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Unit 2

2.6 Real vs Nominal GDP

2 min readโ€ขjanuary 6, 2021

Jeanne Stansak

Caroline Koffke


2.6: Real vs. Nominal GDP

Vocabulary

Nominal GDP (Gross Domestic Product)โ€”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)โ€”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

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 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

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 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 = 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

GDP Deflator

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

๐Ÿ’กRemember in the base year the nominal GDP and real GDP are the same number.

The formula is:

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-NjJTy7Pr7w0L.png?alt=media&token=90a9b1c5-0a89-4813-87a0-67618643c590

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 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:

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

2018 Nominal GDP = 20,000,000

2018 Real GDP = 11,000,000

GDP Deflator for 2018 is 181

2018 Inflation Rate 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 Nominal GDP = $9,000,000

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:

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

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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