Test 2 AP Macro - Real & Nominal GDP

Overtime, what usually happens to prices?

Increase

Inflation

Prices normally rising overtime

Nominal

Current output and current prices (not adjusted for inflation)

Real

Adjusted for inflation. Takes into account fact that often times, prices rise.

• Sets inflation as a constant to show change in quantity only

Nominal Equation

Price x quantity of each good added together; referred to as current price and current quantity

Real equation

Price of the good in a base or reference year x quantity of the current year

What stays constant when using Real?

Price is constant

Purpose of real

to use as a reference point to see what was made this year that did not exist before

Deflator

Removes/pops balloon of inflation

Purpose of deflator

• Shows output (changes in quantity)

• Allows for true/better assessment of GDP

Deflator equation

(N/r) x 100 = GDP Deflator