# 2.6 Real vs Nominal GDP

#gdp

#vocab

#nominal-gdp

#real-gdp

written by

jeanne stansak caroline koffke

(editor)

November 15, 2020

## 2.6: Real vs. Nominal GDP

### Vocabulary

Nominal GDP (Gross Domestic Product)—the dollar value of all final goods and services produced within a country's borders in one year, expressed in current dollar value (unadjusted for inflation).

Real GDP (Gross Domestic Product)—the dollar value of all finals goods and services produced within a country's borders in one year, expressed in constant dollar value (adjusted for inflation).

### How to Calculate (sample problem)

Steps to Calculate both Nominal GDP and Real GDP

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

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

EXAMPLE #1

United States GDP Data for 2018 United States GDP Data for 2019 2018 Nominal GDP = Steel Production (\$4,000,000) + Wheat Production (\$600,000) + Corn Production (\$600,000) + Sugar Production (\$100,000) = \$5,300,000

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

Real GDP 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 Germany GDP Data for 2018 2017 Nominal GDP = Iron Production (\$1,500,000) + Coal Production (\$2,000,000) + Wheat Production (\$500,000) + Granite Production (\$1,500,000) = \$5,500,000

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

Real GDP 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) = \$5,100,000

### GDP Deflator

This is another index that is used to measure the effects of inflation.

💡Remember in the base year the nominal GDP and real GDP are the same number.

The formula is: EXAMPLE #1

Great Britain GDP Data for 2017: 2017 Nominal GDP = \$11,000,000

Since 2017 is the base year, the nominal GDP and real GDP are the same. When calculating the GDP Deflator for the base year you will find that it is always equal to 100.

Great Britain GDP Data for 2018: 2018 Nominal GDP = 19,000,000

2018 Real GDP = 15,000,000

GDP Deflator for 2018 is 127

2018 Inflation Rate is 27%

EXAMPLE #2

Italy GDP Data for 2017: 2017 Nominal GDP = \$8,000,000

Since 2017 is the base year, the nominal GDP and real GDP are the same. When calculating the GDP Deflator for the base year you will find that it is always equal to 100.

Italy GDP Data for 2018: 2018 Nominal GDP = 13,000,000

2018 Real GDP = 9,000,000

GDP Deflator for 2018 is 144

2018 Inflation Rate is 44%

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