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Unit 2

2.6 Real vs Nominal GDP

2 min readjanuary 6, 2021

Jeanne Stansak

caroline49234295

Caroline Koffke


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
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.
💡Remember 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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