consumersurban consumers for a market basket of for a market basket of consumer goods and consumer goods and services. services.
The Consumer Price Index (CPI)The Consumer Price Index (CPI)The Consumer Price Index (CPI)The Consumer Price Index (CPI)
Changes in the CPI are designed Changes in the CPI are designed to measure the rate of inflation to measure the rate of inflation facing consumers.facing consumers.
Changes in the CPI are designed Changes in the CPI are designed to measure the rate of inflation to measure the rate of inflation facing consumers.facing consumers.
GDP Deflator is designed to convert GDP Deflator is designed to convert Nominal GDP into Real GDP.Nominal GDP into Real GDP.GDP Deflator is designed to convert GDP Deflator is designed to convert Nominal GDP into Real GDP.Nominal GDP into Real GDP.
GDP Deflator VS. CPIGDP Deflator VS. CPIGDP Deflator VS. CPIGDP Deflator VS. CPI
GDP Deflator Compared to the CPIGDP Deflator Compared to the CPI[CPI is normally higher.][CPI is normally higher.]
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