NOMINAL GDP vs. REAL GDP

# NOMINAL GDP vs. REAL GDP

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## NOMINAL GDP vs. REAL GDP

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##### Presentation Transcript

1. NOMINAL GDP vs. REAL GDP

2. 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.

3. 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.

4. 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.

5. 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.

6. Price of market basket in specific year Price Index in a given year x 100 = Price of same market basket in base year Nominal GDP = Real GDP Price Index (in hundredths) Nominal GDP Price Index (in hundredths) = Real GDP NOMINAL GDP vs. REAL GDP GDP Price Index An Alternative Method

7. NOMINAL GDP vs. REAL GDP (4) Unadjusted, or Nominal, GDP, (1)x(2) (3) Price Index Year 1 = 100 (2) Price Pizza Per Unit (5) Adjusted, Or Real, GDP (1) Units of Output Year 1 2 3 4 5 5 7 8 10 11 \$ 10 20 25 30 28 100 200 250 - - \$ 50 140 200 - - \$ 50 70 80 - - • Nominal Values • Deflate GDP when prices rise • Inflate GDP when prices fall Calculating Real GDP

8. (4) Unadjusted, or Nominal, GDP, (1)x(2) (3) Price Index Year 1 = 100 (2) Price Pizza Per Unit (5) Adjusted, Or Real, GDP (1) Units of Output Year 1 2 3 4 5 5 7 8 10 11 \$ 10 20 25 30 28 100 200 250 \$ 50 140 200 - - \$ 50 70 80 - - 300 280 Price of market basket in specific year Price Index in a given year = x 100 Price of same market basket in base year Year 1 Base Year 100 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

9. (4) Unadjusted, or Nominal, GDP, (1)x(2) (3) Price Index Year 1 = 100 (2) Price Pizza Per Unit (5) Adjusted, Or Real, GDP (1) Units of Output Year 1 2 3 4 5 5 7 8 10 11 \$ 10 20 25 30 28 100 200 250 \$ 50 140 200 \$ 50 70 80 300 300 280 308 Nominal GDP = Real GDP Price Index (in hundredths) 100 110 Year 1 NGDP=RGDP 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

10. GDP Index Numbers 2004 Nominal GDP \$11,728,000,000,000 Real GDP 10,837,200,000,000 www.bea.gov 1/28/05 report

11. 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.

12. 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.

13. GDP Deflator Compared to the CPI[CPI is normally higher.]