Nominal GDP and GDP Deflators

$nominal variables:$ variables such as nominal GDP that haven’t been adjusted for changes in price * describes a name, label, or category without natural order * nominal date can’t be used to perform many statistical computations, like mean and standard deviation, because those statistics don’t have any meaning when used with nominal variables * they can be used to do cross tabulations * ex: sex and type of dwelling

calculated using prices at the time of sale * 2016 nominal GDP = P2016 x Q2016 = $18.6 trillion
creates problems when comparing GDP over time * can’t tell if an increase in nominal GDP was due to greater production or increased prices
increases in production, not increases in price, improve the standard of living
to remove the effect of price changes, we calculate GDP in constant prices
$real variables:$ variables like real GDP that have been adjusted for changes in prices by using the same set of prices in all time periods
it doesn’t account for the effects of inflation or deflation
it is also known as the “current dollar” GDP

$GDP deflator:$ price index that can be used to measure inflation * ratio of nominal to real GDP * GDP deflator = nominal GDP/real GDP x 100 * ex: if the 2019 nominal GDP = $21.4 trillion and 2019 real GDP (in 2015 dollars) = $19.5 trillion… * 21.4/19.5 x 100 = 109.74 * this tells us that 2019 prices were 9.74% higher (109.74-100) than 2015 prices

$GDP per capita:$ GDP divided by the population
real GDP growth is likely the best single indicator of current economic condition * it tells us how the economy is doing relative to last year or previous years
real GDP growth per capita is usually the best reflection not changing living standards * real GDP growth per capita gives the same broad idea of how economic conditions are changing as real GDO growth * there can be big differences for countries with rapidly growing (or shrinking) populations
in general… * real GDP growth per capita = real GDP growth - population growth