Nominal and
Real GDP and
Prices Indices
Jake Reid
Kevin Sercia
Robert Slye
Vytautas Drejeris

Government Expenditures- Spending by federal, state, and
local governments on final goods and services.

Transfers- Outlays that transfer purchasing power from one
group of economic agents to another, including such items
as Social Security and unemployment payments. Transfers
are NOT counted in GDP.

Price Index- A weighted average of the prices of a set of
the goods and services produced in the economy over a
period of time.

Price Level- The average level of prices across goods and
services.
 Inflation
Rate- Rate of change in the price
level from one period of time to another.
 Nominal
GDP Change- Change in GDP
that occurs only because the price level
changed.
 Real
GDP Change- Increase in the actual
quantity of goods and services.

The base year used when calculating GDP
matters!
 Relative prices of goods change over time

Chain-weighting: removing the biases associated
with new products, changes in quality, and
discounted prices
 Used by NIPA for a more accurate year to year
GDP changes
Measuring Price level
 Implicit
GDP Price
Deflator

= Nominal GDP X100
Real GDP

Depends upon base year
 Consumer
Price Index

Less broadly based and only
contains goods and services
purchased by consumers

Current Year CPI =
Cost of base year quantities at current prices
cost of base year quantities at base year price X100
 CPI
inflation rate tends to be more volatile
than the GDP deflator rate.
 This difference matters for contracts which
are geared to the inflation rate and
formulation of monetary policy.
 GDP price deflator measures the inflation
rate better than CPI.