Module 11: Real GDP & Interpretation
Nominal GDP – The actual GDP figure for that year. Also called current-dollar GDP.
Real GDP (RGDP) – GDP adjusted for inflation, using prices from a past year called the
base year. Also called constant-dollar GDP.
GDP is really just a Price x Quantity measure. If Q stays constant and P rises, GDP
increases. This is misleading because the size of the economy has stayed the same, it
has just gotten more expensive.
Real GDP makes an adjustment to measure the true amount of production
change.
Using a constant price from a fixed year called the base year does this.
Now let’s look at an example:
Year
2011
Q of
donuts
100
P of
donuts
$10
Q of
coffee
80
P of
coffee
$5
2012
110
$11
80
$10
Nom.GDP Real
GDP
(100 x
= $1,400
$10) +
(80 x $5)
= $1,400
(110 x
(110 x
$11) +
$10) x
(80 x
(80 x $5)
$10) =
= $1,500
$2,010
In this simple example, nominal GDP has risen $610.
In % terms: (2,010 – 1,400)/1,400 = .436 or 43.6%
WOW! The politicians did a great job, didn’t they?!?!?
Did the economy really grow that much or did prices just increase?
If we check out the Real GDP column, we see that if we keep prices constant at 2011
levels, we see that Real GDP increased by 7.1%.
We need to remember that these are just statistical measures or economic
indicators. (self-esteem and happiness are not measured here!)
We have to remember that Real GDP doesn’t measure everything!
Volunteerism, leisure, & housework are not included but make us happy.
Cleaning up after a disaster & putting bars on your windows are included but are not
really pleasant things!
2 Economies: One builds tanks, the other makes ice cream. One is most-likely a little
better off!