NOMINAL GDP v. REAL GDP
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NOMINAL GDP v. REAL GDP
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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) - PowerPoint PPT Presentation
Transcript of NOMINAL GDP v. REAL GDP
NOMINAL GDP v.
REAL GDP
NOMINAL GDP v.
REAL GDP
DEFINITIONSDEFINITIONS
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)
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 INDEXGDP 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 100given year Price of the same market
basket in the base year
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 100given year Price of the same market
basket in the base year
GDP PRICE INDEXGDP 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.
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 OUTPUT
PRICE PER UNIT (or market basket)
PRICE INDEX
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 OUTPUT
PRICE PER UNIT (or market basket)
PRICE INDEX
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 UNITS OF OUTPUT
PRICE PER UNIT (or market basket)
PRICE INDEX
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
2005
11 28 280 308One way to determine Real GDP is to divide nominal GDP by the price index. For 2005 divide 308 by 280 multiplied by 100
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.
YEAR UNITS OF OUTPUT
PRICE PER UNIT (or market basket)
PRICE INDEX
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
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 OUTPUT
PRICE PER UNIT (or market basket)
PRICE INDEX
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.
