NOMINAL
GDP
vs.
REAL GDP
Any Price Index
…measures the price of a specially
selected collection of goods and
services.
… “a market basket” in a given
year is compared to the price of the
same collection of goods and
services in a reference year.
GDP Deflator
…measures the combined price of a
particular collection of goods and
services that make up the GDP (C,
Ig, G, Xn).
… helps to adjust the Nominal GDP
to a Real GDP figure.
NOMINAL GDP vs. REAL GDP
Nominal GDP
… reflects the current price level
of goods and services
… ignores the effect of inflation on
the growth of GDP.
… this measure is called Current
Dollar GDP.
NOMINAL GDP vs. REAL GDP
Real GDP
… measures the value of goods and services
adjusted for change in the price level. It reflects
the real change in output.
… This measure is called Constant Dollar GDP
… indicates what the GDP would be if the
purchasing power of the dollar has not changed
from what it was in a base year. The government
currently uses 2000 as its base year for GDP
Deflator.
NOMINAL GDP vs. REAL GDP
GDP Price Index
Price Index
in a given =
year
Price of market basket
in specific year
Price of same market
basket in base year
Real GDP =
Nominal GDP
Price Index
(in hundredths)
An Alternative Method
Price Index
=
(in hundredths)
Nominal GDP
Real GDP
x 100
NOMINAL GDP vs. REAL GDP
Nominal Values
• Deflate GDP when prices rise
• Inflate GDP when prices fall
Calculating Real GDP
(4)
(3)
(2)
(5)
Unadjusted,
(1)
Price Price Index or Nominal, Adjusted,
Year Units of Pizza
Year 1 =
Or Real,
GDP,
Output Per Unit
100
GDP
(1)x(2)
1
2
3
4
5
5
7
8
10
11
$ 10
20
25
30
28
100
200
250
-
$ 50
140
200
-
$ 50
70
80
-
(4)
(3)
(2)
(5)
Unadjusted,
(1)
Price Price Index or Nominal, Adjusted,
Year Units of Pizza
Year 1 =
Or Real,
GDP,
Output Per Unit
100
GDP
(1)x(2)
1
2
3
4
5
5
7
8
10
11
$ 10
20
25
30
28
100
200
250
300
280
$ 50
140
200
-
$ 50
70
80
-
Year 1 Base Year 100
Price of market
Price Index
basket
=
in a given
in specific year x 100
year
Price of same market
basket in base year
Year 2
$20/10 x 100 = 200
Year 3
$25/10 x 100 = 250
Year 4
$30/10 x 100 = 300
Year 5
$28/10 x 100 = 280
(4)
(3)
(2)
(5)
Unadjusted,
(1)
Price Price Index or Nominal, Adjusted,
Year Units of Pizza
Year 1 =
Or Real,
GDP,
Output Per Unit
100
GDP
(1)x(2)
1
2
3
4
5
5
7
8
10
11
$ 10
20
25
30
28
100
200
250
300
280
$ 50
140
200
300
308
$ 50
70
80
100
110
Year 1 NGDP=RGDP
Nominal GDP
=
Real GDP
Price Index
(in hundredths)
Year 2
$140/2 = $70 RGDP
Year 3
$200/2.5 = $80 RGDP
Year 4
$300/3 = $100 RGDP
Year 5
$308/2.8 = $110 RGDP
GDP Index Numbers
Year
GDP Index
2004
2000
100.00
2001
102.402
$11,728,000,000,000
2002
104.097
Real GDP
2003
106.003
10,837,200,000,000
2004
110.393
Nominal GDP
www.bea.gov 1/28/05 report
The Consumer Price Index (CPI)
… a measure of the
average change over
time in the prices paid
by urban consumers
for a market basket of
consumer goods and
services.
GDP Deflator VS. CPI
GDP Deflator is designed to convert
Nominal GDP into Real GDP.
Changes in the CPI are designed
to measure the rate of inflation
facing consumers.
GDP Deflator Compared to the CPI
[CPI is normally higher.]