NOMINAL GDP vs. REAL GDP

Any Price Index …measures the price of a specially selected collection of goods and services. … “a market basket” in a given year is compared to the price of the same collection of goods and services in a reference year.

GDP Deflator …measures the combined price of a particular collection of goods and services that make up the GDP (C, Ig, G, Xn). … helps to adjust the Nominal GDP to a Real GDP figure.

… reflects the current price level of goods and services NOMINAL GDP vs. REAL GDP Nominal GDP … reflects the current price level of goods and services … ignores the effect of inflation on the growth of GDP. … this measure is called Current Dollar GDP.

NOMINAL GDP vs. REAL GDP Real GDP … measures the value of goods and services adjusted for change in the price level. It reflects the real change in output. … This measure is called Constant Dollar GDP … indicates what the GDP would be if the purchasing power of the dollar has not changed from what it was in a base year. The government currently uses 2000 as its base year for GDP Deflator.

NOMINAL GDP vs. REAL GDP GDP Price Index An Alternative Method x 100 = in a given year = Price of market basket in specific year Price of same market basket in base year x 100 Real GDP = Nominal GDP Price Index (in hundredths) An Alternative Method Price Index (in hundredths) = Nominal GDP Real GDP

Nominal Values NOMINAL GDP vs. REAL GDP Deflate GDP when prices rise Inflate GDP when prices fall Calculating Real GDP 1 2 3 4 5 7 8 10 11 $ 10 20 25 30 28 100 200 250 - $ 50 140 70 80 (2) Price Pizza Per Unit (1) Units of Output Year (3) Price Index Year 1 = (4) Unadjusted, or Nominal, GDP, (1)x(2) (5) Adjusted, Or Real, GDP

280 300 1 2 3 4 5 7 8 10 11 $ 10 20 25 30 28 100 200 250 $ 50 140 - 70 80 (2) Price Pizza Per Unit (1) Units of Output Year (3) Price Index Year 1 = (4) Unadjusted, or Nominal, GDP, (1)x(2) (5) Adjusted, Or Real, GDP Year 1 Base Year 100 Year 2 $20/10 x 100 = 200 Year 3 $25/10 x 100 = 250 Price Index in a given year = Price of market basket in specific year Price of same market basket in base year x 100 Year 4 $30/10 x 100 = 300 Year 5 $28/10 x 100 = 280

280 300 1 2 3 4 5 7 8 10 11 $ 10 20 25 30 28 100 200 250 $ 50 140 70 80 (2) Price Pizza Per Unit (1) Units of Output Year (3) Price Index Year 1 = (4) Unadjusted, or Nominal, GDP, (1)x(2) (5) Adjusted, Or Real, GDP 308 100 110 Year 1 NGDP=RGDP Year 2 $140/2 = $70 RGDP Year 3 $200/2.5 = $80 RGDP Real GDP = Nominal GDP Price Index (in hundredths) Year 4 $300/3 = $100 RGDP Year 5 $308/2.8 = $110 RGDP

GDP Index Numbers Year GDP Index 2000 100.00 2001 102.402 2002 104.097 2003 106.003 2004 110.393 2004 Nominal GDP $11,728,000,000,000 Real GDP 10,837,200,000,000 www.bea.gov 1/28/05 report

The Consumer Price Index (CPI) … a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

GDP Deflator VS. CPI GDP Deflator is designed to convert Nominal GDP into Real GDP. Changes in the CPI are designed to measure the rate of inflation facing consumers.

GDP Deflator Compared to the CPI [CPI is normally higher.]