nominal gdp vs. real gdp real gdp nominal gdp vs. real gdp real gdp

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NOMINAL NOMINAL GDP GDP vs. vs. REAL GDP REAL GDP

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Page 1: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

NOMINAL NOMINAL GDP GDP

vs.vs. REAL GDPREAL GDP

NOMINAL NOMINAL GDP GDP

vs.vs. REAL GDPREAL GDP

Page 2: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

……measures the price of a specially measures the price of a specially

selected collection of goods and selected collection of goods and

services. services.

… “… “a market basket” in a given a market basket” in a given

year is compared to the price of the year is compared to the price of the

same collection of goods and same collection of goods and

services in a reference year. services in a reference year.

……measures the price of a specially measures the price of a specially

selected collection of goods and selected collection of goods and

services. services.

… “… “a market basket” in a given a market basket” in a given

year is compared to the price of the year is compared to the price of the

same collection of goods and same collection of goods and

services in a reference year. services in a reference year.

Any Price IndexAny Price IndexAny Price IndexAny Price Index

Page 3: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

……measures the combined price of a measures the combined price of a

particular collection of goods and particular collection of goods and

services that make up the GDP (C, services that make up the GDP (C,

IIgg, G, X, G, Xnn).).

… … helps to adjust the Nominal GDP helps to adjust the Nominal GDP

to a Real GDP figure. to a Real GDP figure.

……measures the combined price of a measures the combined price of a

particular collection of goods and particular collection of goods and

services that make up the GDP (C, services that make up the GDP (C,

IIgg, G, X, G, Xnn).).

… … helps to adjust the Nominal GDP helps to adjust the Nominal GDP

to a Real GDP figure. to a Real GDP figure.

GDP DeflatorGDP Deflator

Page 4: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

Nominal GDPNominal GDP … … reflects the current price level reflects the current price level of goods and services of goods and services … … ignores the effect of inflation on ignores the effect of inflation on the growth of GDP. the growth of GDP. … … this measure is called this measure is called Current Current Dollar GDP. Dollar GDP.

Nominal GDPNominal GDP … … reflects the current price level reflects the current price level of goods and services of goods and services … … ignores the effect of inflation on ignores the effect of inflation on the growth of GDP. the growth of GDP. … … this measure is called this measure is called Current Current Dollar GDP. Dollar GDP.

Page 5: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

Real GDP Real GDP … … measures the value of goods and services measures the value of goods and services adjustedadjusted for change in the price level. It reflects for change in the price level. It reflects the real change in output.the real change in output.

… … This measure is called This measure is called Constant Dollar GDP Constant Dollar GDP

… … indicates what the GDP would be indicates what the GDP would be if the if the

purchasing power of the dollar has not changedpurchasing power of the dollar has not changed

from what it was in a base year. The government from what it was in a base year. The government

currently uses 2000 as its base year for GDP currently uses 2000 as its base year for GDP

Deflator.Deflator.

NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

Page 6: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

GDP Price IndexGDP Price Index

Price IndexPrice Indexin a givenin a given

yearyear==

Price of market basketPrice of market basketin specific yearin specific year

Price of same marketPrice of same marketbasket in base yearbasket in base year

x 100x 100

Real GDPReal GDP ==Nominal GDPNominal GDP

Price IndexPrice Index(in hundredths)(in hundredths)

Price Index(in hundredths)

=Nominal GDP

Real GDP

An Alternative MethodAn Alternative Method

NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

Page 7: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

Nominal Values• Deflate GDP when prices rise• Inflate GDP when prices fall

NOMINAL GDP vs. REAL GDPNOMINAL GDP vs. REAL GDP

1122334455

557788

10101111

$ 10$ 102020252530302828

100100200200250250

----

$ 50$ 50140140200200----

$ 50$ 5070708080----

(2)(2)PricePricePizzaPizza

Per UnitPer Unit

(1)(1)Units ofUnits ofOutputOutput

YearYear

(3)(3)Price IndexPrice Index

Year 1 =Year 1 =100100

(4)(4)Unadjusted,Unadjusted,or Nominal,or Nominal,

GDP,GDP,(1)x(2)(1)x(2)

