1. NOMINAL GDP
vs.
REAL GDP

2. 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.

3. 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.

4. … 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.

5. 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.

6. 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

7. 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

8. 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

9. 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

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

11. 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.

12. 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.

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