price index/ nominal vs real GDP

what is nominal gdp and what does it measure

- money, current dollar or unadjusted gdp
- measures combined changes in price and quantity
total value of all goods and services produced

what is real gdp and what does it measure

- gdp adjusted for inflation or constant
- measures only changes in output
measure the actual growth of production without any distorting effects from inflation.

Adjustment process

1. choose base yr - prices equal to 100%
2. create a price index - is a % comparison
3. compute nonimal gdp (P x Q = nominal gdp)
4. compute real gdp (nominal gdp / P.I. as a decimal)

for dividing

top divided by bottom

what does changes in nominal income or nominal gdp mean

changes in price or in P + quantity

what does change in real income or GDP mean

changes in output only

calculate GDP gap? What is its significance?

potential GDP- actual GDP= GDP GAP

lost output due to cyclical EU/ recession

GDP deflator

GDP implicit deflator

a type of price index (broadest)

price index (PI) def

a measure of how prices change over a period of time

GDP deflator or GDP implicit deflator-

a type of price index (broadest)

consumer price index-

price index based on hh consumption

rate of inflation from price index

Yr 2- yr 1/ yr 1 × 100= % inflation rate

(each yr is the price index from that year)

price index by gdps

Nominal GDP / Real GDP= x 100= price index

Convert nominal GDP to real GDP

Nominal gdp/ Price index x 100= real gdp

price index by prices

“Prices” in any yr / “prices” in base yr x 100= price index for that year

Base year is where price index= 100

Adjusting nominal gdp to real gdp

Nominal gdp/ price index x 100= real/adjusted gdp

Average price level and pp of dollar

(are reciprocals of each other)

1/ Average price level= Purchasing power of dollar

1/ purchasing power of dollar= average price level

changes in nominal gdp or income mean

changes in price and quantity

change in real gdp or income mean

changes in output only

Implicit gdp deflator/ price deflator formula

Add up “current year value” section

Add up “base year equivalent value” section

“current year value” total / “base year equivalent value ” total x 100= implicit gdp deflator%

percent change in gdp

implicit gdp deflator% - 100%= % change so inc or dec

consumer price index formula

Add up the “current year cost” section

Add up the “base year cost” section

“current year cost” total  / “base year cost” total x 100= consumer price index