2.06 Real vs. Nominal GDP + Master Formula List

Nominal GDP - shows how much is spent in that year’s prices

Real GDP - measures how much is produced according to one particular year’s prices to be able to meaningfully compare the output of different years

  • formal definition: the dollar value of final goods and services produced within a country with an adjustment for inflation using a base year’s price level.


Again,

Nominal GDP uses current or actual prices in a given year, together with current quantities, to determine the current value of all final goods and services produced in the given year.

Real GDP uses constant or past prices from a base year, coupledwith current quantities for the given year, to get the real value of all final goods and services produced in the given year.


⭐️ There is no way to know how much prices will change unless you can magically see the future. Hence, why we use nominal GDP


  • The GDP deflator (a price index that aggregates the price of everything produced in the economy, not just consumer goods and services like the CPI; used to adjust nominal GDP figures to real GDP) is used to convert nominal GDP into real GDP, based on a given benchmark year.

  • The GDP deflator looks and operates just like the CPI, adjusting nominal values for inflation.

  • The GDP deflator includes the prices of all goods and services exchanged, not only those focused on consumers.


GDP deflator provides a good indicator of inflation, since it uses the current or actual quantities in the calculation of both nominal and real GDP.


Master Formula List: