Fiveable
Fiveable

or

Log in

Find what you need to study


Light

Find what you need to study

2.6 Real vs Nominal GDP

4 min readmay 7, 2023

J

Jeanne Stansak

dylan_black_2025

dylan_black_2025

J

Jeanne Stansak

dylan_black_2025

dylan_black_2025

Problems With Nominal Variables

So far, we've calculated GDP, but we haven't looked at how price changes factor into our interpretation of GDP. The raw number of GDP, not adjusted for prices, is called . For example, let's say one year, GDP was $100, and the next, $200. This could mean one of two things: either production doubled, or prices doubled. If prices doubled, then the economy didn't actually get any better, prices just rose. This main problem means we can't accurately compare nominal GDPs, since we don't know how prices changed. Thus, we adjust by calculating .

Nominal vs. Real GDP

Nominal Gross Domestic Product (GDP) is the total market value of all goods and services produced in an economy in a given year, calculated using current market prices. It is typically used as a measure of economic growth and is often used to compare economic performance over time.

As discussed, does not take into account the impact of on the economy. is the general increase in the price of goods and services over time, which can lead to a decline in the of money. As a result, may not accurately reflect the true growth of an economy, as it does not consider the effect of on the value of goods and services.

Real Gross Domestic Product (rGDP) is a measure of economic growth that adjusts for the impact of . It is calculated by adjusting for the effects of , using a as a reference point. This allows for a more accurate comparison of economic performance over time, as it takes into account changes in the of money.

How to Calculate Real and Nominal GDP

Steps to Calculate both Nominal GDP and Real GDP

  • : Multiply the amount of each good produced by the prices (i.e in this case the is 2018)

  • : Multiply the amount of each good produced by the price in that particular year.

EXAMPLE #1

United States GDP Data for 2018

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-LRZNXEqKqvVa.png?alt=media&token=caa5b195-4931-4024-b999-bc58c7f739d5

United States GDP Data for 2019

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-tuEKx2cukyYa.png?alt=media&token=daaa21d3-5dc4-40c0-b3e7-02a509ad708a

2018 = Steel Production ($4,000,000) + Wheat Production ($600,000) + Corn Production ($600,000) + Sugar Production ($100,000) = $5,300,000

2019 = Steel Production ($5,500,000) + Wheat Product ($900,000) + Corn Production ($1,200,000) + Sugar Production (400,000) = $8,000,000

for 2019 = Steel Production (550,000 x $8) + Wheat Production (300,000 x $3) + Corn Production (400,000 x $2) + Sugar Production (200,000 x $1) = $6,300,000

EXAMPLE #2

Germany GDP Data for 2017

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-dPPqBf2dbaSE.png?alt=media&token=734a2afb-4f98-4549-bc63-69cd6825c7d6

Germany GDP Data for 2018

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-wPvO8168IzaJ.png?alt=media&token=a9444a98-1909-486c-8019-d1098fbd84eb

2017 = Iron Production ($1,500,000) + Coal Production ($2,000,000) + Wheat Production ($500,000) + Granite Production ($1,500,000) = $5,500,000

2018 = Iron Production ($1,500,000) + Coal Production ($3,500,000) + Wheat Production ($900,000) + Granite Production ($2,000,000) = $7,900,000

for 2018 = Iron Production (100,000 x $10) + Coal Production (500,000 x $4) + Wheat Production (300,000 x $2) + Granite Production (100,000 x $15) = $5,100,000

Using the GDP Deflator

This is another index that is used to measure the effects of . Instead of comparing two market baskets, it compares the nominal and of a country in a year. When = (ie. there is zero ), the is 100. It is called the because it is used to "deflate" , which may be overstated because of high prices.

The formula is:

= ( / ) * 100

This formula can also be rearranged to solve for nominal or :

= * ( / 100)

= / ( / 100)

EXAMPLE #1

Great Britain GDP Data for 2017:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-rwo91QeY06ZL.png?alt=media&token=0d7ced3d-0817-4c95-ad4a-0614375acddf

2017 = $11,000,000

Since 2017 is the , the and are the same. When calculating the for the you will find that it is always equal to 100.

Great Britain GDP Data for 2018:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-OrTeaJwASG86.png?alt=media&token=afc8458d-5bc9-4c69-9bcb-cf98320ca129

2018 = 20,000,000

2018 = 11,000,000

for 2018 is 181

2018 is 81%

EXAMPLE #2

Italy GDP Data for 2017:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-iZxP5g72V7VS.png?alt=media&token=99cc4c87-0df6-48a6-bbc3-4f19d34d8352

2017 = $9,000,000

Since 2017 is the , the and are the same. When calculating the for the you will find that it is always equal to 100.

Italy GDP Data for 2018:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-OQRhQGUmMTB0.png?alt=media&token=ecfbfc24-4ec3-4199-ba39-f1002f39882c

2018 = 13,000,000

2018 = 9,000,000

for 2018 is 144

2018 is 44%

Key Terms to Review (7)

Base Year

: The base year is a reference point used to compare economic data over time. It serves as a benchmark against which other years are measured to calculate changes in variables like GDP or price levels.

GDP deflator

: The GDP deflator is a measure of the overall price level in an economy. It compares the current prices of all goods and services produced to a base year, allowing us to see how much inflation or deflation has occurred.

Inflation

: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It means that, on average, prices are rising and the purchasing power of money is decreasing.

Inflation Rate

: The inflation rate refers to the percentage increase in the general price level of goods and services over a specific period of time. It measures how fast prices are rising and indicates the rate at which the purchasing power of money is decreasing.

Nominal GDP

: Nominal GDP refers to the total value of goods and services produced in an economy during a specific period, measured at current market prices.

Purchasing Power

: Purchasing power refers to the amount of goods and services that can be bought with a given amount of money. It is influenced by changes in prices and inflation.

Real GDP

: Real GDP refers to the total value of all goods and services produced within a country's borders, adjusted for inflation. It measures the economic output of a nation over a specific period.

2.6 Real vs Nominal GDP

4 min readmay 7, 2023

J

Jeanne Stansak

dylan_black_2025

dylan_black_2025

J

Jeanne Stansak

dylan_black_2025

dylan_black_2025

Problems With Nominal Variables

So far, we've calculated GDP, but we haven't looked at how price changes factor into our interpretation of GDP. The raw number of GDP, not adjusted for prices, is called . For example, let's say one year, GDP was $100, and the next, $200. This could mean one of two things: either production doubled, or prices doubled. If prices doubled, then the economy didn't actually get any better, prices just rose. This main problem means we can't accurately compare nominal GDPs, since we don't know how prices changed. Thus, we adjust by calculating .

Nominal vs. Real GDP

Nominal Gross Domestic Product (GDP) is the total market value of all goods and services produced in an economy in a given year, calculated using current market prices. It is typically used as a measure of economic growth and is often used to compare economic performance over time.

As discussed, does not take into account the impact of on the economy. is the general increase in the price of goods and services over time, which can lead to a decline in the of money. As a result, may not accurately reflect the true growth of an economy, as it does not consider the effect of on the value of goods and services.

Real Gross Domestic Product (rGDP) is a measure of economic growth that adjusts for the impact of . It is calculated by adjusting for the effects of , using a as a reference point. This allows for a more accurate comparison of economic performance over time, as it takes into account changes in the of money.

How to Calculate Real and Nominal GDP

Steps to Calculate both Nominal GDP and Real GDP

  • : Multiply the amount of each good produced by the prices (i.e in this case the is 2018)

  • : Multiply the amount of each good produced by the price in that particular year.

EXAMPLE #1

United States GDP Data for 2018

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-LRZNXEqKqvVa.png?alt=media&token=caa5b195-4931-4024-b999-bc58c7f739d5

United States GDP Data for 2019

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-tuEKx2cukyYa.png?alt=media&token=daaa21d3-5dc4-40c0-b3e7-02a509ad708a

2018 = Steel Production ($4,000,000) + Wheat Production ($600,000) + Corn Production ($600,000) + Sugar Production ($100,000) = $5,300,000

2019 = Steel Production ($5,500,000) + Wheat Product ($900,000) + Corn Production ($1,200,000) + Sugar Production (400,000) = $8,000,000

for 2019 = Steel Production (550,000 x $8) + Wheat Production (300,000 x $3) + Corn Production (400,000 x $2) + Sugar Production (200,000 x $1) = $6,300,000

EXAMPLE #2

Germany GDP Data for 2017

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-dPPqBf2dbaSE.png?alt=media&token=734a2afb-4f98-4549-bc63-69cd6825c7d6

Germany GDP Data for 2018

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-wPvO8168IzaJ.png?alt=media&token=a9444a98-1909-486c-8019-d1098fbd84eb

2017 = Iron Production ($1,500,000) + Coal Production ($2,000,000) + Wheat Production ($500,000) + Granite Production ($1,500,000) = $5,500,000

2018 = Iron Production ($1,500,000) + Coal Production ($3,500,000) + Wheat Production ($900,000) + Granite Production ($2,000,000) = $7,900,000

for 2018 = Iron Production (100,000 x $10) + Coal Production (500,000 x $4) + Wheat Production (300,000 x $2) + Granite Production (100,000 x $15) = $5,100,000

Using the GDP Deflator

This is another index that is used to measure the effects of . Instead of comparing two market baskets, it compares the nominal and of a country in a year. When = (ie. there is zero ), the is 100. It is called the because it is used to "deflate" , which may be overstated because of high prices.

The formula is:

= ( / ) * 100

This formula can also be rearranged to solve for nominal or :

= * ( / 100)

= / ( / 100)

EXAMPLE #1

Great Britain GDP Data for 2017:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-rwo91QeY06ZL.png?alt=media&token=0d7ced3d-0817-4c95-ad4a-0614375acddf

2017 = $11,000,000

Since 2017 is the , the and are the same. When calculating the for the you will find that it is always equal to 100.

Great Britain GDP Data for 2018:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-OrTeaJwASG86.png?alt=media&token=afc8458d-5bc9-4c69-9bcb-cf98320ca129

2018 = 20,000,000

2018 = 11,000,000

for 2018 is 181

2018 is 81%

EXAMPLE #2

Italy GDP Data for 2017:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-iZxP5g72V7VS.png?alt=media&token=99cc4c87-0df6-48a6-bbc3-4f19d34d8352

2017 = $9,000,000

Since 2017 is the , the and are the same. When calculating the for the you will find that it is always equal to 100.

Italy GDP Data for 2018:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-OQRhQGUmMTB0.png?alt=media&token=ecfbfc24-4ec3-4199-ba39-f1002f39882c

2018 = 13,000,000

2018 = 9,000,000

for 2018 is 144

2018 is 44%

Key Terms to Review (7)

Base Year

: The base year is a reference point used to compare economic data over time. It serves as a benchmark against which other years are measured to calculate changes in variables like GDP or price levels.

GDP deflator

: The GDP deflator is a measure of the overall price level in an economy. It compares the current prices of all goods and services produced to a base year, allowing us to see how much inflation or deflation has occurred.

Inflation

: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It means that, on average, prices are rising and the purchasing power of money is decreasing.

Inflation Rate

: The inflation rate refers to the percentage increase in the general price level of goods and services over a specific period of time. It measures how fast prices are rising and indicates the rate at which the purchasing power of money is decreasing.

Nominal GDP

: Nominal GDP refers to the total value of goods and services produced in an economy during a specific period, measured at current market prices.

Purchasing Power

: Purchasing power refers to the amount of goods and services that can be bought with a given amount of money. It is influenced by changes in prices and inflation.

Real GDP

: Real GDP refers to the total value of all goods and services produced within a country's borders, adjusted for inflation. It measures the economic output of a nation over a specific period.


© 2024 Fiveable Inc. All rights reserved.

AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.


© 2024 Fiveable Inc. All rights reserved.

AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.