NOMINAL GDP v. REAL GDP

DEFINITIONSNominal 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 INDEXDefinition: 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 INDEXThe 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.

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

YEARUNITS OF OUTPUTPRICE PER UNIT (or market basket)PRICE INDEXUNADJUSTED, or NOMINAL GDPADJUSTED, or REAL GDP20015$10100$50$502002720200140702003825250200802004103020051128

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.

YEARUNITS OF OUTPUTPRICE PER UNIT (or market basket)PRICE INDEXUNADJUSTED, or NOMINAL GDPADJUSTED, or REAL GDP20015$10100$50$502002720200140702003825250200802004103030020051128280

One way to determine Real GDP is to divide nominal GDP by the price index. For 2005 divide 308 by 280 multiplied by 100Real GDP shows the market value of each years output measured in terms of dollars that have the same purchasing power as dollars had in the base year.

YEARUNITS OF OUTPUTPRICE PER UNIT (or market basket)PRICE INDEXUNADJUSTED, or NOMINAL GDPADJUSTED, or REAL GDP20015$10100$50$502002720200140702003825250200802004103030030020051128280308

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)

YEARUNITS OF OUTPUTPRICE PER UNIT (or market basket)PRICE INDEXUNADJUSTED, or NOMINAL GDPADJUSTED, or REAL GDP20015$10100$50$502002720200140702003825250200802004103030030010020051128280308110

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.

YEARUNITS OF OUTPUTPRICE PER UNIT (or market basket)PRICE INDEXUNADJUSTED, or NOMINAL GDPADJUSTED, or REAL GDP20015$10100$50$502002720200140702003825250200802004103030030010020051128280308110

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*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)*Real GDP shows the market value of each years output measured in terms of dollars that have the same purchasing power as dollars had 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)*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.*