NOMINAL GDP
v.
REAL GDP
DEFINITIONS
 Nominal GDP is the market value of all final goods
and services produced in a given year. It is
calculated as (Price X Quantity = Nominal GDP)
 Real GDP is the inflation/deflation adjusted market
value of all final goods and services produced in a
given year relative to a base year. Real GDP
represents the true purchasing power of our
money. It describes how far our money will go. One
way to calculate Real GDP is (base year price X
current year quantity = Real GDP)
GDP PRICE INDEX
Definition: A price index is a measure of
the price of a specified collection of
goods and services, a “market basket”
in a given year as compared to the
price of an identical “market basket” of
goods and services in a reference year.
Price of market basket in
Price Index
specific year
in
= ----------------------------------- X 100
given year
Price of the same market
basket in the base year
GDP PRICE INDEX
 The GDP Price Index allows accountants to
make comparison between different years
possible.
 The GDP Price Index also allows accountants to
adjust nominal GDP to real GDP for that year.
YEAR
UNITS OF PRICE
PRICE
OUTPUT PER
INDEX
UNIT (or
market
basket)
UNADJUSTED,
or NOMINAL
GDP
ADJUSTED,
or REAL
GDP
2001
5
$10
100
$50
$50
2002
7
20
200
140
70
2003
8
25
250
200
80
2004
10
30
2005
11
28
To calculate the price index for 2004 take the value of the market
basket in 2004 ($30) and divide it by the value of the market
basket in 2001 ($10) and multiply by 100. For 2005 divide 28 by
10 X 100
YEAR
UNITS OF PRICE
PRICE
OUTPUT PER
INDEX
UNIT (or
market
basket)
UNADJUSTED,
or NOMINAL
GDP
ADJUSTED,
or REAL
GDP
2001
5
$10
100
$50
$50
2002
7
20
200
140
70
2003
8
25
250
200
80
2004
10
30
300
2005
11
28
280
To find the Nominal GDP for 2004 multiply the units of output in
2004 (10) by the price of the market basket in 2004 ($30).
Determine Nominal GDP for 2005 in the same way.
YEAR
2001
2002
2003
2004
2005
UNITS OF PRICE
PRICE
OUTPUT PER
INDEX
UNIT (or
market
basket)
5
7
8
10
11
$10
20
25
30
28
100
200
250
300
280
UNADJUSTED,
or NOMINAL
GDP
$50
140
200
300
308
ADJUSTED,
or REAL
GDP
$50
70
80
Real GDP shows the market value of each year’s output
measured in terms of dollars that have the same purchasing
power as dollars had in the base year.
One way to determine Real GDP is to divide nominal GDP by the
price index. For 2005 divide 308 by 280 multiplied by 100
YEAR
2001
2002
2003
2004
2005
UNITS
OF
OUTPUT
5
7
8
10
11
PRICE
PRICE
PER
INDEX
UNIT (or
market
basket)
$10
20
25
30
28
100
200
250
300
280
UNADJUSTED, ADJUSTED,
or NOMINAL or REAL
GDP
GDP
$50
140
200
300
308
$50
70
80
100
110
A second method to determine Real GDP is to multiply the
output of a year in question by the market basket price in the
base year.
To determine Real GDP for 2002 multiply the output of 2002
(7) by the market basket price in the base year ($10)
YEAR
UNITS OF PRICE
PRICE
OUTPUT PER
INDEX
UNIT (or
market
basket)
UNADJUSTED,
or NOMINAL
GDP
ADJUSTED,
or REAL
GDP
2001
5
$10
100
$50
$50
2002
7
20
200
140
70
2003
8
25
250
200
80
2004
10
30
300
300
100
2005
11
28
280
308
110
To determine the Price Index a different procedure would be to
divide Nominal GDP by Real GDP times 100. For 2002 divide
Nominal ($140) by Real GDP ($70) and multiply by 100.