Real GDP v. Nominal GDP. What GDP Tells Us GDP measures the size of the economy, so it is a means for comparison over time and between economies.

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Presentation transcript:

Real GDP v. Nominal GDP

What GDP Tells Us GDP measures the size of the economy, so it is a means for comparison over time and between economies

Why Real GDP? GDP change over time can be distorted by price changes Nominal GDP – value of production (or value of spending) in contemporary dollars Real GDP adjusts for price changes, making comparison over time of aggregate output more valid

Real GDP and Output Growth Real GDP = (nominal GDP X 100) price index Output growth = (real GDP in another year – real GDP in base year)X 100 real GDP in base year “Chained” numbers used by the U.S. – average of output growth using both earlier and later year as base

What Real GDP Doesn’t Measure Larger populations have an advantage – GDP per capita removes the impact Living standards not reflected – uneven distribution, non-monetary components of good life Bad government and other factors can keep wealth from reaching the people