14230_Nominal,Real Gdp,GDP Deflator,Price Indices Used in India

8/14/2019 14230_Nominal,Real Gdp,GDP Deflator,Price Indices Used in India

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Nominal Versus Real GDP

Nominal GDPvalues the production of

goods and services at current prices.

Real GDPvalues the production of

goods and services at constant prices.


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2

Real and Nominal GDP

Year

Price of

Hot dogs

Quantity of

Hot dogs

Price of

Hamburgers

Quantity of

Hamburgers

2001 $1 100 $2 50

2002 $2 150 $3 100

2003 $3 200 $4 150


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3


Calculating Nominal GDP:2001 ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200

2002 ($2 per hot dog x 150 hot dogs) + ($3 per hamburger x 100 hamburgers) = $600



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4


Calculating Real GDP (base year 2001):2001 ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) =$200

2002 ($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) =$350



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5


Calculating the GDP Deflator:2001 ($200/$200) x 100 =100

2002 ($600/$350) x 100 =171

2003($1200/$500) x 100 =240


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(6) Price: CPI tells the prices at two differentpoints of time (One Base Year and the other

Current Year)--- It helps to calculate the rate of growth ofprice level. For example;

5 apples @ $3 per apple + 5 oranges @ $3 each

(current price in 2007)5 apples @ $2 each + 5 oranges @ $1 each

(Base Year Price,year 2000).

This means that prices have doubled during 2000-07

Measurement of Price Change


7/19

GDP deflator

An accurate view of the economyrequires adjusting nominal to real GDP

by using the GDP deflator. The GDP deflatoris a measure of the

price level calculated as the ratio ofnominal GDP to real GDP times 100.

It tells us the rise in nominal GDP that isattributable to a rise in prices rather thana rise in the quantities produced.


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The GDP Deflator

Converting Nominal GDP to Real GDP Nominal GDP is converted to real GDP

as follows:

R e a l G D PN o m i n a l G DP

G D P d e f l a to r2 0 X X

2 0 X X

2 0 X X

= 1 0 0


9/19

GDP and Economic Well-

Being

GDP is the best single measure of the economicwell-being of a society.

GDP per persontells us the income and

expenditure of the average person in the economy. Higher GDP per person indicates a higher standard

of living.

GDP is not a perfect measure of the happiness or

quality of life, however.


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GDP and Economic Well-

Being

Some things that contribute to well-being are not included in GDP.

The value of leisure. The value of a clean environment. The value of almost all activity that takes

place outside of markets, such as the

value of the time parents spend with theirchildren and the value of volunteer work.


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Green GDP

Green GDP is an index of economic

growth with the environmental

consequences of that growth factoredin.

Green GDP=Traditional GDP-

environmental/ecological costs


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Consumer Price Index

The consumer price index (CPI) is a measureof the overall cost of the goods and servicesbought by a typical consumer.

It is used to monitor changes in the cost ofliving over time.

When the CPI rises, the typical family has tospend more Rs. to maintain the samestandard of living.


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Calculating CPI: steps

Fix the Basket

Find the Prices

Compute the Baskets Cost Choose a Base Year and Compute theChoose a Base Year and Compute the

IndexIndex


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Calculating Inflation Rate

Compute the inflation rate: The inflation

rate is the percentage change in the price

index from the preceding period.

I n f l a t i o nR a t e i n Y ea r 2= C P I i n Yr 2- C P I i nr 1C P I i nr 1

1 0 0


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GDP deflator and CPI

Economists and policymakers monitor both theGDP deflator and the consumer price index togauge how quickly prices are rising.

There are two important differences between theindexes that can cause them to diverge.

The GDP deflatorreflects the prices of all goodsand servicesproduced domestically, whereas...

the consumer price indexreflects the prices of allgoods and services bought by consumers.


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Differences Between GDP Deflatorand CPI

GDP DEFLATOR

1. All prices

2. Domestic Goods

3. Changing Weights

CPI

1. Consumer Prices

2. Both Domestic andImported Goods

3. Fixed Weights


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GDP deflator and CPI

The consumer price indexcompares the

price of a fixed basketof goods and

services to the price of the basket in thebase year

whereas the GDP deflatorcompares the

price ofcurrently producedgoods and

services to the price of the same goods andservices in the base year.


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Correcting Economic Variables for

Effects of Inflation

Price indexes are used to correct for the

effects of inflation when comparing dollar

figures from different times.


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Example

S a l a r y S a l a r yP r i c e l e v el i n 2 0 0

P r i c e l e v el i n 1 9 32 0 0 1 1 9 3 1=

=

=

$ 8 0,.

$ 9 3 1,

0 0 01 7 7

1 52

5 7 9

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14230_Nominal,Real Gdp,GDP Deflator,Price Indices Used in India