8.3 Real GDP VS Nominal GDP

What is Nominal GDP?

the value of final goods and services evaluated at current-year prices

How to calculate Nominal GDP

calculated by summing the current values of final goods and services

How is real GDP calculated?

Multiplying the quantity x the price in a base year.

What is real GDP

the value of final goods and services evaluated at base-year prices

by keeping prices constant, we know that changes in real GDP represent changes in the quantity of goods and services produced in the economy

Drawback to calculating real GDP using base-year prices

overtime prices may change relative to each other. because this change is not reflected int he fixed prices from the base yea, the estimate of real GDP is somewhat distorted. The further away the current year is from the base year, the worse the problem becomes

Compare Real GDP and Nominal GDP

real GDP holds prices constant, which makes it a better measure than nominal GDP of changes in the production of goods and services from 1 year to the next.

because on average, prices rise from one year to the next, real GDP is greater than nominal GDP in years before base year and less than nominal GDP for years after the year.

What is price level

a measure of the average prices of goods and services in the economy

What is the GDP deflator?

a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100

when there is a deficit in the economy what does the government do

when there is a deficit the government borrows to make up for a difference, so they write more checks than they have in reven ue

what is the value of dollar

it is how much the US dollar is worth compared to foerign currencies

What is deflation?

a fall or decrease in the overall price level

what is disinflation

a decrease in the rate of inflation but prices are still increasing but at a deaccelerated rate