(5)(5)Adjusted,Adjusted,Or Real,Or Real,

GDPGDP

Calculating Real GDP

Page 8: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

280280300300

1122334455

557788

10101111

$ 10$ 102020252530302828

100100200200250250

$ 50$ 50140140200200----

$ 50$ 5070708080

----

(2)(2)PricePricePizzaPizza

Per UnitPer Unit

(1)(1)Units ofUnits ofOutputOutput

YearYear

(3)(3)Price IndexPrice Index

Year 1 =Year 1 =100100

(4)(4)Unadjusted,Unadjusted,or Nominal,or Nominal,

GDP,GDP,(1)x(2)(1)x(2)

(5)(5)Adjusted,Adjusted,Or Real,Or Real,

GDPGDP

Price IndexPrice Indexin a givenin a given

yearyear==

Price of market Price of market basketbasket

in specific yearin specific year

Price of same marketPrice of same marketbasket in base yearbasket in base year

x 100x 100

Year 1 Base Year 100Year 1 Base Year 100

Year 2 $20/10 x 100 = 200Year 2 $20/10 x 100 = 200

Year 3Year 3 $25/10 x 100 = 250 $25/10 x 100 = 250

Year 4Year 4 $30/10 x 100 = 300 $30/10 x 100 = 300

Year 5Year 5 $28/10 x 100 = 280 $28/10 x 100 = 280

Page 9: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

Real GDPReal GDP == Nominal GDPNominal GDP

Price IndexPrice Index(in hundredths)(in hundredths)

Year 1 NGDP=RGDPYear 1 NGDP=RGDP

Year 2 $140/2 = $70 RGDPYear 2 $140/2 = $70 RGDP

Year 3Year 3 $200/2.5 = $80 RGDP $200/2.5 = $80 RGDP

Year 4Year 4 $300/3 = $100 RGDP $300/3 = $100 RGDP

Year 5Year 5 $308/2.8 = $110 RGDP $308/2.8 = $110 RGDP

280280300300

1122334455

557788

10101111

$ 10$ 102020252530302828

100100200200250250

$ 50$ 50140140200200

$ 50$ 5070708080

(2)(2)PricePricePizzaPizza

Per UnitPer Unit

(1)(1)Units ofUnits ofOutputOutput

YearYear

(3)(3)Price IndexPrice Index

Year 1 =Year 1 =100100

(4)(4)Unadjusted,Unadjusted,or Nominal,or Nominal,

GDP,GDP,(1)x(2)(1)x(2)

(5)(5)Adjusted,Adjusted,Or Real,Or Real,

GDPGDP

300300308308

100100110110

Page 10: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

GDP Index NumbersGDP Index NumbersGDP Index NumbersGDP Index Numbers

YearYear GDP IndexGDP Index

20002000 100.00100.00

20012001 102.402102.402

20022002 104.097104.097

20032003 106.003106.003

20042004 110.393110.393

www.bea.gov 1/28/05 report

20042004

Nominal GDPNominal GDP

$11,728,000,000,000$11,728,000,000,000

Real GDPReal GDP

10,837,200,000,00010,837,200,000,000

Page 11: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

… … a measure of the a measure of the average change over average change over time in the prices paid time in the prices paid by by urban consumersurban consumers for a market basket of for a market basket of consumer goods and consumer goods and services. services.

The Consumer Price Index (CPI)The Consumer Price Index (CPI)The Consumer Price Index (CPI)The Consumer Price Index (CPI)

Page 12: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

Changes in the CPI are designed Changes in the CPI are designed to measure the rate of inflation to measure the rate of inflation facing consumers.facing consumers.

Changes in the CPI are designed Changes in the CPI are designed to measure the rate of inflation to measure the rate of inflation facing consumers.facing consumers.

GDP Deflator is designed to convert GDP Deflator is designed to convert Nominal GDP into Real GDP.Nominal GDP into Real GDP.GDP Deflator is designed to convert GDP Deflator is designed to convert Nominal GDP into Real GDP.Nominal GDP into Real GDP.

GDP Deflator VS. CPIGDP Deflator VS. CPIGDP Deflator VS. CPIGDP Deflator VS. CPI

Page 13: NOMINAL GDP vs. REAL GDP REAL GDP NOMINAL GDP vs. REAL GDP REAL GDP

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