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Nominal GDP Vs Real GDP. Part II of Unit 3—measuring domestic output. GDP. Reminder: GDP is a figure including every item produced in the economy. Money is the common denominator that allows us to add the total output. Nominal GDP. - PowerPoint PPT Presentation

### Transcript of Nominal GDP Vs Real GDP

• Nominal GDP Vs Real GDPPart II of Unit 3measuring domestic output

• GDPReminder: GDP is a figure including every item produced in the economy. Money is the common denominator that allows us to add the total output.

• Nominal GDPIs the market value of all final g & s produced in a year.Calculated using current prices when the output was producedIncludes inflationIt is hard to compare market values from year to year when the value of the \$ itself changes (inflation or deflation)To measure changes in the quantity of output, we need a yardstick that stays the same size.

• Real GDPThe value of the final g & s produced in a given year expressed in the prices of a base year2000Nominal Vs Real

• Traditional Method of Calculating Real GDPThis economy produces apples & orangesThe base year is 2000. Since 2000 is the base year, real and nominal GDP are the same.

• To find the real GDP in 2000, + the value of apples & oranges produced in 2000 using the table:

Value of apples = 60 apples X \$.50 = \$30Value of oranges = 80 oranges X \$.25 = \$20Real GDP in 2000 = \$30 + \$20 = \$50

GDP DataFor2000ItemQPApples60\$.50Oranges80\$.25

• To calculate real GDP in 2006, + the value of apples and oranges using the prices of 2000

Value of apples = 160 apples X \$.50 = \$80Value of oranges = 220 oranges X \$.25 = \$55Real GDP in 2006 = \$80 + \$55 = \$135Real GDP is constant dollars or 2000 dollars measure (taken inflation out)

GDP DataFor2006ItemQPApples160\$1.00Oranges220\$2.00

• 2 purposes of estimating Real GDPTo compare the standard of living over time (based on quantity, not price)To compare the standard of living among countries

• Price IndexA measure of the price of a specified collection of g & s (market basket) in a given year as compared to the price of an identical collection of g & s in a reference year.PI = price of market basket for a specific year X 100 price of same market basket in the base year

Find Real GDP = Nominal GDP X 100PI

• GDP DeflatorAn average of current prices expressed as a percentage of base year prices.Measures the price levelThe average level of pricesGDP deflator = (NGDP / RGDP) X 100(\$135 / \$50) X 100 = GDP deflator2.7 X100 = 270If NGDP rises but RGDP remains unchanged, prices have risen.

• Real GDP and the Price LevelDeflating the GDP BalloonNominal GDP increases because productionreal GDP increases.

• Real GDP and the Price LevelDeflating the GDP BalloonNominal GDP also increases because prices rise.

• Real GDP and the Price LevelDeflating the GDP BalloonWe use the GDP deflator to let the air out of the nominal GDP balloon and reveal real GDP.

• The Consumer Price Index(CPI)Index the govt uses to measure inflationGovt uses it to adjust SS benefits and income tax bracketsReports 300 items in a market basket

• InflationA rise in the general level of pricesInflation rate = current CPI-Index CPI = rate (X 100)= %index CPI

or Year2 Year1 = rate (X 100) = % Year1